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Internal Accounting Control at Kojach Pharm Limited

by Dr. David Ackah (Author) Makafui R. Agboyi (Author)

Research Paper (postgraduate) 2014 28 Pages

Business economics - Economic Policy

Excerpt

ABSTRACT

In any organization, cash receipts are easily pilfered if they are not taken care of properly that is why every organization Cashiers must record cash receipts immediately in the cash books.

In the case whereby control systems in the organization are not effective enough to eliminate errors or frauds to ensure protection or safeguarding of assets, the completeness accuracy and reliability of the accounting records may not be achieved.

Every organization need internal accounting controls to ensure that the overall operational policies governing accounting operations are adhered to so that the financial resources of the organization might not be pilfered.

This study analyses the accuracy and completeness of the accounting records after the entry of transactions so that there is a complete and accurate reflection on the operations of the organization (Kojach Pharma limited).

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Internal Accounting controls are instituted in an organization to generate confidence and assurance in management that the overall corporate internal procedures of doing things are being adhered to. Some organizations do not have enough or strong internal accounting controls and for that matter some employees maneuver to misuse or misapply the financial resources of the organization.

Every organization needs internal accounting controls to ensure that the overall operational policies governing accounting operations are adhered to so that the financial resources of an organization might not be pilfered. It is against this background that the researcher decided to probe into the internal accounting controls at Kojach Pharma Limited with the view of coming out with their strengths and weaknesses and to suggest ways of making them more effective so that the overall assets of the pharmaceutical firm will not be ripped off.

1.2 STATEMENT OF THE PROBLEM

In any organization, cash receipts are easily pilfered if they are not taken care of properly. Cashiers must record cash receipts immediately in the cash book. Where financial records are inadequate, for example, where receipts are sometimes not issued for payments made there is the tendency of revenue being embezzled or misused.

In such cases, Cash disbursements may not be properly authorized by management for valid business purposes. They do not ensure that petty cash and other working funds are disbursed only for proper purposes.

Furthermore, where control systems, in the organization are not effective enough to eliminate errors or frauds to ensure protection or safeguarding of assets the completeness, accuracy and reliability of the accounting records may not be achieved.

1.3 OBJECTIVES OF THE STUDY

The main purpose of this research is to examine the existing internal accounting controls and to find out whether employees really adhered to them in Kojach Pharma limited.

The researcher attempted to determine what prevents employees from obeying the accounting controls so as to suggest possible solutions to them.
In addition to the above, the other objectives are as follows:

- To suggest additional internal accounting controls to improve their effectiveness where it is deemed necessary.
- To assess the accuracy and completeness of the accounting records after the entry of transactions so that they completely and accurately reflect the operations of the organization.
- To determine whether there are proper internal accounting controls to safeguard the monetary and other assets of the organization.
- To suggest possible ways of preventing fraud and collusion in the organization.

1.4 SIGNIFICANCE OF THE STUDY

This study is important in several ways.

- It will be useful reference to the public institutions involved in internal accounting controls.
- Again, it will be used by students, businesses, professionals and other stakeholders as a basis for further studies and reference on issues of internal accounting controls.
- It is hoped that this study would benefit the accounts department of every organization seeking to keep proper records to avoid mistakes and also to detect fraud and errors in an organization.

1.5 LIMITATIONS OF THE STUDY

Inadequate funds coupled with the complexity in the procedures for acquiring detailed and authentic information for the study were typical constraints. These were overcome through prudent use of resources and perseverance.

The reluctance on the part of some respondents to release some information because they deemed them to be confidential and not a major constraint. Sometimes, professional with the appropriate authority from their superiors were also caught in this web. The researcher’s assurances that the information was needed purely for academic purposes paved the way.

In addition, the researcher also did not have enough time for the research because of the combination of the research study and the academic work.

REVIEW OF RELATED LITERATURE

2.0 INTRODUCTION

This chapter covers what others have written about the topic: Internal Accounting controls.

This chapter has been written and discussed under the following headings.

- Definition of the terms.
- Types of internal Controls
- Control on cash receipts
- Control on disbursements of funds
- Budgeting
- It also includes a brief history of the case study organization that is Kojach Pharma Limited, Takoradi.

2.1 CONTROLS

Bateman and Snell (1999) define control as ‘any process that directs the activities of individuals towards the achievement of the organizational goals.’ That is, Control measures progress towards planned performance and applying corrective measures to ensure that performance is in line with management’s objectives.

2.1.1 INTERNAL CONTROLS SYSTEM

To ensure that cash collected is effectively managed, there is the need to put in place certain internal control measures.

