Internal Control and Accounting Systems Essay

The following report covers the AAT ICAS unit. The report covers the area of credit control within the organisation and makes recommendations for its improvement. The report was researched through the internet, written information and trade journals as detailed in appendix. 1. Cookridge Carpets Ltd is involved in the sale of carpets, soft furnishings and beds. They are the main dealer for “[email protected]” foam beds and mattresses in the Southampton area since 2010. 2.

The company was established in 2007 by the Cookridge brothers, Peter and John. 3. The premises is an aircraft hangar-sized building which is used as a carpet and bed showroom. 4. Peter-developed relationships over twenty years in the industry. Recently they hae become the main dealer for Memo Beds, a company specialising in foam beds and mattresses. 5. Their main source of business is through direct sales, but are increasingly finding success through online sales. . Twenty members of staff are employed, nine in direct sales, three in online sales, one in accessory sales, two drivers, two cleaners, and three part time accounts staff. 7. The accounts function was until recently overseen by the company secretary. Due to maternity issues she has been replaced by a full-time Senior Accounts Clerk to oversee the running of the office.

8.There are currently four staff members within the accounts department, the Accounts Receivable clerk, responsible for the management of credit accounts, the preparation of information for information for management, the preparation of sales invoices; the AP clerk, responsible for purchase invoices, liaising with suppliers, management of supplier accounts, the making of prompt payments; the payroll clerk, responsible for the preparation of weekly and monthly payroll information, the calculation of monies due, comprising wages and commission, making up of pay packets and preparation of BACS returns where appropriate. . The accounts statements produced are the income statement, the statement of financial position and the cashflow forecast. Each provides information which is useful within the business, and to external stakeholders.

10. The Statement of Financial Position is a snapshot of the assets and liabilities held by the business at a set point in time. 11. The Income Statement gives information on the performance of the business over a period of time. (PandL as result of trading) 12. The Statement of Cash Flow shows the movement of cash in and out of the business over a period of time, and is a key indicator of liquidity. 3. The purpose of the accounting function is to provide information to the users of financial statements. Management, for instance, will be interested in an analysis of revenues and expenditure that will provide useful information for decision making. The budget can be compared with actual results over time, and variances can be investigated. The cost consequences of various courses of action can aid decision making. 14. The employees of a company will be interested as good potential performance may indicate safety of employment and promotional prospects.

Trade union representatives will balance this information in demands for better pay and conditions. 15. External stakeholders will also have an interest in the viability of the company. Although Cookridge Carpets Ltd does not trade on the stock market, shares can be sold privately, and the investing public and their advisors will be interested in past events as a performance indicator. This may affect their voting on certain proposals, or their willingness to buy and sell shares. 16. Creditors of the business will be interested in the security of their loans. Suppliers, for example, in credit terms.

This will affect the ability of the company to meet its obligations. 17. The Inland Revenue requires a tax computation based on profit. 18. Business contact group comprising suppliers, competitors who seek basis for comparison and potential customers about to place an order or contract. 19. Cookridge Carpets is, as has been mentioned, a limited company. This means that the company is a separate legal entity to its shareholders and directors, and that shareholders can avail themselves of limited liability. They are not responsible for debts incurred by the company, but in the event f insolvency will be the last to receive payment. 20. The organisation is tertiary, namely involved in retail. It is not involved in manufacture. 21. The accounting function must permit flow of required information. Reporting procedures should be in place to monitor work, and progress must be kept on schedule. 22. The role of the function is as both a resource that can be deployed in order to meet objectives, which are often themselves couched in financial terms, and financial controls are often used to plan and implement strategies.

Financial indicators are often used to assess performance in detail. 23. Systems : 24. Movement of staff kept to a minimum 25. Duplication of work should be avoided 26. Best and most effective use of attributes should be made 27. Simplicity within 28. Use of tecknology where appropriate 29. Review: 30. Purpose 31. What happens 32. Who does what 33. How 34. Quality of performance 35. It is desirable to create an anti-fraud culture within the organisation. In order to do this, responsibility must be placed on each member of staff.

36.There is no fixed legal definition of fraud, but it must contain one of the following: False representation Failure to disclose information Abuse of position. 37. This may involve falsification or alteration of accounting records or documents, misappropriation or theft of assets, suppression or omission of the effects of transactions from accounting records or documents, recording of false transactions, intentional misapplication of accounting policies, and wilful misrepresentation of transactions or the entity’s state of affairs. 38.

Theft (opportunistic) + deception (ie deceit, denial, concealment) involving department staff = fraud 39. Common frauds may involve straightforward theft of physical property, ie stock, petty cash, stationery, IT equipment, theft of intellectual property including customer or price lists, or may involve collusion between employees, or between employees and accomplices outside the company. For instance, with customers to charge lower prices, with customers to raise spurious credit notes, with customers to order goods on credit with no intention of paying.

