LEARNING OBJECTIVE:
INTERNAL CONTROL OVER FINANCIAL REPORTING –
PRACTICE
AUDIT PROCESS
Sales Documents
Key Documents
Sales Order
Goods Dispatch Note (GDN)
Sales Invoice
Remittance Advice (for payment received)
All should be SEQUENCED and on STANDARD forms.
The Accounting System
When goods are dispatched, stock records will be updated
The sales invoice will result in sales, debtors (or cash) being recorded
and the customer’s individual sales ledger account being debited.
When payment is received debtors will be reduced, cash will be
recorded and the customer’s individual sales ledger account will be
credited.
ICS-The Sales System
Order Received
Sales order should be sequentially numbered;
Confirm from the customer
Inventory check
One copy of the GDN is sent with the goods, one copy stays in the
warehouse, & one copy is sent invoicing department.
New customer: credit check;
Existing customers: credit limit check, should be updated regularly
Any discounted committed should be authorized;
Follow up unfulfilled orders;
Automatic environment: access to master file limited to authorized
individuals only.
ICS-The Sales System
Goods dispatch
Sequentially pre-numbered Goods Dispatched Note;
Matched to the sales order
Signed by the warehouse manager after quantity and quality checks
3 copies (warehouse, customer, accounts/invoicing)
Customer should sign the copies to acknowledge receipt of goods
ICS-The Sales System
Invoice Generated
Sequentially pre-numbered invoices
Matched to GDN
3 copies (accounts/invoicing, customer, sales day book clerk if applicable)
Ensure the authorized price list is used to prepare the invoice
Any discounts authorized
Arithmetic checks on invoices
Sequence check on GDNs to ensure all GDNs have been invoiced
Sequence check on Invoices to ensure all invoices have been entered in
the accounting system
Customer statements should be sent monthly to ensure any errors and
disputed invoices are quickly identified and resolved
The sales ledger control account should be reconciled on a monthly basis
to the individual ledger to identify any errors.
ICS-The Sales System
Payment received from the customer
Match payment to invoice
Check validity of any settlement discounts availed by the customer
Segregation of duties: receiving payment and recording
Encourage bank transfers
A Bank Reconciliation Statement should be prepared on a monthly basis
Goods returned by the customer
Sequentially pre-numbered credit note
Signed by the manager
Matched to invoice
Prepare a report for reasons for returns and actions taken by the
management.
COMMUNICATING CONTROL DEFICIENCIES
Deficiencies in Internal Control is communicated to Those Charged with
Governance and Management and this is referred Management Letter.
Deficiency A clear description of what is wrong
Consequence What could happen if the deficiency is not corrected?
Recommendation Try to recommend how to improve the internal control
by adding who, when how and how often
Techniques
Identify copy words from the scenario from Q to A;
Explain the loss the business will face due to the deficiency;
Recommend – what should be done.
Management Letter
Deficiency
Purchase invoices were missing from the sequentially numbered invoice file.
Consequence
There is a possibility that purchases and liabilities are not completely
recorded.
This could result in late payment of invoices which could cause damage to the
company's relationship with the supplier resulting in removal of credit terms or
discounts.
Recommendation
All invoices should be sequentially filed on receipt by the accounts
department.
Regular sequence checks should be performed to ensure completeness. Any
missing items should be investigated and copies requested if necessary.
Scenario 1
Sales ordering, goods despatched and invoicing
Heraklion Co sells footballs to a range of large and small sports equipment
retailers in several countries. Sales are made through a network of sales staff
employed by Heraklion Co, but new customer leads are generated through a
third party company. Sales staff are responsible for assessing new customers’
creditworthiness and proposing a credit limit which is then authorised by the
sales director. The sales staff have monthly sales targets and are able to use
their discretion in granting sales discounts up to a maximum of 10%. They then
record any discount granted in the customer master data file.
Continuous
The sales staff visit customer sites personally and orders are completed using
a two-part pre-printed order form. One copy is left with the customer and the
other copy is retained by the sales person. The sales order number is based
on the sales person’s own identification (ID) number.
The company markets itself on being able to despatch all orders within
three working days. Once the order is taken, the sales person emails the
finance department and warehouse despatch team with the customer ID
and the sales order details and from this a pick list is generated.
Sequentially numbered goods despatched notes are completed and filed in the
warehouse.
