[ Degree Essay in Finance

To start out , it is important to clarify why the particular company run by Tony fits the of a small business . The product line offered is not very wide where what is involved are products that are digital items and the equipment used as their outlets such as TV computer , or cameras that are used to create digital product , which reveals the line of business is narrow simply because of the limited amount of product line that is involved . The other aspect that will make the particular company fit comfortably into a small

business category is it has three outlets only and one web site through which it avails its products to the consumers . From what was mentioned , the owner of the company has a tight control on what is taking place in the company . In addition the two major management groups are sales and finance director , which means it is obvious that they have a wider span of control in the company , while it is possible that they have a wider range of duties

Each store might have a sales staff and a manager but might not have an accounting or an audit staff to record and control the day to day transaction as it is customary in most bigger businesses , where the accounting department is responsible to take care of the recording aspect of each transaction and balancing the books on a daily basis The internal audit staff in its turn will make sure that each day 's book had been balanced and will scrutinise if each transaction had been executed and accounted for properly . Since the business is run by the owner who has a hands on control on what goes on in the business , vital departments such as a legal department , human resources , accounting and internal auditing are missing . Although it is difficult to say the size of the business justifies the coming into existence of some of these departments if an effective control system in the business is sought at least the accounting and the audit department should be part of the business in the long run since the business is growing . [1]

For most businesses the controlling aspect of the business is vital in helping them run a sound business , but it has to be evaluated in parallel to the cost that will be involved . This means if a hbusiness cannot afford the cost of having an effective control system in place it would mean that it does not make an economic sense to have one and such a business will have to go after other similar controlling systems such as what the particular company had been using for the last five years , a period not only the company was profitable but was also able to expand and increase its presence in the market place . Such systems could involve introducing a simple accounting system that is supported by many of the small business accounting software that are available in the market that are capable of giving the owner or the two top management team a good picture of what is taking place in the small business environment that they are running . [2]

But now the particular company has started experiencing problems simply because it is growing in size and it also has future plans to go public and this is a pivotal time for it to have a better controlling mechanism in place . It is not only that with the new size the ability of the company to absorb additional operating costs such as better controlling system will be there , which means having some kind of an internal audit existence that will have presence in the day today business of the company will be a necessary major step in introducing a control system instead of waiting for the once a year outside auditors . Such a system will eliminate the minor problems that seem to be cropping up presently If there is another aspect that will have to change it is that there will also be a need for having an independent accounting department that will have a presence in each branch if an effective control system is required to be introduced into the business to alleviate it from lack of control that is slowly being created because of the growth it has shown At the beginning if one internal audit staff could go around the three stores and spend at least one day poring on what is taking place and verifying the involved transactions if not all , at least by taking samples and by balancing the books , taking inventory and compare them with the books that is a control system that was not in existence , but which will enhance the business operation and a means to reduce mistakes and frauds if they are in existence

Accordingly , the new transformed business will have to have an adequate segregation of duties and it is not possible to run it as a family business where everyone has the goodwill and capacity to cover for everyone else . What this means is each staff will have his or her duty assigned to them and they will be accountable for it . Since everyone will have a clearly defined and assigned duty , it will make it easy for management to avoid overriding not only the duties of each worker but the control system that will be put in place . To create such an environment , at least as far as the accounting and the audit departments are concerned there will be a need to recruit , train and retain personnel who have sufficient qualification and experience in the field This will enable to create a leeway for the management to run the business more efficiently because they will have a better co-ordinated timely information whenever they need it and since computerising the whole operation is recommended their controlling process will be much enhanced

However , it does not mean any system that is done manually will fall behind , but since it has become not only customary but more efficient this particular company will be encouraged to use a computerised accounting system and the internal audit that will be established will based on that . Even if it is understood that the manager who is the owner of the business has the final say in the business if what is being done is based on a sound and up to date information the decision making process will be enhanced , and in fact that is what control is all about among some of its importance that we will discuss as we go further . [3]

It might be possible at the beginning to find out that there could be a constraint of resources that will result in making it difficult to segregate duties . However , putting the preliminary process of an enhanced system could enable the management team to do things that it was not be able to do earlier . For example managers could easily review system reports of transactions in detail , they can randomly select any transaction and compare it with its supporting document , they can also engage into counting the physical inventory of a particular product line and compare it with what is on record that will be up to date because of the existence of the bolstered accounting team and the audit department that will verify it on a regular basis that the books are in . It will also be possible to pick a certain equipment line from the product at random and make a comparison with the accounting records knowing in advance that it will be there , and whatever steps that is being performed and the outcome arrived at would be a sound result . Such confidence and certainty in any business is only possible when there is an efficient accounting , controlling and auditing system in place

