Accounting: Internal Control Essay

Question:

Discuss about the Accounting for Internal Control.

Answer:

Organizational Process

The organization has two types of operation- procurement and sales. In these two processes, logistic management plays a vital role through value addition in the field of inventory maintenance. The procurement process is originated through the supply chain associates who are with long term relationship and contract. Supply chain associates are of two types- domestic and international. Sale is made through own outlet for retailing and institutional supplies to the hotels and restaurants. The products are perishable in nature with the segment of non-durables. As these products are of high tendency to get perished with low shelf-life, the company is maintaining a justified plan for procurement and sales. The products are also divided into two categories- premium and regular products. It is the basic objective of the organization to ensure sales of maximum products within their shelf life, and thus to mitigate the probability of spoiled inventories. In order to ensure that, I have made an internal audit to find the probable risk factors and with my effort to find out probable steps to mitigate them through proper technological planning. The main objective of this report is to find out those risks and fix strategies to avoid them with the present facilities available in the infrastructure of the organization (Handfield, 2011).

Relevant Risk Factors

To find out the relevant risk factors, I have to find out them through the overview of the organizational process. It is so important that the identification of risks and to mitigate them will raise the profitability of the organization (Kannan, 2006). While going through the process, I have found following probable risk factors which may affect the performance of the organization:

Quality of Products

As the organization is not manufacturing anything, instead is mainly involved in trading of products which are procured from the market, there is no scope of showing skills in the domain of manufacturing area. The organization is procuring the vegetables and fruits from the vendors of the market. As they are highly perishable in nature, the first risk detected is the quality of the products procured from the vendors.

Inventory Maintenance

As these products are biological products and have the tendency to get perished by stipulated time, inventory maintenance is of high priority in this segment. As inventory is contributing to the current assets and subsequently to the working capital of the organization, the impact of inventory with physical quality maintenance is to be the biggest risk factor of this business (Janiga, 2005).

Risk of Spoilage

This is an obvious phenomenon in this business. The vegetables and the fruits get spoiled in due course of time and to lengthen its shelf life through maintenance of inventory is concerning risk in this domain (Lenghel, 2004).

Internal Controls to Mitigate Risks

The overall observations showed the need of internal control in the organizational process in different levels to ensure mitigation of identified possible risks. The risks are identified and internal control is to be exercised to minimize them (Frc, 2014).

Risk of Quality of Products

The procurement system should have specified benchmark to ascertain quality of vegetables and fruits. As the organization is involved in attending two types of buyers in the form for retail and institutional, the importance of quality control is most important while procuring the products from the vendors. The company procures materials from local as well as international vendors. The main concern of quality is with the local vendors. The vegetables and fruits procured from them are to be passed though quality control system of the company to ensure the eligibility of the product. For international vendors, risk is lesser as they are organized and maintain total quality management related to their process management. Lower quality is involved in loss of market share as a result of not attending the benchmark for quality buyers. The institutional buyers are concerned about quality as they have to serve the products in other forms to their customers. Poor quality will make them loosing their customers and market shares too. Moreover, if the market is aware of supply of poor products by Fruito, the organization will not be able to run the business with sustainability (Ries, 2014).

Inventory Maintenance

As the products are of perishable in nature, proper internal control is to be maintained for inventory maintenance. Maintenance of proper temperature in the warehouse is one of the big factors related to this. The organization is to follow inventory maintenance through FIFO or First in First out method. This will ensure proper rolling of the inventories as per age of the products. Indenting of fresh products is to be made after thorough scrutiny of materials in hand and the regular sales forecast method. Over stacking of products only increases the pressure on the organization due to blockage of working capital and risk of spoilage (White, 2015).

Spoilage

The nature of products does not permit the organization to keep hefty stock in the warehouse. There must be proper sales forecast which can ensure the procurement in real practical manner. Risk of spoilage can be averted through the exercise of proper forecasting. The trend of sales received from historical data of accounting information system can help the organization to fix the projected requirement and this internal control can ensure mitigating the probability of spoilage. Proper technological infrastructure like bar coding can be helpful in this aspect to differentiate the products as per date of procurement and date of expiry for making useful decision towards the products (Watson, 2015).

References:

Frc. (2014). Guidance on Risk Management Internal Control. Retrieved December 08, 2016, from Frc:

Handfield, R. (2011, january 16). Role of Procurement within an Organization: Procurement : A Tutorial. Retrieved December 08, 2016, from Ncsu:

Janiga, D. (2005, January 05). Five keys to effective inventory management. Retrieved December 08, 2016, from Plantengineering:

Kannan, N. (2006, August 02). Reducing Operational Risk in Business Process Outsourcing. Retrieved December 08, 2016, from Sourcingmag:

Lenghel, R. D. (2004). Considerations regarding perishable items. Quaestus Multisiaciplinary RESEARCH JOURNAL , 132-139.

Ries, H. (2014, June 26). Risk Assessment and the Quality Management System. Retrieved December 08, 2016, from Qualitydigest:

Watson, D. (2015). Helping customers manage risk and solve operational. Retrieved December 08, 2016, from Hsb:

White, J. (2015, August 07). Warehousing and Inventory Management. Retrieved December 08, 2016, from Logcluster:

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