ACCOUNTING 322 (AUDITING II)

Vishavpreet Sembhi
Professor Ruthizer
December-15-2011

December 15, 2001

To:

The Board of Directors

MicroFlash Corporation

From:

Vishavpreet Sembhi, CPA

12001 97th Ave
New York, New York 11012

Subject:

Internal control and systems (ICS)

Dear Members of the Board of Directors:

I'm writing to you after a review of MicroFlash Corporation functions. We have come to a conclusion
that MicroFlash is missing a very important aspect, the internal control in order to function properly.
It is important that we must implement internal control and systems to avoid cases of fraud such like
the ones management has recently discovered and other accounting errors. As you all know, every
business organization is subject to some kind of risks depend upon several factors such as the products,
services, market, finance, and resources. Significance of internal control and systems helps coordinate
every aspects of a corporation in an effective way.
In general, internal control and systems (ICS) is needed to effectively integrate policies, activities,
plans, and employee cooperation in the organization, and in order to achieve business goals in both
short and long term. Internal controls help the corporations operations and achieve objectives
economically and efficiently. Actions and achievements of the organization through internal control are
designed to provide reasonable assurance following categories:

Effectiveness and efficiency of operations

Reliability of financial reporting,
Compliance and accordance with applicable laws and regulations

I believe by executing internal control within MicroFlash, it can protect corporation's resources against
cases like mismanagement and fraud. Internal control will administer activities concerning with
authorizations and reconciliations, asset protection and segregation of employee's duties. Putting these
functions of the internal control into practice provides assurance of assets and they will be efficiently
and effectively utilized for the intended purpose, with that said it will help overcome risk associated
with the misuse of MicroFlash's funds and resources.
Internal control and systems should be applied to the following processes:
1. Accounts Receivable and Revenue
2. Inventories and Cost of Goods Sold
3. Property Plant and Equipment, Depreciation
In accounts receivable and revenue, because of the risk of intentional misstatement of revenue and
sales, it is very important to implement effective control, an important one is having an independent
administrative unit who will ensure that:
There are effective control monitoring recognition of sales and revenue, properly recording on

the accrual basis of accounting and classifying by service type.

Overseeing and monitoring management's judgment about revenue recognition principles and
estimates and internal audit function.
Placing commitment to competence, which puts qualified personnel to perform procedures of
key functions effectively.
Management's control over revenue and receivables which should include method of revenue
recognition, recording, allowance, and uncollectibles accounts estimating.

Risk assessment of A/R and revenue should be processed by identifying, examining and managing
uncertainty faced by the organization. Risk assessment focuses on difficulties and risk which may defer
and harm the organization's financial assets and operational objectives. Few example changes in
economic conditions, competition, customer demand, new product lines, or fast expansion could
change an organizations risks.
A/R and revenue control activities should form specific policies and procedures for management to use
to achieve its objective, which involves segregation of duties, approvals and authorizations of
transactions, returns and allowances, verification of invoices, issuing, shipping, reconciliations, review
and adjustment of revenue and receivable, and security of assets.
The internal control over Inventories and Cost of goods sold serves a primary purpose of physically
safeguarding the assets. Stressing control over inventories, management can prevent fraudulent
incidents like theft, over and under estimation of assets and other fictitious activities. As you know the
quality, condition and value of inventory directly affects the COGS and has a major impact on net
income for the year. With the following procedures it can be done effectively:
Assignment of responsibilities to qualified and trained personnel for purchasing, receiving,
storing, issuing and control goods and inventory.
Communication and requirement of management's authorization to ensure that purchase and
supplying of inventory are legitimate, approved and appropriately recorded.
Physical counts of the inventory periodically or perpetually, by independent personnel to sure
competence
Planned and systematic method for used for purchase and issuing of supplies to efficiently
control optimum quantities of goods and inventory on hand
Review of inventory and data to determine obsolete and excessive inventory
Comparison of physical inventory to recorded inventory data for accuracy and materiality of
inventories
Risk assessment of inventories and costs of goods sold includes concern how availability of inventory
on hand, the stability of prices and labor rates, cash flow to purchases, excess and obsolescence of
inventory.
Internal control over property, plant, and equipment is a all important concern because the amount
invested in plant and equipment represent a large factor of the total assets. Control provide guidance to
safeguarding of assets, maintenance, depreciation, salvage value calculation and making correct entries
for retirement and disposal are major expenditures in the income statement. Following guidelines will
be helpful in establish control of these assets:
A need of effective system of authorization and approval to calculate capital expenditure of
plant assets.
Purchase of plant and equipment to be handled through the independent department and should

be subject to receiving, inspections and payment

Capitalization and depreciation policies are outlined in writing and recorded appropriately
A subsidiary ledger and detailed record of individual assets and unit of property, which should
be balanced periodically with general ledger control accounts
Effectively applied procedures detailing authorization and accounting for deposing of assets

I am asking you to carefully review this letter and the future of MicroFlash with or without internal
control. A utilized internal control and system effectively will provide protection to the corporations
from any kind of fraudulent activities, mismanagement, misappropriation of company's funds and
resources.
I hope to hear from you regarding the this issue. Your input will be greatly appreciated
Thank you.