Another capability that will be created from putting in place an accounting and an audit team is any kind of monitoring could be made in real time whenever the management wants to know how each department and those who are in charge of it are performing . Because what will be shown in the various accounts and books is what these individuals were able to do properly and if there had been any falling behind or wrong doing it will not escape both teams . However , if the books go unchecked on a daily basis , on the days they go without checking something might have gone wrong and it might go unnoticed for a long time . It is situations such as this that will make any system susceptible for fraud

Another essential issue to look at in any business is it is possible to compromise its efficiency by not directing the focus to what is important to the business . Without being specific , the controlling aspect of the business encompasses everything , which means every action initiated from within the company will require verification and documentation . This will enable whoever is making the business decision to realise what is taking place in the company is accounted for and that would mean the risk level will be brought down , and in fact any risk level that would originate from inefficiency could be eliminated . If the risk that will be created from lack of reliable financial reporting is not eliminated it will eventually affect the decision making process because there will not be reliable financial instruments telling those who are making business decision where the business stands and when the situation is such that managers will have no choice other than taking risk while making decision . If things turned out bad , the assumption is such incidents would have been averted by simply having a good control of the whole scenario in the given company so that every decision-making process would be risk free , as much as possible ) risk [4]

The other essential thing that will have to be addressed is the amount of documentation that is going to be involved and it seems that for a small business where a close working relationship is prevalent , it is possible to communicate instructions verbally . But the truth of the matter is there has to be some level of documentation about the company 's policy and procedure and in most cases that is what declares a company is coming of age and is out of the tutelage of its owner Because there is a policy put in place that could be enhanced , but cannot be changed by the whim of the manager or the owner , and that will create an accountability environment where each employee will know what the duty of each department is . It does not mean there is no cost involved in preparing such documentation , but it could always be done gradually reflecting the level the company is at , and for starters , in the case of this particular company there will be a certain amount of documentation that will have to be put in place , because without it especially the internal audit department will find it difficult to obligate the other staff to follow a company procedure because there is not going to be any . At the same time when the external auditors make their yearly visit , it is from the company 's documentation that they will find the company 's policy and it is needless to say its vital External [5]

The five components of internal control risk assessment , creating a control environment , the involved control activities , the accumulated information and communications , and finally the monitoring have one purpose , which is to serve the management achieve its objectives . It is always possible these components and their part could be adjusted and improved over time , as said earlier according to the need and the ability of the company . The risk assessment is to enable the management to foresee the vulnerable areas so that managing and minimising the risk will be possible . These means of controlling the business are there so that its operation will not falter for lack of proper controlling that emanates from the accounting and audit department , which demonstrates they both are vital segments of the business . One important point to take a note of here is , even if the mentioned five components of internal control are vital for any business small or big , the importance of each component could vary from business to business and it is not possible to expect all of them to have a standard outcome , however the right way of approaching their effective performance is to realise their relevance . This means in the case of the company at hand , it is in the long-run it will be possible to tell their effectiveness . To start out the priority is to make sure all of them will work together so that they can prevent , detect , and correct wrong financial statement reporting This would mean further that the functioning together of these components by itself is an assurance for the management that the information that is reaching them is reliable , which will make their introduction into the system essential

As far as the stock control is concerned , it is the merchandising through which any retailer gives the required quantity and quality of products at the right location , at the required time , and at an acceptable price . At the same time , it is a known fact , the largest single investment and expense on an ongoing basis for any retailer is the stock it purchases in to put in the market . Hence , it is an utmost requirement for any retailer to have an effective stock control system in place so that it will be possible to plan and control inventory on a timely fashion to maintain some kind of a balance between what the various customers are expecting to what the retailer 's ongoing financial objectives are

Stock control used to be a clumsy manual work before the introduction various applications that enabled retailers to achieve a better management system . Stock control components such as pricing , space arrangements , and assorting the various products necessitated the introduction of systems that will handle all of them more effectively Most applications that have come into existence have the capabilities of merchandise management built into them . The advanced ones could also include such crucial functionality such as forecasting , price optimisation , a means the management can use to promote the business effectively etc . The idea behind all this is in to attain the optimum use from these applications they will have to be integrated in one platform

