Internal Control Weaknesses

Question 1

“in her head then leaves” –> There is no indication that anyone is covering her duties and, given that all the information “is in her head”.

Answer 1

Implication :
1. FC holds key knowledge needed to make commercial decisions therefore without could cause business interruption.

2. key tasks are not being performed which could have a severe impact on the company.

Recommendation:
1. Additional staff must be trained to cover work gaps upon absence.

2. Before going on holiday, there must be an effective ‘handover’ of duties.
3. A checklist of people’s key tasks should be produced.
4. Back-up process documentation that explains how this task should be completed should be made available.

Question 2

” No authorisation over employees using stock “

Spare parts are not formally booked-out from a depot’s central stores, with staff ‘helping themselves’ from the store.

Answer 2

Implication:
“Poor control of inventory will result in differences between the accounting records and actual stock levels.”

“items could be stolen for personal use”

Recommendation :
“Support vans should carry a minimum standard of inventory items which should be replaced on return to the main depot.”

“Stock should be issued by specific personnel within Central stores who must update the inventory system upon despatch – this could be managed by items being ‘scanned-out’ (thus requiring items to receive an identifying bar code upon receipt).”

Stock checks should be performed monthly (floor to sheet to prove completeness and sheet to floor to prove existence) and differences between physical and the system investigated.

Question 3

“stock running out then reordering”

Purchasing manager only reorders after items have run out.

Answer 3

Implication:
“Stock items could run out without the system knowing or without informing management to reorder, with the result that the company will not be able to service customers”

Recommendation :
System should report on stock outs or be set to report when stock levels are low.

Penalties and disciplinary procedures should be imposed for staff not arranging for return of items to warehouse.

Question 4

Manager not always available :

Depot manager must sign-off purchase requisition and there is a suggestion that he/she may not always be available.

Answer 4

Implication:
If the depot manager does not sign, there would be a further delay in ordering the stock.

Recommendation:
Another member of staff should be empowered to sign on Depot Manager’s behalf to cover for absence – this should be set out in an internal delegated authority.

Question 5

Items received in warehouse not checked against order

Items received into the warehouse are checked against DN not against the original order.

Answer 5

Implication:
Items may be delivered that have not been ordered.

Incorrect items may have been delivered to those originally ordered.

Recommendation:
Copies of orders (system or hardcopy) should be made available to warehouse.

Warehouse should match all deliveries to open orders and reject anything without a supporting order.

Question 6

The delivery note is sent to Head Office by post to create the related GRNI accrual.

Answer 6

Implication:
The delivery note could get lost in the post resulting in an understatement of liabilities.

Recommendation:
Each depot should keep suppliers’ delivery notes (or a copy) and create a Goods Received Note upon delivery. The GRN should be used to inform the accounting records of an inventory and liability update.

Question 7

Upon receipt of a purchase invoice, the A/P ledger is updated directly rather than via the GRNI accrual (which is only being looked at annually) being reversed out.

Answer 7

Implication:
The GRNI accrual will likely become unmanageable if entries are not being matched to the related purchase invoices.

Recommendation:
Receipt of a purchase invoice should be matched to its relating GRNI accrual and an accounting entry used to reverse the accrual and account for the A/P.

Question 8

Purchases are being accounted for twice.

Answer 8

Implication: If the double-entry is incorrect for the GRNI accrual and receipt of the purchase invoice, this could overstate liabilities and overcharge ‘purchases’ thus affecting Gross Margin.

Recommendation:
A monthly review of the GRNI accrual should be performed to ensure that
individual accruals are being reversed on a regular basis; and
old accruals are alerting the company to chasing-up invoices from suppliers

Question 9

Suppliers are paid in the month in which purchase invoices are received rather than when they fall due.

Answer 9

The company may be paying invoices too early, thus losing-out on working capital cash-flow benefit of retaining cash until invoices are payable.

Recommendation

Accounting system should have a ‘prompt’ when an invoice is payable.

If prompt payment discounts are available, a report of all outstanding invoices could be produced on a ‘regular’ basis for manual authorisation of early payment.

Question 10

There is a lack of segregation of duties within payroll as the payroll manager is responsible for setting-up employees as well making payments.

Answer 10

The payroll manager would be able to extract monies from the business by creating ghost/fictitious employees.

Separate individuals should be responsible for setting-up and making payments. Any amendments to the payroll system should be authorised by the Finance Director before payroll is transmitted.

