+1 862 207 3288 Project – Report – Anlaysis
Title (and reference number) Principles of Internal Control (Knowledge) (PIC)
Level 4
Learning outcomes – learners will: Assessment criteria – learners can: Section / Paragraph number
1 Demonstrate an understanding of the role of accounting within the organisation. 1.1 Describe the purpose, structure and organisation of the accounting
function and its relationships with other functions within the organisation. 1.2 Explain the various business purposes for which the following
financial information
is required
• income statement (profit and loss account)
• forecast of cash flow (cash flow statement)
• statement of financial position (balance sheet) 1.3 Give an overview of the organisation’s business and its critical external relationships
with stakeholders 1.4 Explain how the accounting systems are affected by the organisational structure, systems, procedures, and business
transactions. 1.5 Explain the effect on users of changes to accounting systems caused by
• external regulations
• organisational policies and procedures. 2 Understand the importance and use of internal control systems 2.1 Identify the external regulations that
affect accounting practice. 2.2 Describe the causes of, and common types of, fraud and the impact of this on the organisation.
2.3 Explain methods that can be used to detect fraud within an accounting system. 2.4 Explain the types of controls that can be put in place
to ensure compliance with statutory or organisational requirements. 3 Be able to identify and use the appropriate accounting system to meet specific
organisational requirements. 3.1 Identify weaknesses in accounting systems
• potential for errors
• exposure to possible fraud. 3.2 Explain how an accounting system can support internal control. 3.3 Identify ways
of supporting individuals who operate accounting systems using
• training
• manuals
• written information
• help menus. 3.4 Explain the value and benefit to a specific organisation of different types of accounting systems and software
packages.
Title (and reference number) Evaluating Accounting Systems (Skills)
Level 4
Learning outcomes – learners will: Assessment criteria – learners can: Section / Paragraph number
1 Evaluate the accounting system and identify areas for improvement. 1.1 Identify an organisation’s accounting system requirements.
1.2 Review record keeping systems to confirm whether they meet the organisation’s requirements for financial information. 1.3 Identify
weaknesses in and the potential for improvements to, the accounting system and consider their impact on the operation of the organisation. 1.4
Identify potential areas of fraud arising from lack of control within the accounting system and grade the risk. 1.5 Review methods of operating for
cost effectiveness, reliability and speed. 2 Make recommendations to improve the accounting system. 2.1 Make recommendations for changes to the
accounting system in an easily understood format, with a clear rationale and an explanation of any assumptions made. 2.2 Identify the effects
that any recommended changes would have on the users of the system. 2.3 Enable individuals who operate accounting systems to understand how to
use the system to fulfil their responsibilities.
2.4 Identify the implications of recommended changes in terms of time, financial costs, benefits, and operating procedures.
Guidance
Your report will form your assessment for the learning and assessment area Internal Control and Accounting Systems that comprises the following two QCF units:
• Evaluating Accounting Systems
• Principles of Internal Control
You should map your report to these units by page and paragraph number to ensure that you cover all the assessment criteria (see Appendix 1 – Mapping of report to
outcomes and criteria).
You will be assessed on your formal business report, which your assessor can review a maximum of five times.
Your report must be written/typed, completed and submitted for formal assessment within four months.
You may have four further opportunities to submit additional supporting evidence at the discretion of your assessor. Please discuss this with your assessor.
There may also be a final interview required with your assessor.
If you are judged to be not yet competent at that stage, you will need to complete a new report based on a different case study.
Assessors will conduct a final interview with Distance Learning candidates.
To access general guidance on report writing and report content, log into your MyAAT account on the AAT website, http://aat.org.uk/myaat
Assessment Tasks
Anil Gupta, the Finance Director of Inkwell Ltd has asked you to review the company’s accounting system – paying particular attention to the effectiveness of its
internal controls. You are then asked to make any recommendations for improvements that you feel are necessary.
Anil Gupta has suggested that you review the following documents:
• ftp://public.dhe.ibm.com/common/ssi/rep_wh/n/WSW14053USEN/WSW14053USEN.PDF
• http://www.pwccn.com/home/eng/forensic_fraud.html
To help you in this task he has provided some information about the company including:
• history
• the personnel in the Accounts Department
• an overview of the accounting system
• a list of events that have occurred over the previous few months.
You must produce a business report for Anil Gupta. It should be approximately 3,500 to 4,000 words long, and should cover the following tasks:
Task 1)
Complete a review of the accounting system.
Task 2)
Identify weaknesses and make recommendations for improvement.
Task 3)
Prepare a cost benefit analysis.
Task 1)
Complete a review of the accounting system
You can review the complete system or one or more of the accounting functions, depending on your findings. Whichever you choose, you must specifically cover the
following points. They’ve been mapped to the assessment criteria in the units for your guidance.
