Tutor Name: Luba
Name: Peng Xueyuan
Date: May 9, 2010
The general purpose of financial statement is to provide information for users for decision making. That is to say, the financial statement provided must be reliable for users to make the most correct decision to make profit or contributions. Internal control is one part of financial method to avoid the mistakes and incorrect information in financial statements in order to safeguard the entity’s assets.
All the policies and procedures adopted by management to assist it in achieving an entity’s objectives are used to define internal control. (Financial Accounting, 2009). In other words, internal control is used to avoid errors from financial statements in order to make the statements more reliable. The ‘Framework for the Preparation and Presentation of Financial Statements’ defines reliability as follows: …Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. That is to say, to make sure the information is reliable, financial statement must be free of material error. Furthermore, there are several procedures and structures that are referred to in Auditing Standard ASA 315 ‘Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatements’ as the entity’s internal control, which is defined as:… the process designed the effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations (para.54). Moreover, there are several different control activities within internal control. According to ASA 315 (Appendix 2, para. O) identifies four control activities, two of which are important for this discussion. Physical controls are activities directed towards physical security of assets, such as secured facilities for storing assets, authorization for access to computer programs and data files, and periodic counting and comparing amounts of cash, inventory and non-current assets with amounts shown on control records. Segregation of duties is the process of assigning different people the responsibilities for authorizing transactions, recording transactions, and maintaining custody of assets. Segregation of duties is intended to reduce opportunities for any person to be in a position to both carry out and conceal errors or fraud. In accounting system and financial statements, it is very important to prevent errors and fraud to make sure the financial statements are reliable, and in order to help safeguarding entity’s assets.
There are several ways of internal control, but only effective internal control can help to ensure that financial statements are correct and reliable. According to Financial Accounting (2009), there are several characteristics of effective internal control. The first one is competent and trustworthy staff. Competent and trustworthy staffs are probably the most important element in effective internal control. Attracting and retaining competent and trustworthy staff require good pay and conditions, and effective training and supervision. (Financial Accounting, 2009). Every single organization consists of numbers of individual staffs. Their attitude of working will influence the quality and quantity of the contribution to the organization. If those requirements above are met, the attitude of staffs will be great enough to work properly, and then they can avoid making mistakes and errors. As we have observed in prior years, problems applying accounting rules, human and system errors, and fraudulent behavior...