Question 11

Expenses are not being recorded against specific ‘jobs’ and being coded as ‘general expenses’ and then allocated-out as a HO overhead.

Answer 11

The ‘true’ profitability of each job is not being recorded correctly resulting in a potential loss on each job.

Recommendation
Expenses pertaining to individual jobs should be assigned the individual job code to which all costs (and revenue) should be allocated.

Question 12

Expense total is approved without supporting detail if total claim is within a certain tolerable range.

Answer 12

Finance Director would be unable to verify who is claiming what and whether these claims were bogus and/or inconsistent with company policy.

Recommendation
Supporting documentation should provide the composition of the totals being paid.

The FD should perform sample checks of individual items, going back to physical expense claims to verify validity.

Question 13

Work can be performed for new customers without credit checks made.

Answer 13

Risk that company is selling to customers who are not credit-worthy and therefore increasing the risk of debt default.

Customers should pay a deposit (or full payment) upon calling the 24 hour line. This could be in the form of a credit card payment at point of call.
(as credit check may not be possible in emergency circumstances)

Question 14

No employee references

Answer 14

Implication: New employees may not possess the
appropriate skills for the role. They may lack integrity, have a criminal record or may have falsified information about past roles, their identity or qualifications. Such issues could lead to errors or losses and may result in requirements for additional training and staff development. In some instances Ludwig may be legally exposed.

Recommendation:
References from past employers should be requested and followed up for all prospective employees. All offers of employment should be made subject to satisfactory references being received.

Question 15

Office equipment authorisation - purchasing office equipment

Answer 15

Implication :
Unnecessary or duplicate expenditure may be incurred or assets may be purchased which do not benefit Ludwig. Assets may also be purchased that are sub-optimal both in terms of quality and price. The lack of authorisation leaves Ludwig exposed to the possibility of fraudulent expenditure and theft by employees. High volumes of unauthorised expenditure could leave the
company financially overcommitted and assets may not be appropriately recorded.

Recommendation :

Company policy over authorisation for capital expenditure should be re-communicated to all employees.

Disciplinary action should be taken against those employees who fail to adhere to company policy. Segregation of duties between those responsible for
ordering and those receiving ordered items should be put into place.

A regular comparison of capital expenditure against budget should be made and any significant variances investigated.

For high value purchases two directors should be required to sign the authorisation and the authorisation limit should be lowered to, for example, £10,000.

Question 16

Orders accepted despite no checking of inventory levels & credit checks

Answer 16

Implication :

Orders may be accepted for goods which are not currently in inventory leading to delays in fulfilling customers’ orders and a loss of customer goodwill.

Orders may be accepted from customers who have exceeded their credit limit leading to an increased risk of bad debts or slow payment.

Recommendation:
Inventory levels and available credit limits must be checked before an order is accepted over the telephone.

This could be achieved through IT controls in the sales order system which require such checks to be performed before orders can be processed.

Checks on credit limits should also take account of the value of the current order.

The warehouse manager should report any instances of “stock outs” to the sales manager as this would indicate that inventory quantities have not been checked by sales staff or that any IT controls had been overridden.

A regular review of receivables balances against credit limits should be carried out to identify any balances exceeding the credit limit.

Question 17

No centralised control of preferred suppliers

Answer 17

Consequences
Asulu may not achieve best prices or maximise discounts available for larger purchase volumes
Best quality may not be obtained/inconsistent quality across branches
Recommendation
Undertake a review of all suppliers; negotiate contracts with preferred suppliers for the wholebusiness and issue a list of suppliers for use by each outlet.

Question 18

No controls over amount of ingredients ordered within each outlet/no one individual responsible for ordering at each outlet/many employees ordering

Answer 18

Consequences
Items running low on quantity may be ordered by more than one employee resulting in wastage.
Items running low on quantity may not be ordered at all resulting in lost sales
Increased risk of ordering items for personal use
Recommendation
Designate one/two employees to be responsible for ordering at each outlet
Introduce a process for notifying the employee responsible when items are running low
Orders to be approved by supervisor/manager

Question 19

No records of items ordered by phone maintained, orders are placed with suppliers haphazardly throughout the day