1. Record keeping systems: the purpose of financial reports, and the suitability of the organisation’s current reports to meet organisational needs. (EAS 1.2 and
PIC 1.2)
2. Internal systems of control: identify how internal controls support the accounting system. What types of internal controls are in place, and which controls are
missing? (PIC 2.4, PIC 3.2 and EAS 1.4)
3. Fraud: causes of fraud, common types of fraud, methods used to detect fraud and potential areas for fraud within the organisation. (EAS 1.4, PIC 2.2 and PIC
2.3, PIC 3.1)
4. Working methods/practices: including the use of appropriate computer software, and the operating methods in terms of reliability, speed and cost effectiveness.
(PIC 3.4 and EAS 1.5)
5. Training: identify how training is being used, or could be used, to support staff. (PIC 3.3)
Your review should cover all aspects of the assessment criteria as mapped above if they fit naturally into the report. If you can’t cover them in the report then you
should cover them, with a written explanation, in the Appendices.
While a SWOT analysis may be a good starting place, you shouldn’t place this in the body of your report.
Task 2)
Identify weaknesses and recommend improvements
Once you’ve completed your review of the system, you should clearly explain the weaknesses you’ve identified and their impact on the organisation. (EAS 1.3 and PIC
3.1).
For every weakness you’ve identified, you should recommend a way to improve the situation. (EAS 2.1, PIC 2.4 and PIC 3.2)
Your recommendations should concentrate on the effect the changes would have on both the organisation and on individual members of staff. (EAS 2.2 and PIC 1.5). You
might also highlight training needs or aids to improve staff performance. (EAS 2.3 and PIC 3.3).
Task 3) details on next page
Task 3)
Prepare a cost benefit analysis
At least one of your recommended changes should be subject to a cost benefit analysis. While you can’t quantify (that is, know the monetary value of) all benefits, you
can quantify all costs. Make any assumptions or estimates necessary to allocate costs to such items as:
• time
• unknown salaries
• any other unknown expense involved in the recommended changes.
Make sure you identify all benefits, including those you can’t put a financial figure on. These can include such things as:
• improved customer relationships
• improved documentation systems
• improved staff morale (although you could judge this to be a financial benefit, as improving staff turnover cuts recruitment costs). (EAS 2.4)
Note on appendices
You should include any charts, diagrams or supporting evidence you use in the appendices, ensuring you cross reference them within the text. Refer to any appendices
you include in the main body of the report. If you include supporting statements to cover missing assessment criteria, map and cross reference them to a copy of the
unit standards.
Inkwell Ltd
Mission statement
Inkwell’s mission is to save our customers money without compromising quality, and at the same time to help ensure a greener environmental future by better use of
inkjet and toner cartridges. The company supplies a complete range of re-manufactured inkjet and laser toner cartridges that are fully compatible with all major
printers. Customers ordering printer cartridges from Inkwell know they are getting a high quality, 100% guaranteed product.
All leading brands are readily available from our outlets nationwide; or from our 24/7 online shop where orders will normally be shipped out the next day, no matter
where our customers are located.
Each cartridge is put through a thorough multi-stage procedure to ensure its yield is as at least as good as that of the original. Our products are manufactured to the
highest quality standards using the latest state of the art advanced equipment, and in the unlikely event of any customer being dissatisfied will be replaced without
argument.
Company history
The current date is late November 2010, and you are employed as an Accounting Technician with Inkwell Limited (IWL).
The company has a head office on an industrial estate in Birmingham, where its management team and accounts department are both based. It also has a large central
warehouse on this site. It sells its products through a nationwide chain of high street shops and also by way of a 24/7 on line shop, which is on the head office site.
IWL was established seven years ago by two of its three controlling shareholders, Paul Farnon and Victoria Dawson. Anil Gupta bought into the company and joined the
board as Finance Director two years ago when the two other directors realised the need to have more professional accounting expertise. All three have previously worked
for various companies involved in either the manufacturing or distribution of inkjet and laser toner cartridges. Paul was working as the UK General Sales Manager for
Hewlett Packard, a major manufacturer of printers and printer cartridges; Victoria as a Marketing Manager for Rymans, a major office supplies retailer; and Anil as a
Finance Manager for Epson, another large manufacturer of printers and printer cartridges.
The current board and shareholding of IWL is:
• Paul Farnon Managing Director Owns 40% of shares
• Victoria Dawson Sales Director Owns 30% of shares
• Anil Gupta Finance Director Owns 30% of shares
The two founding directors had known each other for several years before setting up IWL, as colleagues who were working in the same industry. From their knowledge of
the printer cartridge sector they knew there existed a strong market demand for cheaper and greener products. They believed this could be achieved by using re-cycled
original cartridges that were refilled and then reused.
Their business model is to offer a part exchange facility whereby customers either post used cartridges to the company’s on line shop or physically take them into one
of over 60 shops in the company’s chain that are situated in all major UK cities, and many large towns. If customers do bring their old cartridges in they are then
given a 10% discount against the cost of a replacement cartridge. IWL then sends these old cartridges in batches to a small number of cartridge manufacturers who then
refill them. Quality is a key issue for IWL and their brief to the manufacturers is that the yield (number of printed pages per cartridge) must be as good as that of
the originals.
