Cookridge_Carpet

AAT | ICAS UNIT LEVEL 4 DIPLOMA | A REVIEW OF THE RECEIVABLE LEDGER SYSTEM | | | | | Name: Aisha Habib Lali Reg no.: 10185325 Centre: Kaplan Financial Leicester BH0477 Word count: 3466 Signed: Date: CONTENTS Section | Page | 1 Terms of Reference | 3 | 2 Methodology | 4 | 3 Executive Summary | 5 | 4 Introduction | 6 | 5 Review of Sales Accounting System | 9 | 6 Recommendations 7 Appendices | 13 | | | | | | | | | | | | | | | | | | | 1:TERMS OF REFERENCE | | | | | | 1:1 This report covers internal control and accounting systems AAT ICAS Unit 1:2 The report covers the need to make improvements on the accounting system particularly the effectiveness of its internal controls. 2: METHODOLOGY 2:1 In order to review the systems and make recommendations, it was very important to know the company and how the current way of operations was developed such as each employee’s work and their roles within the company. 2:2 To ensure this report is carried out systematically and efficiently interviews were conducted with accounts department staffs. 2:3 The accounts department was observed for a period of four weeks. 3: EXECUTIVE SUMMARY 3:1 This report provide an overview of an accounting system and the internal control of Cookridge ltd. Results of the review shows that the company’s internal control in particular, accounts department is very weak. 3:2 The major area of weakness requires further investigation and remedial action by the management within the current system is Receivable ledger, lack of control over credit customers which has increased due to customers being allowed unlimited credit after passing credit check. More weaknesses will be obtained within the report. 3:3 By not setting limit for credit customers, fraud could easily be committed which may result to tie up capital and cashflow will be affected. 3:4 There are several recommendations mentioned within the report, the most ideal recommendation is to allow few credits to existing customers and also engage debt collection agency on the bad debts. 3:5 The cost of recommended debt collection agency is estimated to be in the region of £19,000. This will be ongoing benefit. 4: INTRODUCTION: 4:1 Cookridge Carpet Ltd. Is a large carpet soft furnishing and bed dealerships in Southampton owned by two brothers. The business has been very successful in direct sales, and also sells their product via internet. The company shows that the turnover has increased for the past two years, as the sales force commission payment being varying from £626 in December 2009 to £3606 in April. This is a good increase for the company and they seem to be doing well. 4:2 The company employs a total of twenty employees, this consists of nine direct sales staff, three internet sales staff, one accessories salesperson, three part time staff in accounts department, two car delivery driver and the remaining are cleaners. 4:3 The accounts department are responsible for all financial functions of the company by ensuring record day to day transaction accurately. The department is divided into different section of the accounts; (see appendix 1) Wages Clerk, Accounts Payable, Accounts Receivable, and Sales Manager who reports direct to Account staffs. The accounting functions are responsible to ensure customers pay on time and prompt payment is done to suppliers and business results are stated correctly. 4:4 Wages Clerk is managing the payroll, prepares the pay-packets from the information (on the basis of hours worked) obtained from showroom salesmen. Then prepares how much cash is needed to be drawn from the bank and uses the cheque book ready to be approved and signed by the Director. The pay packets are then sent to Sales Manager to be handed out to the sales staffs. 4:5 Account Receivable Clerk sorts all the mails received and enters cheques or cash from customers in day book and updates the ledger accounts and also is responsible for banking of cash and cheques after living some money on each till and prepares and records the invoice after obtaining all the information of sales order received by the showroom store staffs. Also collects all the cash takings and cheques from the showroom tills end of the day. Responsible for credit control by conducting credit reference on new customers and ensure customers pay on time and do the follow up procedure. 4:6 Account Payable Clerk is responsible for checking GRN (Goods Receive Note) and purchase invoice and also maintain all inventory on excel spreadsheet. Receives all the stock information on stock from Sales Manager, then reconcile the stock levels against stock cards and records the correct amount in excel. Every end of month prepares cheques for suppliers’ payments and passes them either to the directors for approval and signature. Another responsibility is to prepare monthly Manager Information. 4:7 The following financial statement are produced 4:7:1 An Income Statement is produced whereby all the revenue and expenses is recorded; the Income Statement will summarise all the revenue obtained from the products provided by the company into an overall turnover. Each cost centre will receive a copy of Income Statement to help for preparing budget. 4:7:2 A Statement of Financial Position is prepared annually to give out summary of assets, liabilities, and ownership equity at the end of the financial year. Show the snapshot of the company’s financial condition listing the total amount available to the owners of the business. 