Preventive, Detective, And Corrective Controls

Published: 2019-08-30 17:49:49
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Businesses undertake several control measures for varied purposes in their operations. Controls are indeed necessary for effective running of the business operations. Control in itself is defined as the measures put in place by the business management, for instance Wal-Mart, to ensure that the set objectives and purpose of the business are achieved. Control ensures that the business plan matches the expectation of the owners with respect to profitability, corporate social responsibility, staff remuneration, and dividends payable, maximization of owners wealth and general work ethics among the managers and other staff of the business. Management sets strategies, organizes and guides the execution of actions that suffice to give a reasonable assurance of achieving the goals and objectives of the business (Peterson, K. 2012).

Control is a function of a feasible work out plan, organizing and directing which is the duty of the management. Internal Control is a well schemed process for any given business or industry formulated to give reasonable assurance pertaining to the realization of the organizations primary objectives some of them being; the trustworthiness and truthfulness of every information, compliance with regulations, orders, rules, plan and contractual agreements, ensuring security of the organizations assets, the effective and economic use of the available resources efficiently and finally the success of the laid down objectives and aims for operational programs (Peterson, K. 2012).

It is a schematic process that runs vertically from top to down in an organization. It may entail some regular assessments to compare actual results with the expectations and identify the possible loopholes in the organization, hindering the organizations achievement of its objectives. For instance, Wal-Mart Enterprises may apply the SWOT analysis as a control tool for its businesses. It may as well lay down guidelines and measures governing the business operations, discouraging theft by locking various departmental sections, ensuring division of labour and specialization such that auditing of business financial accounts is done by a different person from the finance director (Hoelzer, 2009).

A control account needs to be proper, economical, understandable, unpretentious, expressive, comprehensive, valid and consistent. The three types of internal controls used with operational audits are:

Preventive controls.

Detective controls.

Corrective controls.Preventive controls are meant to deter and dissuade unwanted occurrences within the business like theft, staff conspiracy, and lateness in reporting time, office laziness among others. It plays the preventive role through well-timed reconciliation of the bank statement and cashbook bank balance. This helps in preventing overstatement or understatement of receipts or payments in the cashbook. It also helps prevent wrong posting of deposits and payments in the cashbook. A firm like Wal-Mart Enterprises will use the bank reconciliation statement to prevent fraud and misstatements through identification of the transactions appearing on the cashbook but not appearing on the bank statement like the cheques not credited and deposits and cheques not presented to the bank. It will as well enable Wal-Mart identify the transactions appearing on the bank statement but not on the cashbook (Sharma, A., & Panigrahi, P. K. 2013).

These may include direct credits by customers into Wal-Mart bank account without notifying the enterprise, direct debits from the Wal-Mart bank account such as payment of standing orders yet the enterprise may realize late, bank charges such as ledger fee which will be debited on the enterprise account while the finance director of the enterprise may not have realized to make similar changes in his books of account, dishonoured cheques which will certainly be debited yet they had been credited while it may take some time before the enterprise finance manger realizes it so as to make adjustments on his books of account, income interest which will credited into the enterprise account while the finance manager may not have taken note of it and interest on bank facilities charged on credit cards and bank overdrafts (Steinbart, 2015). All the aforementioned will therefore be detected and deterred by preparation of a timely bank reconciliation statement.

Secondly, preventive accounts will ensure separation of duties through division of labour and specialization. Wal-Mart human resource manager will assign each and every employee the roles one is well-trained for. This will be simplified through the departmental heads who will be in charge of their departments and therefore answerable to the human resource manager of any deeds in those particular departments. The departmental heads will therefore keep close supervision on the employees to prevent issues of employee conspiration to harm the department or rather the entire enterprise. They will as well discourage laziness among employees by checking their productivity in whichever department they belong to. Time wasting shall as well be curbed in such a set up since the departmental heads shall be keeping check of employees reporting time, time spent on productive labour and time spent on unproductive labour and give a recommendation to the human resource manager (Sadiq, 2015). This will as well to a larger extent prevent fraud and misrepresentation in the organization with the help of the departmental heads.

Thirdly, Preventive Controls goes further ahead to ensure safety of money by restricting access to cash areas to only the authorized finance personnel. For an enterprise like Wal-Mart which operates full-time both during the night and during the day, preventive control ensures proper accountability of night collections to prevent any kind of fraud which is usually prominent at night than any other time. The control will as well ensure the finance personnel are equipped with appropriate gadget to detect counterfeit notes and forged bank cheques.