Company history continued
The company emphasises the green advantages of its business model, and stresses its environmental advantages as well as the fact that its refilled cartridges are
usually up to 20% cheaper than those of the original branded products.
IWL aim to keep just enough inventory in each shop to be able to meet three days worth of normal sales. They also keep just sufficient inventory in their on line shop
to be able to offer a next day delivery service – dispatching office supplies to customers immediately on receipt of their order. The intention of this policy is to
minimize IWL’s inventory holding costs, whilst at the same time ensuring there are no inventory outages that alienate potential customers. They are, in effect, able to
operate almost on a just-in-time system and save themselves the cost of holding all but minimal inventory levels.
Each evening the company collates its sales for the day and issues replacement orders to its suppliers. The supplying manufacturers are contracted to deliver to the
IWL central warehouse two days after they receive an order. IWL then sends the cartridges out by post to its nationwide network of stores.
By drawing on their combined experience and track record in all stages of the cartridge market sector, and particularly since Anil joined the company, the directors
have been able to produce a series of convincing annual business plans. These have enabled them to raise sufficient finance from their bank to grow IWL into a
significant player in the cartridge supplies sector.
Over the past seven years the company has grown steadily and now has revenue of over £16 million. It employs around 180 full-time equivalent employees.
Personnel department information
Anil Gupta, BSc, FCMA, Finance Director
Anil is aged 43 and is married, with two daughters, both of whom are at university. He owns 30% of the shares in the company.
His primary responsibility is to manage the overall financial position of the business. This involves ensuring that capital investments, such as new shop openings, are
thoroughly appraised and in line with corporate strategy; that working capital levels (and particularly inventories) are kept to a minimum; and that IWL is funded by
the lowest cost mix of debt and equity. He also needs to ensure that the company’s credit rating is kept strong.
Anil has overall responsibility for all finance, legal and accounting procedures and systems. He personally produces the annual company report and statutory accounts,
deals with all banking and finance issues, and also fulfils the role of company secretary by handling all legal issues.
Anil rarely gets involved in the detailed running of the Accounts Department that is delegated to the Company accountant.
Michael O’Payne, ACCA, Company Accountant
Michael, aged 57, is married, with two grown up sons. He joined IWL when it was first set up and exercises full day- to- day responsibility for the running of the IWL
Accounts Department. He has been employed in the same role as company accountant since IWL was founded, and is AAT and ACCA qualified. When the business was formed
Michael reported directly to the Paul Farnon, the Managing Director, but since Anil’s appointment as Finance Director two years ago he has (reluctantly) reported to
him. Michael saw Anil’s appointment as a demotion for himself and there is ongoing low-level tension between the two men.
Michael produces the monthly management accounts, and personally approves all payments to suppliers. His main role, however, is to manage the work of the accounting
technicians and clerks running the transaction accounting systems. These comprise the general ledger, accounts payable (purchase) ledger, and accounts receivable
(sales) ledger, together with the costing system and the payroll and personnel database management system. Michael considers himself to be by far the most able hands-
on manager in the company.
The other Accounts Department staff, who all report to the Company Accountant, are as follows. They each work a full-time, 35 hour week with paid overtime, unless
otherwise stated.
The first member of the accounts team is you, Alex Fox, Accounting Technician.
You have worked for IWL for the past six months and are hoping to complete your AAT qualifications next year.
You are aged 22, and are single.
You have experience of working on both accounts receivable and general ledgers with your previous employer; and you were recruited to review the company’s systems and
procedures and to identify and recommend changes where needed. Although your role largely involves reviewing accounting systems, you also undertake quite a lot of
other project work that the Finance Director or Company Accountant asks you to do. You report to Michael O’Payne, but have direct access to the Finance Director as
well.
Michelle Labelle, General Ledger and Inventory clerk
Michelle moved to the UK from France five years ago to live with her British partner, John, with whom she has a three year old daughter. She is 25 years of age. Part
of Michelle’s job is to enter all data requiring input directly into the general ledger and to produce the end of month trial balance. She is also responsible for
maintaining the company’s cash book and its petty cash imprest system.
Her other main role is to keep financial control over the company’s inventories. Here she is responsible for reviewing daily e-mail reports submitted by the shop
managers on the number of cartridges held in each shop. She also monitors orders to suppliers, placed by the Purchasing Manager, to replenish these. If inventory gets
above three days’ holding in any shop Michelle has to telephone the shop manager and find out why.
Michelle has been in this job since she joined IWL four years ago, and has no accounting qualifications. Previously she worked in France as a trainee personnel
officer, but decided to change job when she relocated to the UK.
Liana Khan, Accounts Payable (Purchase Ledger) clerk
Liana, aged 32, is responsible for entering all suppliers’ invoices and credit notes into the Accounts Payable (Purchase) Ledger, and for subsequently arranging the
payments to suppliers.
She has been in this job for the past three years, and previously worked for a year as the Accounts Receivable clerk. Liana is married to Patrick, who is Michael
O’Payne’s youngest son, and they have three small children.
Liana has foundation level 2 AAT qualifications, and has expressed an interest in studying for her intermediate level 3 exams.
