Four Main Objectives of a Corporate Activity - Assignment Example

Name: Course: Institution: Tutor: Date: Part A Q1. Four main objectives of a corporate activity The first objective is profit maximization. You find out that most corporations want to get profits. Therefore, they will look into ways in which they can increase their revenues and reduce their expenditure. The second objective is maximizing shareholders wealth. Shareholders are the majority owners of a company and their wealth depends on the dividends they receive. Therefore, the company ensures it makes wise decision and especially in financing and investment decisions. The cost of capital is used when making such decisions by the management regarding the investments and finances. The other main objective is to practice corporate social responsibility. Social responsibility means giving back to the community since without the existence of the community, and then the corporation cannot operate. It entails participation in environmental upgrading, improving social amenities, provision of health, sporting and educational facilities. Finally, we have the objective of customer satisfaction. Customer satisfaction entails meeting customer’s needs and wants. Therefore, the corporation will carry on several activities such as conducting a market research to ascertain on what customers need or customer survey to ascertain on the perception of its customers regarding its products. Customer satisfaction leads to a corporation attaining and sustaining a competitive advantage. Q2. Steps in corporate governance and internal control procedures The many scandals such as WorldCom and Enron raised questions regarding corporate governance and internal controls of corporations (lee, 308). Putting steps in place ensures good corporate governance practices and a sound internal control system in companies (Marnet, 223). The first step is to establish an effective board of directors who have the primary responsibility of running a company. The board of directors should have a balanced number of non-executive and executive directors. A committee should establish the remuneration and the appointment of the board and this should be done in a formal way. The board should be paid well such that their remuneration is enough to attract the right caliber of directors. The internal control procedures should be disgned to ensure that all directors are rewarded according to their individual performance. The other step is implementing an internal audit function. An internal audit function helps ensuring that the management carries out business activities in an orderly and efficient manner. The management sets up the internal audit function and they are responsible for appointing the internal auditor who then directly reports to them. There is a need to establish an internal audit committee, which should comprise of non-executive directors. The function of the audit committee is to ensure the integrity of financial statements and review internal controls. The committee also approves engagement terms and remuneration of external auditors and reviews the effectiveness of the internal audit function. Q3. Four company policies that have an impact corporate objectives and internal control objectives 1) There should be a compliance system for the board of directors, executive officers and all employees. Establishing a corporate ethics committee is the only way of implementing such a policy. 2) There can be a system placed to ensure that the board of directors executes business objectives effectively. This is possible through conducting regular board meetings. 3) A risk management policy is common in many businesses today. The main purpose of this system is to mitigate and reduce risk. Risk management entails risk identification, assessment, reduction, avoidance and transfer. 4) A system of ensuring that appropriate financial reporting is executed. This is achieved by establishing an internal audit committee and an internal audit function. Q4. Four important internal controls in a business The most important controls that are expected by the management are: Internal Controls over wages and salaries Internal controls over sales and debtors Internal controls over purchases and creditors Internal controls over inventories or stock Q5. Techniques for risk identification Risk identification entails determining, describing and communicating the risk before it becomes a problem. The identification of the risk starts from the source either internal or external. Risk can be identified in two ways. To begin with, top-down approach, which involves analyzing an activity from an overall view the top down approach, involves creation of scenarios and guesswork is to identify risk (Greenwood et.al, 127). In this case, events that may trigger the company’s objective from being achieved partly or completely will be the one identified as risk. The other way of identifying risk is use of the bottom-up risk identification approach (Greenwood et.al, 127). A questionnaire is compiled based on best taxonomy knowledge. The answers to these questionnaires are the ones to reveal the risk. Part B Q1. Definition of internal control and its characteristics An internal control system is a system of rules, policies and procedures financial or otherwise the management of an entity to enable a business safeguard the interest of shareholders and the company’s assets institutes that. In most cases, the nature and scope of the accounting system depends on the management of the entity, nature of the accounting system, size of the entity, practicability