© Cengage Learning 2012
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Chapter 9
Case Study
Devise an internal control system for the shops
This could take several different forms and students may want to
prepare flow charts or systems notes. The key principles of any
system are given for this answer.
Relate your system to the definition of internal control
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Identify the types of internal controls in your system
Examination questions
1. Internal controls
(i) Receipt, processing and recording
1. All orders taken should be recorded on a pre-numbered multi-part
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2. The computer system should apply the credit limits set by the credit
controller and the system should reject any orders that exceed customer
credit limits at the point at which the order is taken, so that the customer
can be advised. Any override of credit limits should be authorised by the
credit controller.
5. All invoices should be posted to the sales daybook, the accounts receivable
ledger and the accounts receivable control account automatically by the
system and the accounts receivable ledger and the accounts receivable
control account should be reconciled each month in order for sales and
receivables records to be kept up to date.
(ii) Collection of cash
1. At the end of each period, the system should produce a list of overdue
receivables. There should be procedures for chasing these customers and for
putting a ‘stop’ on accounts where amounts are significant in order to control
bad debts.
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4. A bank reconciliation should be performed on a monthly basis in order to
ensure that the company’s cash records are complete, accurate and up to
date.
(ACCA)
2 Dinko – Payroll
The common features when considering both wages and salaries are:
all employees have to have a contract of employment setting
they have to be paid on time.
Control objectives
To ensure that wages and salaries are paid only to actual employees at
authorised rates of pay.
To ensure that all wages and salaries are computed in accordance with
Control procedures
There should be separate records kept for each employee. The records
should contain such matters as date of employment, age, next of kin,
agreed deductions, skills, department, and specimen signature. Ideally
these records should be maintained by a separate HR department.
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not abuse the system by getting other staff to clock them in or out.
Time records should be approved before preparation of salaries and
wages. All overtime should be authorised.
Output or piecework records should be properly controlled and authorised
and procedures should exist for reconciling output or piecework records
with production records.
only bona fide employees are being paid.
Deductions such as PAYE, National Insurance, pension contributions and
other authorised deductions should be subject to prompt payment over to
the institutions concerned. Control totals subject to frequent review
should be kept.
Regular independent comparisons should be made between personnel
records and wages records, in particular direct bank transfer (such as
BACS payments) lists.
b) The audit objective is to carry out audit work so as to gather sufficient
appropriate evidence to validate the assertions about the payroll system.
These can be summarised as:
payment for wages and salaries relate to work done for the company
being audited (occurrence);
all payments of wages and salaries that should have been recorded have
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The test performed on payroll are basically designed to ensure that:
internal controls are working;
the scope for fraud is limited.
Payroll has often been a vulnerable area to fraud but the decline in the
payment of cash wages has limited the opportunities open to the fraudster
and the use of reliable payroll software has further eroded the possibility of
falsifying payroll details in order to defraud the business.
Again the audit work will consist of a mixture of compliance and
substantive tests. The main procedures are:
check authorised rates of pay are being used;
confirm authorisation procedures operating with regard to:
x
x
clock cards, job cards, time sheets or other evidence of time
worked;
x
production records for payments based on productivity;
x
signed lists for bonuses;
x
approved lists for commission payments to revenues staff.
check calculations of gross to net pay for a sample of employees verifying
authorisation for and calculation of:
xgross pay;
xovertime payments;
xpiecework payments;
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For payment of cash wages:
check the packets to the payroll to ensure each employee has a packet;
attend wages payout and observe procedures;