Liana is employed on a part-time 20 hours a week basis.
Greg Morris, Accounts Receivable (Sales Ledger) clerk
Most of IWL’s sales are retail sales where the customer buys one or two cartridges from one of the shops and pays by cash, debit card or credit card. There is,
however, a number of larger trade customers who buy from the central warehouse, and these are given credit terms. These range from 30 to 60 days depending on the
customer. Typically, these businesses also need a retrospective discount based on the value of their purchases each quarter from IWL.
Greg is aged 27 and engaged to be married. He is responsible for inputting all data into the Accounts Receivable ledger, and for the company’s credit control. Greg
sends out the monthly statements to trade customers and works out their quarterly retrospective discounts.
He has been in this job for the past three years, joining IWS, from Rymans, where he was one of their purchase ledger clerks. He currently has no accounting or credit
control qualifications, but has expressed at least a nominal interest in acquiring some.
Greg is employed on a part-time 20 hours a week basis.
Alan Cook, Costing Technician
Alan, aged 62, is widowed and has three grown up children, who he rarely sees as they all live abroad. He is responsible for operating IWL’s costing system, and has
been in this role since the company was set up. The company uses a target costing approach – the Sales Director advises the market price of any cartridge and IWL then
takes off its required profit margin to arrive at the price it needs to have the cartridge manufactured for. Alan works out what the cost of each component, such as
ink or plastic, should be and supplies management with the information on which to negotiate with suppliers. He then monitors the costs and profitability of each
cartridge on a monthly basis, and advises management of variances from target.
Before joining the company Alan had had a long career in several different sectors, and has worked on Accounts Payable and Accounts Receivable ledgers in the past –
although not at IWL. The last company Alan worked for before joining IWL was a printer cartridge manufacturer, where he had worked as a costing technician until the
factory closed just over seven years ago.
Alan is very experienced and competent at his job, but has no accounting qualifications. He has expressed his reluctance many times to undertake any form of personal
development or training, which he views as a waste of time and money for a man of his age.
Sharon Ward, BA (Hons), Payroll and Personnel Database clerk
Sharon’s main responsibility is running IWL’s two payrolls (a monthly payroll for management and salaried staff; and a weekly payroll for hourly paid staff). She also
issues all the statutory forms required by HMRC, the UK tax authorities – such as P45’s, P60’s, and for preparing annual tax returns, such as P11D’s.
Her second responsibility is for maintaining the personnel database.
Sharon is 26 years old and single.
When Doug French, the previous post holder, left the company some four months ago, Sharon was recruited as his replacement to do this job. Doug had only run the
company’s two payrolls, but the Finance Director decided that his replacement should maintain the (at that time unused) personnel database as well.
Sharon has AAT foundation level 2 accounting qualifications, and had previously worked as a holiday company resort representative for several years, before starting to
study accounting with her previous company six months before joining IWL. Here she worked on the company’s largely manual payroll.
At university Sharon studied modern languages and obtained a good upper- second (2.1) degree. She had then hoped to work as a translator but failed to find a job that
used her qualifications and eventually took her previous accounting job, as a complete change of career. as she needed a regular income. Before joining IWL Sharon’s
only experience of operating a payroll was the six months with the largely manual system at her previous employers. The software company that sold IWL their integrated
payroll and personnel system provided Sharon with a day’s intensive training on it when she joined the company.
Sharon is keen to further her accounting studies, and is has been agreed that she will be given day release to study for her AAT intermediate exams.
Diary of events for last six months
June 2010
The end of June was the company’s financial year- end, which meant that this month produced a peak in workload for the Accounts Department. What made matters worse was
that as well as being very busy the department suffered several serious problems in trying to meet the year- end closure routines.
Greg Morris experienced some of the worst difficulties. These were caused by a conflict between trying to operate the Accounts Receivable (Sales) Ledger and at the
same time trying to act as credit controller. Anil Gupta, the Finance Director, had told Greg to give priority to reducing outstanding year-end debtors by as much as
possible. This meant that he spent most of his time during May and June chasing up trade receivables accounts for payment, and as a result, he fell behind in keeping
up with his work in maintaining the Accounts Receivable Ledger. This problem was made even worse by the fact that Greg is a part-time member of staff – only contracted
to work for twenty hours per week.
By the end of June Greg had only completed the postings for just over half of the transaction entries affecting the Accounts Receivable Ledger, and was now working an
extra ten hours a week paid overtime to try and catch up with his work. The only other member of staff trained to operate the Accounts Receivable Ledger was Liana
Khan, but she could only give a small amount of practical help because she too had more than enough of her own year-end work to get through, and also was only a part-
time member of staff. It had also been three years since Liana worked on the Accounts Receivable Ledger and she was now unfamiliar with it.