4:7:3 The company produce a Cash Flow Statement as well according to IAS 7. Essentially the statement is concerned with the flow of cash in and out of the business, whereby examines how cash has been originated from and distributed to. It is also useful for the company to determine the short term viability particularly its ability to pay bills. Groups and people like shareholders, lenders, creditors, and investors would be interested in the cash flow statement to check whether the company is financially sound, have ability to repay and will be able to afford compensation. 4:8 Other External regulations that affect accounting practice of the company are the Companies Act 2006, Tax regulations, where the organisation runs the Payroll and is registered for VAT will require submitting returns to comply with the requirements. Local by-laws (planning permission, construction of roads) Labour legislation (safety at work, employee protection) 4:9 The effect on accounting system when external regulations change will be on VAT, problem arises when an invoice has been issued and along the payment interval the vat rate changes, then the system need to be adjusted on the VAT column, and then credit note has to be raised. As salary and wage deduction are necessary part of payroll processing, when income tax, social security tax, medical tax, and P.A.Y.E changes, the system need to be adjusted as well, the company will need to install new software with adjusted percentages. 4:10 The Company has three computers in the account department one for each account staff. The software is licensed owned by the company. They are all run on stand-alone basis, linked on one printer. And there are as follows: 4:10:1 Sage payroll system records all the wages of the staffs and is solely used by wages clerk only. 4:10:2 Microsoft office excels spreadsheet, all inventory information of beds, carpets and soft furnishings are recorded in excel spreadsheets. And also sales invoice are being recorded on spreadsheet designed by the receivable clerk. 4:11 Cash or cheques received from customers are recorded manually in day book by receivable clerk, the day book update the ledger accounts. As excel spreadsheet is not appropriate software to record the account; it is recommendable to train staffs on sage system. Or to save the cost, the company can send one staff on a course and then will train the other staff. 4:12 Give out manuals to the staffs listing policies, procedures, and principles for the systems. Create help menus which shows the contents of how to use the software, online help, support forum (to ask how to use the software) how to download. Also provide written information where method of how to run the system is written. 4:13 Other alternative the company can use is link up all the computers in a network so that other staff can get easy access on the records. And also introduce computerised accounts system sage and record all the work concerning accounts in this software. 4:14 Software 4:14:1 It is inappropriate to use excel spreadsheet and Microsoft word for accounting purpose as it can easily be amended, files can easily be deleted and also mistake can be made on formulas and give out incorrect figures. 4:14:2 As the computers are not integrated, but on standalone basis this causes each member to work alone and no other member of staffs can update. 4:14:3 Similar password is being used on all computers is never changed and it very weak to be remembered by any member of staff. There is open opportunity of fraud as any member of staff can get access and alter the input. 5: REVIEW OF THE RECEIVABLE LEDGER SYSTEM: 5:1 After intensive review of the accounts department, it was discovered that, in most areas, the controls in place were insufficient to maintain the integrity of the accounts and to minimise the opportunity of fraudulent. 5:2 The key strength of the in the accounting system is the upgraded payroll sage system on one computer to enable to run payroll. The other two computers were upgraded with Microsoft office this seems to be insufficient for the accounting needs, but there are no any plans to change into an alternative system in the foreseeable future. 5:3 The uses of credit check on new customers to make sure they have good history of payment conducted before granting any credit. 5:4 After a thoroughly analysis it became apparent that the Receivable ledger account is weak and the following weakness were identified. (SWOT analysis can be found in appendix 2) 5:5 Weakness 1: Lack of sales skills. 5:5:1 It is evident that manager’s authorisation is not obtained, customer with different name on the card is allowed to purchase carpet and later it was discovered from the bank that the card is stolen, this is a very high risk of fraud and will attract more customers to use stolen cards as there is no proper control. 5:5:2 By not administering proper control on recording deposit by customers, and being entered as cash sales, this will increase sales figure and would lead to overstatement of profit resulting too much tax being paid in long run. (See 5:5:4 below) 5:5:3 Lack of stock reconciliation lead to some of the stock being sent directly to customers unaccounted for will be very difficult to ascertain what has been sold and this would complicate the company’s VAT account. 