Answer 19

Consequences
Staff may forget whether items required have been ordered or not, resulting in over or underordering.
Suppliers may be called more than once in any day leading to increased risk of errors
Lack of records means goods delivered cannot be checked against those orders– goods delivered may not be those required/incorrect quantities
Goods ordered may not be delivered at all – lost sales and loss of customer goodwill
Recommendation
Document details of order e.g. use pre-printed order pad for completion when orders are placed
Telephone (or email) suppliers once a day, with full order list
On receipt of goods check delivery note to record of order for correctness of goods delivered
Order records checked daily for non-delivery of goods ordered

Question 20

No check of goods delivered to delivery note

Answer 20

Consequence
Items delivered may not agree to items recorded on delivery note – this could lead to Asulu being overcharged for items not received/incorrect quantities/incorrect items
Recommendation
Asulu staff should unpack delivery and agree type and quantity of items to delivery note before signing

Question 21

No check as to quality of goods received/checking of expiry dates

Answer 21

Consequence
Items may be of inferior/insufficient quality or too close to their “sell by” date
Recommendation
Asulu staff should check quality of items being delivered and the “sell by” date on perishable goods.

Question 22

No controls apparent over completeness of delivery notes sent to head office

Answer 22

Consequence
Accounts staff at head office may understate liabilities at year end
Accounts staff will be unable to agree invoices to delivery notes if delivery notes are missing - loss of supplier goodwill if invoices paid late/accounts put on ‘stop’
Recommendation
The outlet manager should attach each delivery note to the relevant order in the order pad.
A copy of each delivery note should be made and filed at the outlet
Each note/order should be sequentially numbered and kept in a file for sending to head office at the end of each week.
Sequence regularly checked for completeness at head office.

Question 23

Lack of SOD in Purchases

Answer 23

Implication : This lack of segregation of duties means that Nick is in charge of the full transaction which could lead to money being fraudulently extracted from the company.

Recommendation:
Once payment is ready to be made, the physical payment should be authorised by the Finance Director/someone that isn’t Nick.

Question 24

Deliveries checked to drivers notes

Answer 24

Goods delivered may be surplus to requirements increasing the risk of obsolescence, incurring additional inventory storage costs and tying-up working capital.

Recommendation:
Warehouse staff should match the delivery note to an order. (Koffeehub could insist that order numbers are to be included on the delivery note as a condition of purchase). Where no order exists the delivery should be rejected.

Question 25

GRNs are posted by the warehouse to Head Office.

Answer 25

GRNs could be lost. The corresponding liability would not be recorded and inventory records would not be updated. Resulting delays in the payment of invoices would likely damage working relations with suppliers.
There are delays (as reliant on post) in the updating of inventory records and creation of liabilities.

Recommendation:
A system-generated GRN could be produced from the warehouse which automatically creates a GRNI accrual or, at least, is sent directly to the Accounts department for relevant action.

Question 26

Supplier statement reconciliations are no longer performed

Answer 26

This may result in errors in the recording of purchases and payables not being identified in a timely manner

Supplier statement reconciliations should be performed on a monthly basis for all suppliers and these should be reviewed by the Finance Director.

Question 27

The website is not currently integrated into the inventory system

Answer 27

The company could be accepting customer orders when they do not have the goods in stock. This can cause the company to lose sales and customer goodwill.

Recommendation
The website should be updated to include an interface into the inventory system: this should check inventory levels and only process orders if there is adequate inventory to fulfil the order. If the inventory is out of stock, this should appear on the website with an approximate waiting time.

Question 28

undergo credit checks just before being set-up on the company’s sales ledger system.

Answer 28

Credit history of customers is likely to change from the point of set-up. If credit checks are not done, sales may be made to customers with high credit risk resulting in irrecoverable receivables.

Recommendation
Credit checks should done regularly (perhaps two-monthly) for regular customers. Customers who make sporadic orders should have their credit histories check at each order.

Question 29

Customer credit limits are set by Nick, a recent starter.

Answer 29

Nick is not sufficiently experienced or senior and so may set limits too high, leading to irrecoverable debts, or too low, leading to a loss of sales.

Recommendation
Credit limits should be set by Margaret or the Finance Director.

Question 30

Sales discounts are set by Koffeehub’s sales team.

Answer 30

In order to boost their sales, members of the sales team may set discounts too high, leading to a loss of revenue.

Recommendation:
All members of the sales team should be given authority to grant sales discounts up to a set limit. Any sales discount above these limits should be authorised by a specific senior individual.

Question 31

Goods are despatched by local courier but customer signatures are not always obtained.