Michelle Labelle was the other member of staff who had difficulties during this month. In a normal accounting month, that is not the full or half year-end, Michelle is
always very busy during the last week of the month, but has relatively little to do on the General Ledger during the other three weeks or so. During these weeks she
concentrates on her work of controlling inventories. At the year-end however, Michelle knows that she is always going to be stretched to the limit, and so always tries
to get well ahead with her work on the General Ledger and the cash book. This is so that she can then concentrate on producing the trial balance. This month, however,
both the Accounts Receivable and the Accounts Payable (Purchase) Ledger had to be closed off much later than scheduled, which in turn meant that Michelle was unable to
complete the trial balance until over a week after the due date. As a result of this Anil Gupta was unable to complete the statutory accounts, as planned, before he
was due to go on a three- week overseas holiday. He was not best pleased.
July 2010
Usually the first month of the financial year is fairly quiet and uneventful, but the first two weeks of this month were frenetic, as the Accounts Department had to
catch up on its work that had fallen behind last month.
Michael O’Payne, the Company Accountant, and Liana Khan, the Accounts Payable clerk, spent the first week of this month reviewing the payments that are due to the
cartridge manufacturers. IWL, like many businesses, does not usually pay its suppliers the month before either the full- year or half-year ends. This is to ‘window
dress’ its accounts (make the financial position of the company look better than it actually is). They are, however, then paid in the first couple of weeks of the
following month. As IWL now operates with a relatively small number of suppliers, it is usually possible for Liana Khan to contact these and tell them that their
payments will be a couple of weeks late. In general, most suppliers accept that this tends to be standard business practice, and go along with delayed payments once or
twice a year without too much complaint. As a by-product of this review Liana found that Printfine Ltd., one of the suppliers, had put through two large price
increases during the year. She thought this very peculiar, as the directors had told Peter Chapman, the Purchases Manager, that – due to the difficult economic
conditions – there were to be no increases in price conceded this year at all. Yet this supplier had not one but two increases approved by Peter.
Diary of events for last six months continued
As was usual during late July, there were problems caused by staff holidays. Although some aspects of the Accounts Department’s work can be left for a couple of weeks,
others, relating to the transaction accounting, always cause difficulties when they are not done on a day-by-day basis. A particular problem was that no invoices were
raised during the last two weeks of the month because Greg Morris was off on holiday.
Doug French, the Payroll clerk, left the company during the month, and as
an interim measure, an agency temporary employee, who was familiar with the payroll system, was brought in to provide cover whilst a replacement for Doug was
recruited.
This was because no one else was trained to use the system.
August 2010
You visited a number of the shops this month to carry out a count and condition report of their inventory. You were surprised to find in one of the shops that Pamela
Watts, the girlfriend of the shop manager, was booking a holiday on the shop computer when you arrived. She explained that she regularly called into the shop to use
the computer in her lunch break and that her boyfriend had said that this was not a problem as the internet usage deal provided for unlimited downloads. There was,
therefore, no extra cost to the company. You asked her how she managed to access the computer as her boyfriend was out of the shop at the time. This she said,
cheerfully, was never a problem as the computer was always left logged on – and in any event it would be no real inconvenience to her if it were not as she knew the
password anyway.
At the end of the month Sharon Ward, the replacement for Doug French, joined the company. The software company who provided IWL with the payroll and personnel database
package provided Sarah with an in house one-day intensive training course on the system. The temporary worker employed through the agency was kept on for the whole of
this month and for the first two weeks of September to provide some cover whilst Sharon settled in. Sharon found it very difficult to get to grips with both the
payroll and the personnel system after just a single day’s training.
When Anil Gupta joined IWL as Finance Director he was surprised to learn that the company kept no proper archived records of its business dealings. He, therefore,
decided to buy an archiving package, which provides a means of storing full accounting records electronically for each of the past financial years. This enables both
the company’s auditors and its staff to have access to an exact copy of the company’s accounting transactions for these periods. Once configured, the process will be
updated automatically; and can be scheduled to run at times to suit the company’s workload, thereby avoiding any disruption of the day-to-day work. In theory, one of
your tasks since joining IWL has been to load past years’ information manually into this package. It is then intended that it will be linked to the General Ledger and
automatically updated from the start of the next financial year. In practice, however, you have had very little free time to carry out the data entry. Furthermore, the
task in itself is not viewed as a priority by Michael O’Payne and Anil Gupta, with his habitual lack of following through on detail, seems to have all but forgotten
about this task.
September 2010
Several teething problems were experienced with the now-integrated payroll and personnel system. Sharon Ward confessed to you that she was still having problems
operating it, and felt that her one-day training had been insufficient. Unfortunately, no one at IWL could help her with its detailed workings.
Michelle Labelle spoke to you this month; she had been reconciling purchase orders, against inventory levels on a spreadsheet and was surprised to discover that £3500
worth of a particular make of cartridge was unaccounted for. She had reviewed the inventory audit trail, which showed that this cartridge had been ordered from
Fineprint Ltd., but as far as she was aware it did not appear on the inventory record for the warehouse. She then referred the matter to Peter Chapman who it seemed
was very reluctant to get involved with this matter.