5:5:4 Assume that corporation tax of 20% of £300,000 overstated profit has been charged, = £60,000 to be paid to HMRC. 5:6 Weakness 2: Unlimited credit term facilities: 5:6:1 Currently the customers are being granted unlimited credit facilities after passing credit check. Some customers may maintain good credit history on small borrowing but would be difficult to pay when it comes to large amount of credit. There is a higher risk that some of the customers may not pay on time or not pay at all. 5:6:2 This could have an impact on the strategy of the business, in that the company will not be able to acquire more stock as money will be unavailable. (See 5:6:4) 5:6:3 Apparently more than 500 customers owing the company, and tend to take full advantage and pay till the end of credit terms offered. This increases borrowing requirement from bank as no enough cash collected from the customers. 5:6:4 This is the breakdown cost: 500 customers owes £1000 each as stated, 500 x £1000= £500,000 this amount could be available to acquire more stock. 5:7 Weakness 3: Receivable account systems is not reliable: 5:7:1 Due to other member of staff unable to access or input data on the excel spreadsheet in the absence of receivable clerk, this shows clearly that the system created is not reliable and proves to be time consuming as only one member of staff can work on it. This lack of segregation of duties coupled with lack of credit limit has lead to trade debtors reaching excessive levels. 5:7:2 Also excel is inappropriate software for accounting purpose, records can easily be amended, formulas and filters can be mistaken and files could be deleted accidentally. Employees lack proper qualifications hence unable to perform the required tasks appropriately. 5:7:3 As the receivable clerk designed a form in Microsoft word to record invoices and no one else can use the software, it would be very easy to create false invoices and claim on goods bought for personal use. This shows the company lack segregation of duty. The overall risk of fraud being committed would be high in this scenario. 5:7:4 Assume that the average credit sales has reached the limit of £600,000. This amount would cause capital to be tied up. 5:8 The identification of the unlimited credit terms to customers and other issued surrounding the receivable ledger proves the fact that fraud in this area is currently high (see appendix 3) 5:9 Overall it was discovered that, the company has very weak internal control and lack of segregation of duties, authorisation, reconciliation and training within the accounting area. And other area of concern is payroll, cash and banking and software. 5:10 Weakness 4: Payroll 5:10:1 Pay-packets are being prepared prior to actually hours worked, this could lead to showroom staffs to be paid for hours not worked, resulting to calculate wrong figure of income tax. No use of clock cards. 5:10:2 Any member of staff can calculate wages and hand over the pay- packets in the absence of the payroll clerk and also prior to any authorisation by the directors of the company. This lack of control on authorisation could lead to employees claim wages more than once. And error could occur at the time of counting cash for the pay-packets. 5:10:3 Assume some of the paypackets are fraudulent. At £6,000 every month would amount to £72,000 being paid per year to fraudsters. 5:11 Weakness 5: Cash and banking 5:11:1 Cash and cheques received are single handled opened and recorded by receivable clerk and kept in the office safe for more than three days. Lack of segregation of duties that is presence of other member of staff in this scene could lead to higher risk of fraud as the receivable clerk could take cash for personal use. And also there is a danger of being robbed on the way from carrying cash from the company’s premises to the bank 5:11:2 It is obtained there is no checking system for cash counting in showroom tills, cash is passed from the tills to the safe to the payroll assistant without being recorded. 5:11:3 Assume that £2,000 is fraudulent everyday at the time of passing cash from the till to payroll clerk would amount to £6,000 a month. This represents cash that could be used elsewhere in the business. 5:12 Overall it was found that the company has very weak internal control. Transactions are not recorded properly, authorisation is not obtained from the seniors, and also reconciliation is not conducted at any time. Receivable ledger was the one area of weakness where improvements could be made. 5:13 The identification of the lack of sales skills, unlimited credit facilities and other issues surrounding the company shows that fraud within this area is currently a high risk. (see appendix 3) 5:14 Fraud is when some loopholes are used to gain a dishonest advantage financially over business or person. 5:15 Balance credit card transactions to recorded revenue on a daily basis by verifying that the amount recorded as a payment in accounting system and the credit card transaction equals one another. 5:16 Conduct inventory audit every now and then, this will help to know if there are any stocks stolen, or unaccounted for. As the company has obtained from the records carpet worth £5000 was not accounted for in the books and was not in the display. 5:16 Check that accuracy of transactions is conducted by examining invoices to certify that employees generated invoices for the right amount. 