Answer 31

This can lead to customers falsely claiming that they have not received their goods. Koffeehub would be unable to prove that they had in fact despatched the goods and may result in goods being despatched twice.

Recommendation:
Koffeehub should insist that all local couriers obtain customer signatures as proof of despatch and payment will not be made for any despatches with missing signatures.

Question 32

The sales invoice is created and inventory records updated after a sale has been made and after the goods have been despatched. Records are only made once Margaret receives the despatch note through the post.

Answer 32

A delay in receipt of the despatch note increases the risk that inventory records are not updated nor invoices despatched on a timely basis. This risk is further heightened if post goes missing.

Recommendation:
Despatch note should be sequentially numbered to ensure an audit trail of what has been posted to head-office.
Despatch notes should be automatically sent to Head Office with instantaneous updating of inventory and sales ledger records.

Question 33

Logging-in process is not monitored

Answer 33

Employees could bring cards in for absent employees who would then be paid for work not done.

Employees could log-in before actually starting their work

Recommendation :
Manager or deputy manager should reconcile number of workers physically present to computerised record of number of employees logged-in for work each shift

Question 34

Overtime is not authorised by responsible individual

Answer 34

Employees may get paid for work not done (e.g. they may clock-off late in order to receive overtime payments)

Recommendation :
All overtime should be authorised by manager or deputy manager (e.g. by confirming recorded hours in payroll computer after shift completed)

Question 35

Password authorising accuracy of time worked to wages system is an easy password

Answer 35

The password is not secure and could be easily guessed by an employee outside the department

Recommendation :
The password should be changed regularly and require a specified number of letters, numbers, case sensitive characters

Question 36

Accounts clerk authorises payment of wages to employees

Answer 36

It is inappropriate for a new inexperienced (junior) member of staff should sign the payroll as someone inexperienced may not be able to identify errors (which may include ‘dummy’ employees)

Recommendation :
The payroll should be authorised, following a review, by the Finance Director

Question 37

Details of employees leaving company are sent by e-mail to payroll

Answer 37

There is no check to ensure that e-mail sent are actually received in Payroll

A control is needed to ensure e-mails are received in payroll (perhaps a receipt sent from payroll to HR, with HR chasing for non-receipt)

Question 38

No matching of delivery note to orders

Answer 38

May receive goods that haven’t been ordered

No central record of goods received but not invoiced which will result in insufficient information to accrue correctly

Recommendation
A copy of the authorised order should be kept in-store and checked to the GRN. Once checked the order should be sent to head office and logged as completed. A GRNI accrual should be raised

Once invoice is received, it should be matched to those orders that have been completed. An accounting adjustment between GRNI accrual and purchase ledger should be made

On a regular basis, there should be a review of completed purchase orders for any outstanding orders

Question 39

Deliveries from suppliers are sometimes accepted without being checked (during busy times)

Answer 39

Stores are receiving goods without checking that they are correct; if a delivery is subsequently disputed with the supplier there may be little recourse

Recommendation:
Deliveries should only be accepted during designated hours, when the store is less busy. Goods should be checked for quantity and quality and matched to purchase orders before acceptance

Question 40

The purchase invoice is only logged onto the system as it is being
authorised by the purchasing director

Answer 40

If the invoice is misplaced then
payables may not be settled on a
timely basis. In addition at the year-end the purchase ledger may be
understated as invoices relating to the current year have been received but are not in the purchase ledger

Recommendation :
Upon receipt of an invoice this
should be logged into a file of unmatched invoices. As it is matched and authorised it should then be moved into the purchase ledger. At the year-end items in the unmatched invoices file should be accrued for, to ensure liabilities are not understated

Question 41

Lack of segregation of duties between the setting-up of a supplier and payment

Answer 41

P/L clerk would be able to set up a supplier and make payment, without knowledge of purchasing director

Recommendation :
Separate individuals should set-up and make payments to suppliers. The bank report of payment should be sent to the purchasing director who should check that what has been paid equates to what he signed-off

Question 42

No evidence that the purchasing director reviews the payment list for suppliers against evidence (just ‘experience’)

Answer 42

Erroneous payments could be made which may be within tolerance but would not be detected by Purchasing Director

Recommendation :
Purchasing Director should perform test checks of payments to invoices received. He should sign as having reviewed

Question 43

P/L clerk makes payment and is same person who received report from bank

Answer 43

P/L clerk could change payment schedule after review by Purchasing Director and before submission to bank (risk heightened by fact that P/L clerk can also set-up suppliers)

Checking of bank report should be performed by Purchasing Director, who should compare against his signed payment list

Question 44

Data was lost during migration of data from Darvy’s into Carpediem’s systems.

