Internal Control Review - The Practical Approach - Group 2

Internal Control
Review:
The Practical
Approach
Group 2
Azzelya Bara M. S. 1906285900
Ng Drago Kheng 1906358240
Tiara Indah Sari 1906358644
Leyna Lubaba 1906388344
Shafa Athaya Azalia 1906388722
Revanza Auditya 1906389246
Purpose of Internal Control
Internal control is the practice, policy, or

procedure in organization to create value or
minimize risk.
An effective internal control system could help

organizations increase accountability and
prevent incidents.
Review Process
Project TM - Background
TM is a toy seller in the form of a limited liability company founded in Hong
Kong in 1998. Its mission was to deliver high-quality, safe, and innovative
toys. TM had a strong reputation among toy-selling companies in Hong
Kong. For the first 10 years, TM did all the design, manufacturing,
marketing and distribution of its products.
In 2004, TM acquired 80% of the shares of GC or Gadgets Collect, a Hong

Kong incorporated company that owned and operated several
manufacturing plants in the mainland China (PRC). After the share
acquisition, GC terminated most of these contracts and became the
exclusive manufacturer for TM.
Group Structure and Governance
● TM had one executive director, four
non-executive directors, and no
independent non-executive director.
● TM didn’t have a nomination
committee
● TM didn’t have a company secretary to
facilitate information flow within the
board
● TM didn’t have an internal audit
function to review its material controls
● TM had a knowledge management
team that analyzed internal and
external data
● TM didn’t have the resources to hold
regular staff and expected staff to
understand TM‘s mission and vision on
their own
Human Resources
1. In the beginning, human resources of TM company had been relatively
unstructured.
2. An unexpectedly high turnover R&D and warehouse staff forced TM to revisit its
human resources function.
3. The first thing TM did wash to establish a remuneration committee to review its
remuneration packages
4. TM also started reimbursing its warehouse staff for transportation and meal
expense
Relationship with GC
1. GC was the manufacturer for almost all TM‘s toys
2. The stock management systems of ™ and GC were integrated
3. When toys were delivered from GC to ™, the system automatically recorded a
deduction in GC’s stock and an addition to ™’s stock
4. If there were any discrepancies between the stock count and the system record,
the staff reported them to the manager of the sales department.
Policies
1. Andy acknowledged that TM did not have a policy to address the risks in relation
to its online platforms.
2. There is some anonymous post on TM’s public gossip page on a social media
website about some incident about corruption and fraud.
3. There were several incidents that had been followed up and some were not.
4. TM did not applied data privacy policy. This is because employees have agreed to
comply with all applicable laws and regulations in their employment contracts,
so that an anti-corruption policy is deemed unnecessary.
Threatened Litigation
1. There is another incident that TM considered “alarming”. The "Super Hero" TM toy
gun injures the user's younger sister's eye by the laser on the toy gun. This
incident caused the media to further question why TM could legally sell
“offensive weapons.”
2. TM does not have a risk management policy or procedure for communicating
with the media.
3. The directors disagree to make a provision for litigation expenses because it
would adversely impact TM’s financial performance
Financial Performance
1. The Group had a poor financial performance in the previous year. This is because
the demand for toys has decreased as online games have become more popular
and the TM's new product duplicates the previous product, partly due to the
departure of some of its main R&D staff.
2. There were three incidents that occurred during the previous financial year
regarding staff theft, a competitor suing TM for patent infringement, and
problems hiring underage workers at a PRC.
3. TM Directors instructed the accounts department not to consolidate GC
accounts when preparing Group financial reports.
4. Your team members documented their observations of TM’s control
environment in a table and highlighted some of the deficiencies in the design of
the controls in the “Deficiency description” column. And then you suggested
that TM take immediate remedial actions.
Review of the Process-Level Controls of the
Group
Several deficiencies were identified in the
effectiveness of the control design:
1. No signature from a department head was required on the purchase request
form.
2. The procurement and logistic team was not required to consider whether the
fixed assets were properly categorized before checking budget amount.
3. The W System was not password protected. Journal vouchers can be changed,
and no audit trail was kept.
4. A fixed assets register was not maintained, leading to increased risk of misstating
the fixed assets balance, depreciation expenses, and profit or loss on disposal in
the financial statements.
Your team developed plans to test the operating effectiveness

of each control. Your team discovered that:
1. Barcodes for two machines differs from the delivery notes.
2. The GC Accountants prepares incorrect journal entries to add those fixed
assets on a lease and depreciated such assets.
3. Some journal vouchers were not signed by the senior officer or finance
manager.
Thank You!

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Internal Control

Internal control is the practice, policy, or

An effective internal control system could help

In 2004, TM acquired 80% of the shares of GC or Gadgets Collect, a Hong

Your team developed plans to test the operating effectiveness

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