6: RECOMMENDATIONS 6:1 In order to improve the sales system and abolish the fraud surrounding it, the following recommendations are made and it is appropriate to implement them. 6:2 Recommendation 1: Lack of sales skills 6:2:1 Any suspicious debit or credit cards must be reported to the showroom manager and not allow customers to use cards with different names. Signature obtained must match with the name on the card. It would be appropriate to install fraud detection machine. This would cost £200 and train sales staffs how to use the machine which will use couple of hours. 6:2:2 It is recommended that authorisation must be obtain on all money received from customers segregation of duties conducted by two people and posted to the correct customers account. Deposit received should be noted on the order forms to show part payment has been done, reconcile the customer’s account. Training to be given to sales staff by receivable clerk on how to maintain deposits, this will take an hour. 6:2:3 Goods despatched to customers must be properly checked and pre numbered delivery note should always be used. Proof of delivery must be obtained and show that authorisation has been granted for all goods despatched and to do this would be to purchase delivery note which are available from most stationeries. 6:2:4 It is recommended weekly reconciliation must be conducted by the receivable clerk on the stock sold against the invoices to ensure all the despatch matches, and present the report to the internal auditors. 6:3 Recommendation 2: Unlimited credit terms facilities 6:3:1 It would be necessary to prepare aged debtors report monthly to identify quickly the slow paying customers, new acquisition of computer software will enable to do this automatically. Training will be needed for the software and provide written manual on how to use it. Also is recommended to introduce terms of trade and credit control procedures to collect overdue debtors and this should be reminded to customers. 6:3:2 It is recommended to have authority from the directors’ prior allowing customers a credit limit, and also credit facilities should be allowed according to the frequency of their bill payment. It is recommendable to raise credit limit for client who always pay full and on time. 6:3:3 In order to have proper payment from customers Debt collection agency must be engaged to the follow up. The benefit of the agency they have the expertise and resources needed to be able to carry the job hence speedy the process of debts recover and will save time as well. (See appendix 5 for further debt collection of £190,000) 6:4 Recommendation 3: Receivable account systems is not reliable 6:4:1 A proper computerised sales control system should be integrated with other account staffs computers, this will help other staff to update and save time when the sales clerk is absent. Will speed up payment from customers and also improve efficiency and reliability of records. 6:4:2 Introduce proper sales software which will give a secure record of sales where formula cannot easily be amended. The sales staff can have an outside training and then train other staffs during office hours. The cost to install new software would be in the region of £200, and training fees would cost £60 per session. 6:4:3 In order to maintain good segregation of duties all the invoices must be recorded in the presence of two people. It should be created by sales clerk and authorised by the company’s directors. This will ensure the invoices sent to customers prove to be legitimate business transaction and will secure customers goodwill in long term. 6:5 Recommendation 4: Payrolls 6:5:1 Clock cards must be introduced to showroom staffs, and pay packets should be prepared according to the actual hours worked shown on the clock cards which have been approved by showroom manager, by doing this the company will have proper control on authorisation. 6:5:2 It is recommended to maintain a written record for each employee containing details of rates of pay and contracted hours to facilitate calculation in the absence of payroll clerk and authorisation must be always obtained prior payment. 6:6 Recommendation 5: Software 6:6:1 New software should be upgraded to record sales, this will improve the accuracy of the account procedures and will also enhance the speed by running reports straight off the system. 6:6:2 Join the computers so that other staff can get access to work and update on the inputs by other member of staff. This will save time when the staffs are absent hence obtain segregation of duties. 6:6:3 Access to the system should be authorised and password should be changed regularly and not be disclosed or shared. 6:7 Recommendation 6: Cash and banking 6:7:1 In order to maintain good segregation of duties, all cash, and cheques received from customers must be recorded in the presence of two staffs. All money must be counted and posted to the correct customer account and should be banked intact on the same day. Operating till and cash counting must be supervised. Bank reconciliation must be done on regular basis. 6:7:2 Introduce counting system on cash and banking of the takings from the tills, record the movement of cash from till to account department and bank reconciliation must be done on regular basis. The company will benefit more ability to manage cash and accuracy of cash counting. (See appendix 5) 6:8 All the recommended points must be implemented to benefit. Some cost will be incurred which will amount approximately to £250,000. The company will be free from fraud. Improve reporting system and control of budget reducing unexpected items of cost. 6:9 For cost and benefit analysis refer to appendix 5.