The Fraud triangle is made up of pressure, opportunity and rationalization. Fraud cannot occur with any single or two of these elements; the three must all be present for fraud to occur. The Wal-Mart staffs should be mindful of pressures and how they recount to the enterprises overall fraud risk. In order to minimize and contain rationalization, there is need to inculcate and promote a robust sense of business and social ethics amongst employees and establish a positive and conducive working environment (Hoelzer, 2009). Wal-Mart will actualize this by putting in place steadfast preventive control measures to counter any kind of rationalization. It would be therefore be quite easy to deter any chance of fraud and even become better placed at the slightest attempt of it. Pressure plays a critical role in the fraudulent acts done by people. Such pressures may include addiction, luxurious tastes, family burdens, and dire need of money among others. Pressure is majorly caused by financial constraints. The fraudster often finds it hard to share such financial constraints. They in fact deem them quite personal and confidential. They strive to solve the problems secretly thus ending up in fraudulent deeds. However, some frauds are just as a result of greed and lust.

Opportunity is when the chance of committing fraud presents itself. Fraudsters are always optimistic that their deeds wont be detected and therefore do leave nothing to chance whenever the opportunity presents itself. Such opportunities arise as a result of poorly established preventive controls, poor oversight by the management and in some cases misuse of ones authority to influence the fraudulent acts. It is necessary that firms like Wal-Mart seal any possible loophole to fraud so as not to provide any such opportunity to its employees. Firms should therefore establish measures, rules and procedures that deter fraudulent acts or if any, detect it before it goes far (Kourilova, 2015).

Rationalization is where a fraudster reconciles his fraudulent act with the generally conceived notions of decorousness and acceptability of such acts. For instance, one would justify fraud using the rationale that they are doing it for the sake of their loved ones or family, some would argue that they stand losing everything of theirs; assets, family, life, if they dont take the cash. Some would claim that there is no possible external support thus resorting to the fraudulent act as a source of support. Some because of salary dissatisfaction have a mind-set that they are owed something which they must use other means to get thus resorting to fraud (Steinbart, 2015). Some also fall prey to fraud because they completely dont understand the repercussions of their acts hence act like they dont care.

The second internal control system is the Detective Control System. Detective controls identify detrimental events in the firm so as to initiate corrective measures against such actions. Such events may include those that lower the profitability of the firm, give a negative image of the firm to the corporate world; they stir poor working relations among employees in the firm. They detect all indiscretions and errors that may have already transpired and to assure they are promptly corrected. Detective controls characterize incessant operating expenses which are most of the time an additional burden to the firm however significant they are. They offer the criteria with which to rectify erroneous data, modify controls and get back missing assets (Luippold, 2015).

Steinbart, 2015 says that detective controls include carrying out an aging analysis of account receivables. Account receivables are debtors who the firm sold goods to on credit and are yet to pay their debts. An aging analysis of account receivables will enable the firm establish which debtors are likely to settle their debts before or on the expiry date of the debt payback period and which ones are likely to extend their repayment period. The debtors likely to extend their debt payback period will therefore be categorized under bad debts of which when they completely fail to pay back the debts then they will be grouped under bad debts written off and this will be a liability to the firm. The firm shall have to restructure its statement of financial position and comprehensive income statements in order to cater for the debts written off. The firm will therefore always put into consideration a provision for bad debts at a certain percentage of the total debts expected so a snot to be caught unaware with the defaulting debtors.

Wal-Mart inventory control department will then have to establish inspection policies for incoming and outgoing inventories and the balances left so as not to repeat any future shortage if any had occurred in the past trade periods. Stock taking shall be done through the First in First out (FIFO) criteria of inventory control or Last in First out (LIFO) inventory control criteria. Use of FIFO will enable the firm clear off the first-bought stock so as to detect any damage with them whether expired or destructed by weather conditions or some pests and rodents. This will enable the firm make correctional measures in the future to curb such expiry by selling the products before they go bad and even creating conducive storage places free from pests and rodents for that matter (Luippold, 2015). LIFO will help in clearing off perishable products just as soon as they are acquired for they will be delivered first on the basis of last in first out. Both stock-taking methods will be providing a balance of the remaining stock thus enabling detection of any change of products unaccounted for in the inventories.

Thirdly, having a single person dealing with hiring and firing of employees an...


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