Justification For An Internal Control System

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Justification for an Internal Control System
Barbara Lay
Acc/544
3/8/2015
Bunny Schmidt

2
Justification for an Internal Control System
Recently I have encountered a great deal of inquiries from leadership as to why there is need for an internal control system. I would like to submit a brief document explaining my reasoning for this recommendation. As the Controller of Los Pollos Hermanos, I have a great deal of responsibly to ensure I am doing everything I can to mitigate risk and have a plan in place if the need for risk management should arise. I take this responsibility very seriously and want to do everything in my power to protect Los Pollos and continue to be a part of their success for years to come.
I do realize that there are certain controls in place already. Our liability insurance policy is a more than adequate and will be there to protect Los Pollos in the event of a incident. I don’t think we need to change anything in this regard. I am also aware of the portfolio approach we take in order to see “the big picture” and can make up any loss in a different way. As someone who works closely with the CFO, I can attest that the portfolio approach has facilitated a positive outcome for company over and over again. I wouldn’t change anything in this area either. The portfolio approach continues to keep Los Pollos a strong, profitable company with a bright and exciting future.
I am suggesting additional internal controls because as we continue to diversify and grow, we will be faced with new challenges and new risk factors that must be taken into account. Going global presents a new set of risks we must plan and prepare for. I am suggesting five additional areas that would be beneficial to focus on from an internal standpoint. We must ensure our business dealings remain ethical and we are upholding the highest possible standards.
“Management Integrity - Management integrity, or the moral character of persons of authority, sets the overall tone for the organization. Management integrity is communicated to employees through employee handbooks and procedural manuals. Management policy indicates that in addition to communicating management integrity, policy manuals facilitate training to employees. However, 3 management’s enforcement of policies is the major indicator of an organization’s commitment to a successful internal control system.
Competent Personnel - An organization’s ability to recruit and retain competent personnel indicates management’s intent to properly record accounting transactions. In addition, the retention of employees increases the comparability of financial records from year to year. Furthermore, an auditor’s confidence in the underlying accounting records increases as he observes the reliability of the organization’s personnel. This in turn reduces an auditor’s assessment of the risk of a material misstatement in the entity’s financial statements.
Segregation of Duties - Segregation of duties is critical to effective internal control because it reduces the risk of mistakes and inappropriate actions. An effective system of internal control separates authoritative, accounting and custodial functions. For instance, one employee opens incoming mail; a second employee prepares deposit slips for daily receipts, while a third employee deposits receipts in the bank. The previous example
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