Some of the features available are the availability of up to the minute price information that could be assessed anytime by a click of a button and the outcome is they would enable those in charge to act on them depending on the need at hand . This means the process is not arduous and those in charge will not be in the dark about what goes in the stockroom . The trend of the new supply chain system is to keep , as much as possible , a low inventory so that the cost of handling will be at a minimum . Similarly , keeping a huge inventory that is not possible to clear on time would also increase the cost and risk of doing business Hence , these applications could introduce a controlling system where the inventory holding cycle would be manageable and could be tailor made to the consumers ' demand . What these means is more of the products that have demand could be kept in a bigger quantity since their being cleared out is high when compared to those that are slow to clear , which will end up holding up space . Inventory [6]

The other advantage of these applications is it is possible to link the core functions in such a way that one change made in a given process could be shown in all the linked process saving time as no one will have to follow up on them and enter the changes manually , which had been proven to be a method that is prone to mistake . Most of these applications are equipped with planning capability where they can process data directed and focused in helping the overall planning of the stocks . They also help with the pricing management process and where it is possible to follow the price pattern and could become handy and helpful in introducing discounts and the like . They also have a built is mechanism that enables them to produce basic forecasting on which the management capitalise on to come up with a more sophisticated and accurate forecasting . When it comes to replenishing stocks it is a matter of clicking a button and all the items that need replenishing will be on display . In fact , this kind of an application has more functionality that will make the management and controlling of the stock very easy . It is also possible to control any kind of internal fraud simply because access could be in the hand of the management and by simply reconciling what is in stock and what is sold and comparing it with the available cash or sales journal it will be possible to tell the sales stand of each retail store . If there is a difference it is possible to take an immediate action , which means it does not take a long time to find out some kind of fraud or mistake has taken place , and this is a high level of risk management . Fraud [7]

As it is customary , what should get the priority is the amount that will be involved when buying inventory , which needs tailoring according to the need and ability . One of the serious risks involved is making the wrong decision while purchasing merchandise , especially if the merchandise is not going to be sold on a timely fashion . It could cost any business a lot of money to the point where they will be obliged to sell unsold items at a very low price to recover a small portion of what they spent . One way of avoiding that is to have a very good audit system that should definitely be backed by an effective applications to spot and analyse what exactly goes on in the stockroom . However , it is important that the audit system will only be a supplement for a well-planed buying process that follows a given procedure that should start from a sales forecast . It is possible to arrive at the forecast from what the audit procedure avails to those who are in charge of decision making . Consequently , the forecast based on the report presented by the audit department should not be high or low , since both outcomes have a negative effect on the business . If the forecast is high at the end of a given season there will be products that will not be sold , and if it is low the stores could run out products to sell early on and that means a loss to the business . Therefore , it is the responsibility of both the accounting and audit departments to help the decision-makers to avoid making risky decisions

There are also external and internal variables that need taking into account while making decision . These factors could be anything that the decision makers could be aware of , but if they find them integrated with reports that they are getting from their audit and accounting departments it will make their decision making process based on facts These variables could be change on the climate , the state of the local economy , the employment rate , demographic shifts in the area where the business is located , the level of competition and other amenities , both the accounting and audit staff will have to keep a tab of to help them prepare a better , well rounded report , which in its turn will empower the decision makers and could be translated into a tool that will enable them make sound decision that will minimise or eliminate the involved risks . It is also possible to make suggestions based on factual findings about certain aspects of the business that will enable the business to perform better , and if the decision makers found it sound they can implement it . This means the audit department will have the leeway to play an essential role in the company 's decision making as long as they base their findings and recommendations on factual findings , far removed from ambiguity . Planning [8]

The other key area where the audit department could have an input is by preparing the report keeping in mind stock planning that by itself is dependant on the stock turnover , which is the number of times a given inventory will be sold out and replaced . Keeping a good track of this record will enable the decision makers to make a risk free decision that being the main drive here , because the decision makers will be expected to start from a feasible stock turnover goal . Such an analysis will also enable the decision makers to distinguish which products have high and which ones have low turnovers , making the decision making of what products to on what number easy and close to the correct figure