Okai (1996) defines internal control as ‘the system which ‘encompasses all the methods, procedures and arrangements adopted within an organization to ensure as far as practicable the safeguarding of assets, the completeness, accuracy and reliability of the accounting records and the .promotion of operational efficiency and adherence to management policies’.

Furthermore, internal control, according to Millichamp (1993), is the whole system of controls financial and otherwise, established by management in order to carry on the business of an enterprise an orderly and efficient manner to ensure adherence to the management policies, safeguarde the assets and to secure as far as possible. The completeness and accuracy of the records, Glencoe (1994) defines internal control as a “a system of safeguards designed to protect assets, achieve efficient processing of transactions and ensure accuracy and reliability of financial records”.

The basic purpose of internal control is to provide reasonable assurance that all of the objectives of the company are met. Writing on the same topic, Whittington and Pany (1995) and Messier (1997) described internal control as “a process effected by the entity board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

- Effectiveness and efficiency of operations;
- Reliability of financial reporting; and
- Compliance with applicable laws and regulations.

Maher and Deakin (1994) also maintain that internal controls are policies and procedures designed to provide top management with reasonable assurance that the organizational goals will be met. Internal control helps assure management that the data it relies on for decision making have not resulted from fraudulent reports by lower – level managers and employees.

It is, however, not clear whether internal control system is put in place to prevent yes but to detect no and errors. It is in the light of this that Hilton (1997) wrote that “an internal control system comprises the set of procedures designed to ensure that an organization’s employees act in a legal, ethical and responsible manner. Internal control procedures are designed to prevent the major lapses in responsible behavior such as fraud, corruption, financial misrepresentation and unauthorized action”. Whittington, Pany, and Meigs (1992) also supported the argument that an organization’s internal control structure includes policies and procedures employed by an organization to:

- Safeguard its resources from waste, fraud and inefficient use;
- Promote the accuracy and reliability of the accounting records;
- Encourage and measure compliance with company policies; and
- Evaluate operational efficiency.

From the above it can be seen that internal controls are all the policies and procedures adopted by the directors of an entity to ensure that objectives are being achieved. It involves the adherence to rules and regulations, safeguarding of assets, prevention and detection of fraud and errors, ensuring the accuracy and completeness of accounting records and timely preparation of reliable financial information.

2.2 TYPES OF INTERNAL CONTROLS

The main types of internal control on which an auditor may rely on are:

2.2.1 ORGANISATION

According to Okai (1996) and Howard (1992), every enterprise should have a plan of its organization, defining, allocating and identifying lines of reporting for all aspects of the organizations operations. Authority delegation within the organization and the responsibilities should be clearly specified.

2.2.2 SEGREGATION OF DUTIES

According to Kell, Boynton and Ziegler (1989), this category of control procedures involves the assignment of responsibility for the transaction so that the duties of one employee automatically provide a cross – check on the work of one or more employees. The primary purpose of segregation of duties is the prevention and prompts detection of errors or irregularities in the performance of assigned responsibilities. Duties are considered to be incompatible from a control standpoint when it is possible for an individual to commit errors or irregularities in the normal course of his duties and prevent their detection by the internal control structure.

Okai (1996) also said those responsibilities or duties which would, if combined, enable one individual to record and process a complete transaction must be separated. Thus, no one should be allowed to begin and complete a transaction. For example, one records a part of a transaction and it is passed on to another to complete it, and given to another to verify if it was correctly entered. This reduces the risk of internal manipulation and increase the element of checking.

2.2.3 PHYSICAL

These are concerned mainly with the custody of assets which involve procedures and security measures designed to ensure that access to assets is limited to authorized personnel. This includes both direct and indirect access through documentation. Okai (1996). Messier (1997) supported that is the view that assets must be physically secured. He stated hat physical controls include adequate safeguards such as secured facilities, authorization for access to computer programs and data files and periodic counting of asset such as inventory and comparison to control records.

2.2.4 AUTHORIZATION AND APPROVAL

Millichamp (1990) and Okai (1996) are of the view that all transactions require approval by an authorized person. The limits for these authorizations should be specified.

However, Millichamp (1990) further gave examples to which such authorizations should be limited and these are specified below:

- All credit sales must be approved by the Credit Control Department.
- All overtime must be approved by the Works Manager.
- All individual office stationery purchases may be approved by the Office Manager up to a limit. Higher purchases must be approved by the Chief Accountant.

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Details

Pages
28
Year
2014
ISBN (eBook)
9783656850069
ISBN (Book)
9783656850076
File size
524 KB
Language
English
Catalog Number
v284723
Institution / College
Atlantic International University – School of Business and Economics
Grade
B
Tags
internal accounting control kojach pharm limited

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Title: Internal Accounting Control at Kojach Pharm Limited