Business Operations Internal Controls

Question: Discuss about the Business Operations for Internal Controls. Answer: Introduction: The unauthorised use of purchasing systems could result in serious loss each year due to overspending on unnecessary resources. In addition, the misappropriation of products or services is another impact, which be used for personal benefits (Dumas et al., 2013). Therefore, the fairness of the purchase reports and invoices could not be maintained, which, in turn, would reduce the profitability of the organisation. In addition, the ineffective plans of supply chain management and project management lack in mechanism, which has lead to maverick spending. Thus, it clearly depicts the lack of completeness on the part of Fruito in managing its expenditure cycle. Acceptance of short delivery of products or services: Since the issue is concerned with the ordering and receiving portions of the expenditure cycle of Fruito, there is high chance that the inventory manager might place excess order of goods despite the available stock. The main reason identified behind such act is the outcome of collusion (Hull, 2012). Along with this, the receipts might not be confirmed for the goods purchased. As a result, the accounting manager of Fruito might not be able to pass the necessary transactions for such receipts, which would significantly affect the preparation of the financial statements. Hence, the accuracy in developing the accounting reports would be minimised. Acceptance of expanded orders or unsolicited goods: This is another major risk, as the inventory manager might adopt dodgy measures in accepting unsolicited products or expanded orders. The probable reason behind such risk is the monetary benefit of the individuals or gifts from the suppliers (Lam, 2014).Such act might increase the overall cost of sales for manufacturing its products. Moreover, the profit realisation would be abridged, as there is overspending on inventory. Thus, it violates the validity of the existing internal controls of Fruito in managing its purchases and orders. Recommendation of internal controls and application of the same to mitigate the identified risks: The following internal controls would be feasible for Fruito to mitigate the above-identified risks: Application of purchase order forms with sequential numbers: Fruito could apply purchase order forms, which are sequentially numbered, for conducting independent checks. This would help in ascertaining the validity and completeness of the purchase orders made (Lefcourt, 2013).The authorised signatories need to be identified with the limits of authorisation. Therefore, before providing the certification for a particular invoice, the authorisation and matching with the original order need to be conducted. The use of electronic inventory management system needs to be adopted to maintain up-to-date stock records and monitor orders and stock usage (McNeil, Frey Embrechts, 2015). The segregation of duties between receiving, ordering, approving and paying invoices is necessary, as it would help the supervisor of the Accounts Payable department of Fruito to monitor the work. Along with this, the supervisor of the above-mentioned department needs to ensure that the authorised staffs make necessary adjustments to the standing data like invoices of suppliers. Furthermore, the invoice coding is required to be checked to assure that the accurate budget has been debited (Sadgrove, 2016). Finally, the budget holders would match the expense items charged with the budgets. Henceforth, this internal control procedure would help in limiting the unauthorised access to the purchase system. As a result, it would conform to the completeness of the expenditure cycle of Fruito. Checking stock records and confirming receipts: It is the responsibility of the supervisor of Accounts Payable department of Fruito to verify the stock records to ensure that the deliveries have been accounted for in an effective manner. This would minimise the additional orders of products beyond the required level to save costs (Skaife, Veenman Wangerin, 2013). Moreover, the supervisor is required to ensure that no payments for goods are made without the confirmation of receipts. Such step would help the accounting manager of Fruito to keep a detailed record of the overall transactions, which would depict the accurate presentation of the financial statements of the organisation. Thus, this internal control process would wipe out the acceptance of short delivery of goods. Payment after confirmation of goods: In order to minimise the acceptance of spontaneous goods or expanded orders, the payments need to be made only after the confirmation that the goods have been ordered properly with necessary authorisation. Such step would reduce the acceptance of gifts or monetary benefits for the individuals involved in adopting unethical measures (Zikmund et al., 2013).As a result, it would help in saving excess costs on purchase orders, which would contribute to the validity of the expenditure cycle of Fruito. Summary of findings for the CFO: After careful examination of the current ordering and receiving part of the expenditure cycle of the organisation, it has been found that the major risks that confront the business operations include unauthorised access to purchase systems, acceptance of short delivery of goods and expanded orders. The first risk could incur huge losses for the organisation due to overspending on inventory. The second risk identified would lead to inaccuracy in recording transactions due to the absence of receipts. The final risk might reduce the profit recognition of the business due to adoption of unethical practices on the part of some personnel. Therefore, all these risks together would minimise the overall productivity and profitability of Fruito. However, the effective internal controls have been identified to eliminate each of the above-identified risks for ensuring the operational efficiency of the organisation. In order to eliminate the first risk, the purchase order forms could be sequentially numbered to maintain the daily stock records and usage. The second risk could be eliminated with the help of checking stock records, which would help in preparing accurate accounting reports. The final risk could be eradicated by making payments after receiving receipts to prevent the unethical practices. References: Dumas, M., La Rosa, M., Mendling, J., Reijers, H. A. 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