The other area to be worried about is fraud because as long as there is not good control system it is possible for frauds to occur and will not be reported simply because no one is tracking what is taking place on a timely fashion . It is possible to repeat frauds in an environment where they undetected because there is no accounting or controlling mechanism in place . The fraud will be detected after non-reparable damage had been done and most of the time those who commit intentional fraud might have a good way of covering it on an ongoing basis and by the time they are caught it could be too late to recover the loss . In addition except to reprimanding , dismissing , to taking legal action any other measure that have to do with recovering the loss might not be possible when who is responsible for the fraud has become known , where of it might not make up for the loss incurred . In such a situation it is important to have a rigorous accounting and auditing system in place that have access to all the company operations and it will be up to the audit department to decide what kind of control method to implement For a small company with three stores and one web outlet maybe one auditor could make a difference by dividing his or her time between the locations and it would be possible to avoid fraud or risks by making wrong decision . But as the business grows it might be prudent to have a larger presence to the point where each store might need to have its own accounting team and an internal auditor who could go over the books on a daily basis , thus eliminating any loss that might come into existence Fraud [9]

The overall conclusion is as long as long as there is a good application at work in the company , conducting the following testing methods will be easy whenever the need arises or according to an audit schedule which could be monthly or quarterly

It is possible to analyse any item that is below standard

Actual costs and standard costs are comparable

It is possible to use LIFO (last in first out ) method to calculate current items on hand

It is also possible to compare by vendor the speed and accuracy a product can be delivered

Comparing the inventory level and the turnover rates to know which products are selling is possible

Items written-off and items purchased in their place could be compared

The value of physical counts should equal the ledger amount

It is also possible to divide the compare the rate of

investment

Among the list of the stock , identify which items have zero value or zero items

Spot out items that stay round the year

Identifying the obsolete inventory is also important to take steps

Identifying items that have high values by kind , group , make , etc

There are items that need to be identified if they have a cost value higher than retail price

Reconciling sample counts to values arrived at by computing

Items that have high value and had been around for a long time should be identified

It is possible to arrive at unrealised profit if a comparison is made between standard values

and actual sales prices . Samples [10]

The conclusion is we have touched on what should be in place in to have a seamless accounting , control , accountability from the part of the staff and adequate functionality . It is always possible methods could change when they are implemented , but they will not stray from the general accepted accounting and auditing principles . The main advantage of the audit and the accounting department will be introducing hands-on day-to-day accounting and controlling of the business so that there is not going to be a guess work on the part of the decision makers , as well as the system and the work place will not be abused , where things will not go missing . The number of the decision makers will rise eventually if the business goes public or when the number of stores increases , a point in time that require a very efficient controlling method . Without that method in place the whole system could crumble or the loss , the risk and fraud will affect the otherwise healthy profit and growth the company could enjoy for a long time to come if an effective method of control and accounting system is put in place early on

REFERENCE

CPA Journal 1998 . HYPERLINK http /www .nysscpa .org /cpajournal /1998 /1198 /features /f461198 .html www .nysscpa .org /cpajournal /1998 /1198 /features /f461198 .html , retrieved from the Internet January 8 , 2007

The audit of a small business . Wars and dreams . HYPERLINK http /www .nysscpa .org /cpajournal /old .htm www .nysscpa .org /cpajournal /old .htm , retrieved from the Internet January 8 , 2007

Implementing a well-designed audit program . HYPERLINK http /www .metricstream .com /insights /inplementing_audit_programe .htm www .metricstream .com /insights /inplementing_audit_programe .htm retrieved from the Internet January 8 , 2007

Risk Management . HYPERLINK http /www .rsmrichter .com /risk_management .aspx www .rsmrichter .com /risk_management .aspx , retrieved from the Internet January 8 , 2007

Information Security Audit

HYPERLINK http /www .eitnetwork .utoledo .edu /adult /InformationSecurityAudit .asp www .eitnetwork .utoledo .edu /adult /InformationSecurityAudit .asp retrieved from the Internet

January 8 , 2007

Inventory Management HYPERLINK http /www .sun .com /br /retail_807 /aritcle_inventory .html www .sun .com /br /retail_807 /aritcle_inventory .html , retrieved from the Internet January 8 , 2007

RSM Mcgladery . HYPERLINK http /advantage .hanleywood .com /default .aspx http /advantage .hanleywood .com /default .aspx , retrieved from the Internet January 8 , 2007

Plan and control your inventory

HYPERLINK http /muextension .missouri .edu /explore /miscupbs /mp0676 .htm http /muextension .missouri .edu /explore /miscupbs /mp0676 .htm , retrieved from the Internet

January 8 , 2007

Inventory Fraud . HYPERLINK http /www .bus .isu .edu /accounting /faculity /icrumbley /invfraud .html www .bus .isu .edu /accounting /faculity /icrumbley /invfraud .html , retrieved from the Internet January 8 , 2007

IS auditing guidelines HYPERLINK http /www .isaca .org /template .cfm www .isaca .org /template .cfm , retrieved from the Internet January 8 2007

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