Cookridge is particularly vulnerable in the last instance due to their lax credit handling. 40. Features of the environment in which fraud is likely to be found include remote supervision or management, credit notes given for undisclosed or inadequate reasons, amounts written off the sales ledger without adequate authorisation or investigation(the dept is vulnerable within…), the management do not investigate due to apathy, or this being perceived as normal, ie “everybody does it. ” 41. Conditions within the workplace also contribute, such as: 42. Understaffing in key control areas

43.Lack of common-sense controls, for instance changing passwords at regular intervals, requiring two signatures on cheques, restricting access to information. 44. Signs of a problem include late payments, work backlogs, incomplete audit trails, extravagant lifestyles, employees presenting themselves as experts. Simple missing elements of control. 45. There are three prerequisites, oportunity, dishonesty and motive. These can be prevented by separation of duties, control of forms and documentation, input and output controls on computer processing, control over installation and testing of new computer programs. 6. Motive can be avoided by use of instant dismissal where appropriate, provision of good employment conditions, sympathetic grievance procedures. 47. In addition, it is important to have a sysem of measures, such as an audit trail, logging of access to files, terminals, books and records. 48. Also good documentation of accounting procedures and programs.

49. Fraud can be prevented through minimisation of the conditions where it is likely to occur, through minimising opportunity through methods of fraud prevention, and creating a climate where they believe they will be caught, which will act as a deterrent. 0. Having identified weaknesses within the system, these must be changed. 51. The internal control system is defined as the control environment and the control procedures. The environment is comprised of the attitude, awareness and actions regarding internal controls. The procedures and policies are established in addition, to achieve objectives and maintain orderly conduct. 52. Internal controls in the sales system 53. Customers’ orders to be properly controlled and recorded 54. Controls over goods delivered so that proof of delivery obtained and all deliveries are accurately charged 55.

Claims made by customers (sales returns) should be validated and all goods returned properly evidenced 56. All invoices and credit notes should be validated before entry in the records 57. Procedures should exist to ensure that invoices are paid for, overdue debts followed up, bad debts promptly identified 58. No sales should be made to non-creditworthy customers 59. A system involves activities for processing information, together with all the documents needed to convey information to the right people, and to control the activities. 60.

Following applies to the checking, alteration or introduction of new procedures. 61. Smooth flow of work, no bottlenecks 62. Movement of staff kept to a minimum 63. Duplication of work to be avoided 64. Best and most effective use of existing specialist attributes to be made 65. Simplicity within systems must be sought 66. Human efforts must be aided by machines where appropriate 67. Procedures and systems must be designed to facilitate the management by exception principle 68. Any systems must be cost effective. The benefits must be compared with the cost of implementation and subsequent supervision costs. 9. The organisation is at risk of credit fraud, by individuals ordering goods for which they do not intend to pay. Formerly the company had no controls in place, and although customers are now vetted externally, but this check is only proof against previous history. After passing this, customers are given unlimited credit. 70. There is further risk of collusion with the Accounts Receivable clerk to prevent this from coming to light, which as the credit terms offered give the customer six months to pay, would be easy to conceal. 71. The likelihood of this happening is high.

Where individuals who are not disposed to pay their bills are not chased for payment, those who may hve had good intentions will think twice, and those who harboured dishonest intentions will of course escape notice. 72. The impact of this will be shown most apparently in the cash flow of the organisation, since the debtors are shown elsewhere as an asset…. 73. The suggested course of action is to formulate a new strategy, consisting of external vetting in conjunction with a credit limit, which must be approved by a manager… 74. There is further risk of issue of spurious credit notes.

Currently returns are given with little investigation, and so the only barrier to this is the presumed honesty of the Accounts Receivable clerk… 75. The impact of this will be a decrease in the value of sales… 76. Risk of this occurring is low… 77. The suggested course would be to request reasons for the return, require the authorisation of a manager, and a written request from the customer to be filed. 78. Next year’s sales booked in this year’s accounts… 79. Deposits booked as cash sales… 80. Weaknesses (think about impact on co as a whole v separate function) 1. Credit notes 82. Ask manager to check and authorise 83. Manager’s time, opportunity cost of training 84. Reduced chance of fraud 85. The current credit control strategy is to allow the customer six months of interest free credit. Many of Cookridge Ltd’s customers have taken advantage of this. The company pays interest to a finance company of 8. 7% per annum. After six months, the customer is charged interest at a rate of 28. 4%. 86. At present at least five hundred customers have taken advantage of this, at a cost to the company of ?21750 .

A further hundred customers have not paid in full within eight months, yet have paid no interest. This equates to a loss of ?4733 in addition to the cost of financing. 87. Inappropriate system used for AR function 88. Purchase of an integrated system networked over all four machines 89. Training, time taken 90. One superuser 91. Purchase and setup cost 92. Automatic backup; time not lost due to failure 93. Ability to assess position of aged debtors 94. Lessen dependence on Excel 95. Lack of coherent credit control strategy


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