Diary of events for last six months continued
The General Ledger is the central hub of financial information at IWL, containing all the company’s transactions that can be enquired into in different ways so as to
provide a complete picture of the company’s financial activities. A problem occurred this month, however, when unusual entries were found in the General Ledger that
could not be traced to either Michael O’Payne or Michelle Labelle, the only two members of staff who are authorised to work on it. Michelle found these entries and
then checked with Michael as to whether he had made them. Michael confirmed that he had not, and then asked for your help in investigating how these entries had
occurred. After some investigation you found that Greg Morris had apparently unintentionally accessed the General Ledger.
You reminded yourself that the General Ledger software has security settings to ensure that information is only available to those users that have the right clearance,
but the list of authorised access users had not been set up. As at September 2010 all accounts department staff had full general ledger access.
October 2010
During the third week of the month there was a power cut in the head office, caused by an overhead power cable that was brought down by gale force winds. The Accounts
Department’s usual practice is to back up all IT systems once every day – at the close of business. This is the procedure that Michael O’Payne instigated when he
joined the company. Unfortunately, because the power failure occurred in the very late afternoon, this meant that most of that day’s work on all three ledgers, the
costing system and the payroll was not backed up. By the end of the month the department had managed to more or less catch up on their lost work, but only by working a
large amount of paid overtime.
The shop in Norwich was broken into this month, and the burglars escaped with over £2,000 in cash. This shop normally turns over around £4,000 per week, of which 25%
is usually taken in cash and the rest by debit or credit card.
You were sent to Norwich to investigate whether poor internal controls had contributed to the loss. Whilst you were there, Amy Price, one of the sales staff,
approached you about her pay. She told you that she thought she was being slightly underpaid on a regular basis, and gave you last week as an example. She had worked
45 hours in total, of which three hours were normal overtime and two hours were Sunday working doing inventory pricing. Her pay was £332.50 gross and she wanted to
know if this was correct. You promised to investigate this and get back to her, but also wondered if this was another internal control issue for you to think about.
November 2010
Online sales have been steadily improving. Paul Farnon, however, is getting a little concerned, as he does not understand what safeguards the company has in place for
collecting payment when customers are not present. He explained to you that he would prefer to use some other method than customers giving debit or credit card details
over the internet, as he is very aware of the problems of identity theft. He does not, however, know of any more secure ways in which this money could be collected.
You have made some progress during the past few months on configuring the archiving package, and have managed to input quite a lot of the transaction entries from
earlier this year. However, when the payments to suppliers were entered it was not always possible to reconcile these against purchase orders made by the company. The
problem related to a small number of one-off, but significant, payments to cartridge suppliers that the company does not seem to have raised purchase orders for. It
appeared that some details of these transactions might have been deleted from the database. You recalled that automated full invoice matching is available against the
Purchase Order Processing module, but that the company had not bought this module on the advice of Peter Chapman, who considered it a waste of money.
Diary of events for last six months continued
Alan Cook is currently away from work on sick leave, with a slipped disc in his back, for at least the next two weeks. This is causing the Accounts Department
considerable problems, as there is no one else able to operate the costing system. Usually, Alan is never away for more than a week or so at a time, and it is possible
to leave costing for this length of time – but not for a minimum of two weeks. In fact, Alan is usually able to plan his work well enough ahead to cover his taking
annual leave, but his unexpected illness obviously prevented him from doing this.
Michael O’Payne decided he would try and cover Alan’s work himself as best he could, as well as keeping his own work on schedule. However, without any proper training,
it is proving very difficult for him to operate this unfamiliar system and very little is actually achieved on it. Anil Gupta has become concerned at the lack of
proper costing information and has instructed Michael to bring in a temporary agency worker who is properly trained to use the Quickcost system.
Inkwell Ltd
Information technology policy
The following is an extract from the company policy handbook, issued by the Finance Director six months ago, and relating to the company’s IT systems:
All computers whether in head office or in the shop network must only be loaded with licensed software, owned by the company.
No member of staff is allowed to load any software onto computers without prior written permission from the senior management of the company.
No unauthorised devices are to be used for saving, uploading or downloading work (no discs, memory sticks, external hard drives or other devices) other than those
purchased and approved by the company.
Only authorised members of staff are to use IWL’s computers
Each computer must be individually password protected. Only the employee and his/her line manager must know this password.
All IT systems must be fully backed up twice each day; once at lunch time and again at the close of business each day.
Anil Gupta
Finance Director
23/05/10
Information technology systems
The head office has 28 computers, eight of which are located in the Accounts Department where every member of staff, whether full or part time, has their own dedicated
personal computer (PC). These are all run on an integrated basis and are all linked to the same two printers. Each shop, of which there are over 60, has its own PC and
printer that are used by the three or four part time members of staff employed there. These all operate as stand-alone systems. There are, therefore, 88 PCs in total.
When the company was established seven years ago, a password was installed on all the computers then in use to protect the information stored on them. This password
was ‘Go Green’ -, and it has been used ever since for all IT security throughout the company. All 88 computers have this password currently installed on them.
