Omissions found in an adjusting entry by an auditor would mean that there are no proper internal control systems in place that would have ensured that the omission never occurred. It is imperative that a big company like ABC puts these important procedures in place to monitor any monetary transactions taking place within the company. Lack of proper control systems would create loop holes that criminals would use to steal money from the company.
A limitation of the internal control system may be misappropriation of company funds. The money did come in for the three months but was not included in the company money. This if intentionally done was a plot to steal the money from the company purse. This happens mostly in companies that do not keep a close eye on the activities going on in their accounts departments. It is important for companies to ensure that money is not also diverted to purchase goods and services for personal use by company employees.
The company may be having poor policy monitoring controls. The staff in the accounts department needs to be well conversant with the type of controls In their department and the leader of the accounts team needs to keep checking on the updates in finances that the junior members of staff make. This is an effort that should trickle down from the company CEO when he shows an effort in looking at the company financial updated statements regularly. This will make the accounts manager to also keep an eye on his department thus the junior accountants will be on their toes and will be more keen on keeping the financial records, which are vital for the company, properly updated. This is because the set controls are put in place to regularly generate sound financial reporting and to keep the performance of the accounts department within the company standards as accepted by the company.
Internal control procedures include transaction initiation review and approval and balance reconciliation. Transaction initiation and review involves checking and approving of any reimbursement requests and also reviewing of other financial transactions like transfers of expenditure, approval of recharges, looking into and approving payroll personnel and the company financial systems. Balance reconciliation would include monthly checks and certification of the accounts receivable ledger balance and account balance listings. The petty cash account also has to be monitored on a monthly basis. These two internal control procedures are easily implemented and bring great results when properly followed by the parties concerned.
The petty cash account should be handled by only one person who would be held responsible for any transaction made in that account. It is easier to monitor money flowing in a systematic manner unlike when it is handled by any one in a company setting as it reduces the chances of fraud. A missing entry in a financial journal has the ability to make all financial results unreliable and thus give the wrong results of a company due to wrong calculations. If they were expenses involved, it would favor the books balance making it look more profitable since the expenses were omitted but if they were omitted inputs of money coming in to the company, the balances would show losses since the income was not integrated into the final accounts.