of such controls and other practices by other organizations. The following are the characteristics of a sound internal control system: A good organizational plan clearly defining the duties and responsibilities of employees, staff, departments and sections Proper authorization and approval of transactions Proper segregation of duties and responsibility to enhance accountability and minimize errors and fraud Maximum supervision of activities Accounting and arithmetic controls put in place. Physical controls such as guards or surveillance cameras Qualified personnel Q2. Reasons for the need of accounting controls a) To ensure orderly and efficient conduct of the business When a business is run in an orderly and efficient manner, it displays several qualities. To begin with, there should free flow of information, documents, goods and services within the organization itself, among various departments and its dealings with external parties. Secondly, there should be co-operation among the various departments and officials within and outside the entity. The third quality is that the system should be in a position of producing reliable and timely information the purpuse of decision-making. In addition, the organization should meet the needs of its suppliers, customers, employees, shareholders and even the regulatory authorities. Finally, the efficiency in the organization ensures that resources are optimally utilized to minimize waste. b) To ensure adherence to management policies One of the primary goals of a company is maximize the shareholders wealth. The shareholders are the owners of a company but the responsibility to carry on operations is placed on the management. Therefore, the management formulates broad and specific policies, which are to be adhered to to attain the organizations objectives. If such management policies are followed then we say the internal control system of the company is sound. c) To safeguard the company’s assets The assets are to be safeguarded against theft, damage, misuse or deterioration. Therefore, if an auditor establishes that the assets are safeguarded against these circumstances, then the internal control system is sound. d) Detection and prevention of errors and fraud Errors and fraud lead to financial statements misstatement. Therefore, a sound internal control system is put in place to minimize the incidences of errors and fraud (lee, 308). e) Ensure completeness and accuracy of financial statements The management needs to prepare accurate and complete financial reports to enhance their relevance and reliability in a timely manner. Therefore, proper procedure should be put in place to ensure this. f) Risk management It is the role of the management to ensure that risks that are significant are kept at minimal to achieve objectives. Therefore, it is important for controls to be in place to manage the risks. Q3. Responsibility of management with regard to preparation of accounting records The users place the management with the responsibility of preparing accurate and complete records that are relevant and reliable for timely decision-making. The management should ensure that these financial reported are fully discloses to enhance accountability and transparency. It is therefore very essential for the management to put strong internal controls to achieve these objectives. The reason why internal controls are put in place is to give evidence incase there is a fraud or error. Q4. Factors considered by an auditor when assessing the internal controls To begin with, the auditor should consider the completeness and adequacy of the accounting system. The accounting system is the records and series of tasks of an organization, which are processed as a way of mainatining financial records. The accounting system is usually in built in the internal control system. Therefore, if the accounting system conforms to the financial assertions then it is adequate. The accounting system is adequate if it is relevant and reliable. The second factor, which he should consider, is the integrity of the management. This factor is important because the integrity of the management determines that of the financial reports. In such a case, if the auditor finds out that the integrity of the management is reliable, then he assumes that the same case applies to the financial statements. Finally, the auditor must consider the level of risk. In this, case the inherent. The inherent risk is the unavoidable risk or danger of using the internal control system. This is because at the beginning of an audit he will perform preliminary evaluation of the system to evaluate its strength. Q5. Importance of the segregation function Segregation of duties entails the division of responsibilities. Some of the functions, which should be segregated, are authorization and approval, recording, execution of duties, custody of company’s assets and systems development. The reason for segregation of functions is to make sure that no one records a complete transaction. The involvement of several people reduces the degree of risk regarding accidental errors and frauds. The element of checking of work is also increased. In simple terms, segregation of duties enhances accountability. Work Cited Hughes, will (PhD); Hughes, Will; Hildebrandt, Patricia and Greenwood, David. Procurement in the construction industry: Impact and cost of alternative. Taylor and Francis, 2006. Pg 127 Lee, Thomas. Financial reporting and corporate governance. Wiley publishers, 2007, Pg 308 Marnet, Oliver. Behavior and rationality in corporate governance. Routledge,2008, Pg 223 Read More