All the current computers were purchased during the past five years, and are running on the Windows Vista operating system; they are also loaded with Microsoft Office
2007 version (with an 80-user operating licence). All have full Internet and email access, using Firefox as the internet web browser program. Ten months ago, one of
the Accounts Department computers was also loaded with Sage Payroll software to enable the new payroll and personnel systems to be run in-house.
The inventory information on the number of printer cartridges in the central warehouse and in the network of shops is maintained on a series of Microsoft Office Excel
spreadsheets. Michelle Labelle updates these each evening when the shop managers e-mail her the details of their sales for that day. This is the company’s main
inventory control system which keeps a record of all inventory movements in and out of the business, produces automatic orders to suppliers when pre-set reorder points
are reached and runs a perpetual inventory balance.
The principal financial accounting system comprises an integrated General, Accounts Payable (Purchases) and Accounts Receivable (Sales) set of Ledgers. This system
runs on the Windows Vista environment and holds data in a non-relational database.
The costing system is a proprietary one, called Quickcost, which is used by Alan Cook to calculate the target costing information that is used to negotiate prices with
cartridge suppliers.
Accounts receivable (sales ledger)
Sales and customer receipts policies
Smaller non-trade (retail) customers pay by cash, debit or credit card at the time of placing their order with the on-line store, or when they buy their cartridges in
one of the network of shops. These customers account for 80% of IWL’s revenue.
The company’s policy for large trade (business) customers is generally to trade with them on a cash- with- order basis for the first three months of doing business. It
then uses a credit reference agency to ensure that these potential new credit customers have no history of poor payments. Other than this check any new customer who
applies is always given a line of credit after this trial period. They are usually given open credit terms of between 30 and 60 days from the end of month of ordering.
Greg Morris, the Accounts Receivable (Sales) clerk, is responsible for credit checking all new trade customers. He discusses with Victoria Dawson, the Sales Director,
all new accounts requiring a credit limit of more than £1,000 per month. He then recommends a credit limit, for any new account, which will apply after the 3-month
trial period. The Finance Director also approves all new credit limits and changes to existing limits for large trade customers that are more than £5,000 per month.
IWL has around 120 large trade customers, and these account for some 20% of the company’s revenue.
Greg Morris uses the goods dispatched listings as the trigger to produce sales invoices, which in accordance with Anil Gupta’s instructions are sent out on a weekly
basis to trade customers. When cheque payments are subsequently received from debtors they are sent to Greg who banks them also on a twice-weekly basis. Greg is then
responsible for making the postings to the Accounts Receivable Ledger, and for the associated entries in the General Ledger.
Greg also produces a monthly aged trade receivables listing and is responsible for ensuring payment occurs. The policy is that once payment is seven days overdue Greg
will telephone the customer. If payment is not received within 14 days of the telephone call, then Greg writes to the customer asking for payment and for the account
to be brought into order.
All outstanding accounts more than one month overdue are reviewed with Michael O’Payne. Any outstanding accounts more than two months overdue are in principle reviewed
by either Anil Gupta or Victoria Dawson. In practice, however, this rarely happens because Anil is not a details man, and avoids this type of tedious task; equally
Victoria does not like damaging her relations with her customers by chasing them for money.
If payment is still not received after three months then company policy is that the details are passed onto a debt collection agency that work on behalf of IWL. The
debt collection agency charges £100 per case, plus 25% of any monies collected. Once again, this policy is not always followed, because Victoria Dawson often persuades
the Accounts Department not to alienate her customers by pursuing them in this way.
Cash and banking
Cash/cheque handling and banking policies
Cash receipts:
The vast majority of IWL’s income comes from retail sales, to the man in the street, through its UK wide network of shops. Many pay by debit or credit card and these
are processed in the shops at the point of sale. Others pay by cash or by cheque. At the end of each business day, all cash and cheques are supposed to be removed from
the shops and banked, leaving a float of £50 cash in each for the start of the next day. The shop managers, however, tend to leave cash and cheques in the tills, until
they bank them once or twice a week and rarely follow company policy.
Payments from trade customers are dealt with centrally by Greg Morris, the Accounts Receivables clerk, who opens the mail every morning and sorts through it for all
cheques received from customers. These are entered manually into a day book to record the receipt, and the day book is then used to update the ledger accounts. The
cheques and any cash are then placed in the head office safe until a banking day.
Cash payments: authorised banking signatories:
All BACS transfers and company cheques are required to be signed by any two of the company’s authorised signatories. These are the three directors and the Company
Accountant.
Bank reconciliations
Michelle Labelle, the General Ledger clerk, manually produces a monthly bank reconciliation statement. Amongst other things, this reconciles the cash book to the bank
statements, and the paying in book to the bank statements. Michael O’Payne then checks this reconciliation and formally signs it off as being correct.
Wages and salaries
The Payroll and Personnel database clerk Sharon Ward’s main responsibility is for operating the company’s two payrolls (a monthly payroll for management and salaried
staff; and a weekly payroll for hourly paid staff). In addition Sharon is also responsible for issuing the statutory forms required by HMRC, the UK tax authorities.