Answer 44

Potential for
• inaccurate reporting of cumulative financial performance of enlarged business at year end
• audit report being modified by external auditors due to limitation on scope/ALT lack of evidence
• lack of information about amounts previously owed to Darvy that are now owed to Carpedium which may have formed part of agreed price originally paid
• impairment of investment/ underlying assets of Darvy

Recommendation
Management must employ all efforts to recreate the data lost
This may require reviewing the original due diligence working papers as part of Darvy purchase.

Question 45

IT Staff lack of experience

This was likely given that IT staff do not have experience of merging data.

Answer 45

Training needs must be reviewed before any exercise that involved affecting the general ledger or operational effectiveness of the business.

Question 46

• The backup IT server is located on the business’ premises and

Answer 46

If the business suffered a fire or flood which affected the master server, it is likely that the back-up server will also be affected.

The back-up server should be located separately to where the master server is located.

Question 47

copies of data are taken monthly.

Answer 47

This will render the ability to restart the business with previous transactions useless.
The business may be unable to continue given lack of data, including details of amounts owed and liabilities to third parties.
Whilst it is good practice to take copies of the transactions, there is the potential to lose a whole month’s worth of data if a catastrophic event were to happen towards the end of the month but before a copy had been taken.

Back-ups should be taken more regularly, ideally daily to ensure disruption is minimised as much as possible.

Periodic checks should be made to ensure copies are being taken as part of the disaster recovery protocol of the company.
IT staff should sign to confirm understanding and disciplinary action should be taken for non-adherence.
A director should be given the dedicated role of IT security to ensure this is performed.

Question 48

Carpedium pays its suppliers at the end of the week when a purchase invoice is received.

Answer 48

Whilst it is good practice to pay suppliers within the given period, paying early places a burden on working capital.

Payments should be made on or near to the due date. The purchase ledger can be set up to alert when a payment is due.

Management should only look to pay early where early settlement discounts are available.

Question 49

There are reports of Carpedium’s suppliers exploiting their workers

Answer 49

Carpedium may not wish to be associated with third parties which have a poor history of the treatment of workers.

Carpedium’s buyers should investigate these social media comments (as they may have no base) before taking action.
The sourcing of suppliers must include an assessment of their corporate social responsibility ethos before being accepted.

Question 50

Delivery notes are checked for quantity but there is no reference to them being checked to the relevant purchase order(s)

Answer 50

Carpedium may be receiving inventory that has not been ordered, or the incorrect quantity that had been originally ordered.
For under-deliveries, this increases the risk of not satisfying their customers, affecting potential sales and customer good will.
For over-deliveries, if accepted, there is a higher liability than there should be and likely too much inventory which may become obsolete.

A file of POs should be kept in the warehouse to match against DNs on receipt.
T&Cs of suppliers should include the need to include the PO reference number for ease of matching.

An email or electronic response should be completed to acknowledge receipt of bona fide deliveries.

Question 51

The G/L is updated when suppliers’ purchase invoices are received.

Answer 51

Purchases and the liability for the receipt of inventory is not being accounted for at the time when the inventory is received, meaning that cut-off for cost of sales and liabilities will be incorrect.
This is of particular concern at financial year-end.

An accrual should be made at the point of receipt of inventory to ensure the purchase of inventory and its associated liability is recognised at the correct time.
Once the purchase invoice is received, this should be matched to the accrual and this should be reversed.

Question 52

Supplier statements are not being reviewed and therefore reconciliations are not being routinely performed, despite the requirement for suppliers to provide this information.

Answer 52

Carpediem’s liabilities may contain errors which have not identified all deliveries or suppliers may not have provided expected discounts or missed payments made.

Such errors would affect cashflow and profitability and failure to record the correct amounts may result in incorrect payments to suppliers which may result in damaged goodwill which could affect future deliveries.

Supplier statement reconciliations should be routinely performed, ideally monthly and by an individual who is separate to the worker responsible for updating the purchase ledger.
The reconciliation should be test checked by a more senior individual to ensure (detective) control is operating effectively.

If further pressure on staff resource continues, a decision on which statements to be performed, as a priority, should be made.