Continuous
Sequentially numbered invoices are generated using the pick lists for
quantities and the customer master data file for prices. Standard credit
terms for customers are 30 days and on a monthly basis sales invoices
which are over 90 days outstanding are notified to the relevant sales
person to chase payment directly with the customer.
Required:
a. Identify and explain SEVEN deficiencies in the sales system of Heraklion Co
and provide a recommendation to address each of these deficiencies.
b. Note: Prepare your answer using two columns headed Control deficiency
and Control recommendation respectively.
Responses:
Deficiencies – Summary:
1. New customers’ creditworthiness assessed by sales staff
2. Sales staff have discretion to grant discounts up to 10%
3. Sales staff has access to amend master files
4. Inventory not checked by sales people prior to order being placed
5. No copy of order with the sales ordering department, unable to identify
unfulfilled orders
6. Orders not sequentially numbered
7. Warehouse despatch team do not receive a copy of the sales order
8. Salesperson responsible for chasing invoices over 90 days old
Responses:
Control Deficiency Recommendation
Credit worthiness assessed by Credit worthiness should be
sales staff. May be wrong and poor assessed by credit agency.
credit customers accepted for
bonus.
Sales staff awards discretionary All discounts should be authorized in
discount. May lead to fraudulent advance.
discount and loss of revenue.
Sales staff has access to amend Access to master file restricted to
master files. May lead to authorized personnel only.
unauthorized changes to master
file.
Responses:
Inventory not checked when order Inventory to be checked before
accepted. Unfulfilled orders and order acceptance to ensure goods
loss of customer goodwill. available.
Customer orders not sequentially Orders should be sequentially
numbered. Difficult to identify numbered with regular sequence
missing orders. checks.
Sales orders are not sent to Pick list should be generated from
warehouse. Wrong quantity or original orders.
quality may be dispatched.
Payments are only followed up on Credit controller should be
after 90 days. Will lead to increased appointed to follow up on payments
bad debts. after credit period.
Purchase Documents
Key Documents
Purchase Order
Goods Received Note (GRN)s
Purchase Invoice
Remittance Advice (for payment made)
All should be SEQUENCED and on STANDARD forms.
The Accounting System
When goods are received, stock records will be updated
The purchase invoice will result in purchases, creditors (or cash) being
recorded The purchase invoice will result in purchases, creditors (or
cash) being recorded
When payment is made creditors will be reduced, cash will be
recorded ... and the supplier’s individual purchase ledger account will be
debited.
ICS-The Purchase System
Requisition
• Sequentially pre-numbered
• Authorized to ensure only those goods are ordered which are required
• Monitor inventory level or Re-order level set
• Inventory/ re-order level checked before raising the requisition to ensure
only order when required.
Purchase Order
• Sequentially pre-numbered and matched to requisition
• Authorized supplier list used and updated annually
• Authorized
• 3 copies (supplier, order department, warehouse)
• Follow up on order placed but not yet received
ICS-The Purchase System
Goods Received
• Sequentially pre-numbered GRN
• Matched to purchase order
• Signed by the warehouse manager after quantity and quality checks
• 3 copies (ordering department, warehouse for their records, account)
ICS-The Purchase System
Invoice Received
Match to GRN
File in an order (CANNOT be Sequentially pre-numbered) but should be
numbered manually. This way, a sequence check can then be carried
out to ensure all invoices have been entered in the day book/ledger
Arithmetic checks
Entered in the ledger /day book on a daily basis-application controls
( such as control total) should be applied to ensure completeness and
accuracy over the input of purchase invoices Stamp ‘entered’ when
recorded
Segregation of duties (order placement, goods received and recording)
Monthly reconciliation: PL to PLCA
ICS-The Purchase System
Payment made
Segregation of duties (Purchase order, goods received, payment);
Before approving invoices for payment, a senior official should match them to
the audit trail (esp. the GRN);
Bank transfer preferred;
If payment by cheque: senior individuals only plus two signatories for high
amounts;
Stamp invoice ‘paid;
Try and avail settlement discounts and pay according to supplier’s terms to
maintain supplier goodwill;
Payment against specific invoices only (avoid ‘on account payment’);
Supplier statement reconciliation with PL;
PL reconciliation with PLCA;
Monthly BRS.
End
Questions & Answers