These include P45’s, P60’s and the annual tax returns, such as P11D’s.
All staff, except those on administrative or management grades, who work in the network of shops, the on-line shop and the central warehouse, are paid weekly by BACS,
on the last working day of each week. The other staff are either paid on the administrative (salaried) grade or the management grade; each of which has five points in
its scale. They are paid, also by BACS, on the last working day of each month. The directors are paid separately, for confidentiality reasons, by an outside payroll
agency.
The following table sets out the working hours, rates of pay and frequency of payments for the various categories of staff in the company. Management grade staff are
not paid overtime.
Staff Rate Normal time Time and a half Double time Pay period
Sales and warehouse £7 per hour
40 hours Hours over 40 Monday to Saturday Sunday hours Weekly
Administrative grade From £15,000 per year (Point 1). To £20,000 per year (Point 5) 35 hours Hours over 35 Monday to Saturday Sunday hours Monthly
Management grade From £17,500 per year (Point 1). To £30,000 per year (Point 5) N/A N/A N/A Monthly
All sales staff and shop managers earn a commission of 2% each on the first £4,000 of sales per month, and 5% on any sales over that figure. This commission is based
on the sales for each shop rather than on the individual sales made by staff that work in that shop. It is paid on the 15th of each month, based on the sales achieved
in the previous month by each shop.
The shop managers are responsible for preparing their own staff rotas to ensure that there is adequate staff coverage for all of the opening hours of their shop. Most
of the sales staff are willing to work overtime – so this does not usually create any problems. Once the week has finished, the shop managers send their completed
rotas to Sharon who uses them to calculate the number of hours that the individual staff have worked. The same procedure is followed for the warehouse staff.
Using this information, Sharon calculates all overtime payments due, and any payments for Sunday working. There is a regular problem with getting the shop managers to
send their returns in on time, and staff often complain that they have been underpaid. This is not usually a problem with the commission payments, however, as Sharon
has more time to calculate these.
The salaried staff are paid monthly on the last working day of the month, and this is paid using the Bankers Automated Clearing System (BACS). The BACS information is
prepared by the Payroll and Personnel data base clerk and then signed off by the Company Accountant. It needs to be with the bank by 24th of each month.
The company has no system in place, for sales, warehouse or administrative employees to sign in or out when they arrive or leave work. All payments for hours worked,
therefore, rely on the accuracy and honesty of the managers returns.
Mapping of report to outcomes and criteria
Title (and reference number) Principles of Internal Control (Knowledge)
Level 4
Learning outcomes – learners will: Assessment criteria – learners can: Page/ Section / Paragraph number
1 Demonstrate an understanding of the role of accounting within the organisation. 1.1 Describe the purpose, structure and organisation of the accounting
function and its relationships with other functions within the organisation.
1.2 Explain the various business purposes for which the following financial information
is required:
• income statement
• statement of cash flows
• statement of financial position.
1.3 Give an overview of the organisation’s business and its critical external relationships with stakeholders.
1.4 Explain how the accounting systems are affected by the organisational structure, systems, procedures, and business transactions.
1.5 Explain the effect on users of changes to accounting systems caused by:
• external regulations
• organisational policies and procedures.
2 Understand the importance and use of internal control systems 2.1 Identify the external regulations that affect accounting practice.
2.2 Describe the causes of, and common types of, fraud and the impact of this on the organisation.
2.3 Explain methods that can be used to detect fraud within an accounting system.
2.4 Explain the types of controls that can be put in place to ensure compliance with statutory or organisational requirements.
3 Be able to identify and use the appropriate accounting system to meet specific organisational requirements. 3.1 Identify weaknesses in accounting
systems:
• potential for errors
• exposure to possible fraud.
3.2 Explain how an accounting system can support internal control.
3.3 Identify ways of supporting individuals who operate accounting systems using:
• training
• manuals
• written information
• help menus.
3.4 Explain the value and benefit to a specific organisation of different types of accounting systems and software packages.
Mapping of report to outcomes and criteria
Title (and reference number) Evaluating Accounting Systems (Skills)
Level 4
Learning outcomes – learners will: Assessment criteria – learners can: Page / Section / Paragraph number
1 Evaluate the accounting system and identify areas for improvement. 1.1 Identify an organisation’s accounting system requirements.
1.2 Review record keeping systems to confirm whether they meet the organisation’s requirements for financial information.
1.3 Identify weaknesses in and the potential for improvements to, the accounting system and consider their impact on the operation of the
organisation.
1.4 Identify potential areas of fraud arising from lack of control within the accounting system and grade the risk.
1.5 Review methods of operating for cost effectiveness, reliability and speed.
2 Make recommendations to improve the accounting system. 2.1 Make recommendations for changes to the accounting system in an easily understood format, with
a clear rationale and an explanation of any assumptions made.
2.2 Identify the effects that any recommended changes would have on the users of the system.
2.3 Enable individuals who operate accounting systems to understand how to use the system to fulfil their responsibilities.
2.4 Identify the implications of recommended changes in terms of time, financial costs, benefits, and operating procedures.
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