Internal Controls Flashcards
Financial Statements - Full Set of Statutory Accounts
Statement of comprehensive income (P&L)
Statement of financial position
Statement of changes in equity
Statement of cashflows
Notes to the accounts
Statement of comprehensive income (P&L)
Shows performance for a period of time, resulting in profit or loss
Statement of financial position
Shows assets, liabilities & equity at a point in time
Shows how much the company owns or owes
Statement of changes in equity
Detailed statement of the movement in equity section (financed by section)
Statement of cashflows
Real cash movement
Story which tells the story of bank balance movement
Notes to the accounts
Details policies used (depreciation)
Details any irregular events (lost inventory due to fires, court case, large bad debt)
Internal Stakeholders
Staff - working conditions, development, workload
Directors - performance, bonuses
Credit control - receivable days, performance
Management accountant - to plan budgets & variances
External Stakeholders
Bank - they want you to bank with them
Suppliers - quantity of supply, payable days
Investors - current & potential investors, invest more or sell?
HMRC - make sure they are getting right amount of tax
Treasury Department
Invest on behalf of the company
Ensure money is in the correct places / accounts
Managing cashflow
Lending on behalf of the company
Monitor & plan for currency / interest rates
Internal Audit
Work for the company
Optional
Checks processes & procedures
Addresses any issues
External Audit
External company coming in
Legally required if the company is large
Checks accuracy of accounts
Reports on the processes
End result - Audit report, gives conclusion of how good the accounts are
8 Control Activities
Supervision
Personnel
Authorisation & Approval
Management
Segregation of Duties
Organisational Structure
Accounting & Mathematical checks
Physical
Control Activities: Supervision
Supervisors
CCTV
Remote computer access
Control Activities: Personnel
Getting right people for the right job
Qualifications
DBS
References
Criminal conviction check
Control Activities: Authorisation & Approval
Who can approve?
Credit limits
Method of approval
Number of people to authorise
Control Activities: Management
Different levels and responsibilities of managers
Control Activities: Segregation of Duties
Break down a task to have more people involved
Reduces error / fraud
Potential of collusion - 2 or more people working together to commit fraud
Control Activities: Accounting & Mathematical Checks
Bank reconciliation
Debtors / Credits rec
Auto calc for VAT
Software with date checks, duplicate checks, credit limit checks
Control Activities: Physical
Locked doors
FOB access
Passwords
Safe
Photo ID
Receivable Days
Trade receivables / Revenue (only credit) X 365
= x days
Average number of days for credit customers to pay
Can be affected by: discounts, credit terms, bad debts, credit control department
Aim to be as small as possible / on target
Payable Days
Trade payables / cost of sales X 365
= x days
If no cost of sales, use PURCHASES
Average number of days to pay credit suppliers
If bigger: improve cash flow, possible late fees
If smaller: better supplier relationships, better terms, discounts, increased credit rating
Inventory Days
Average inventory / cost of sales X 365
= x days
Use closing inventory if can’t work out average
Average amount of days inventory is held for
Pros: buffer stock so can meet demand if there are shortages elsewhere
Cons: can become obsolete, have to pay to store / insure
Gross Profit Margin
Gross profit / Revenue X 100
= %
Shows the amount of revenue which has been converted into gross profit
Operating Profit Margin
Operating profit / Revenue X 100
= %
Shows the amount of revenue which has been converted into operating profit
Return On Capital Employed
Operating profit / Capital employed X 100
= %
Shows how well the long term funding is being used and how much profit is being generated from it
Capital Employed
Non Current Liabilities + Total Equity
OR
Total Assets - Current Liabilities
Asset Turnover
Revenue / Capital Employed
= x times
Shows how many times the long term funding has been turned into revenue
Working Capital Cycle
Inventory days + receivable days - payable days
The days the business has to fund itself
Ideally want this to be 0
Inventory Turnover
365 / Inventory Days
The number of times the stock room empties & refills
Current Ratio
Current assets / Current liabilities = X:1
Shows how much asset we have to cover every £1 of debt (liabilities)
A measure of liquidity, short term cash flow
Ideal is 2:1 or above
Quick Ratio (Acid Test)
(Current assets - inventory) / Current liabilities = X:1
Shows how much asset we have to cover every £1 of debt (liabilities), less inventory as it is the least liquid asset
A measure of liquidity, short term cash flow
Ideal is 1:1 or above
Gearing
Non-current liabilities / (non current liabilities + equity) X 100
= %
Shows the percentage of the company which is funded by debt not equity
Strategic Level of Organisation
Senior Management
Tactical Level of Organisation
The people who make senior management plans happen
Operational Level of Organisation
Day to day operations staff
Wide / Flat Structure
Less layers
More responsibility at each layer
Quicker decisions made
Thin / Tall Structure
Lots of layers
Longer for decision to make
Longer ‘scaler’ chain
Centralised Organisation
All power and decisions are at head office
Decentralised Organisation
The power is delegated to divisional heads
Done from local branch
Scalar Chain
Steps between lowest and highest in organisation
Fraud
Intentional
Deliberate
Illegally gaining an advantage
Causing a loss
Types of Fraud: Theft
Can be physical / non physical
Types of Fraud: Bribery / Corruption
Giving or receiving of a bribe to influence
Deception
Obtaining by deception
Lying
False Accounting
AKA window dressing
Making accounts look better than they actually are
E.g. Increase revenue, exclude an expense
Would happen when looking for investment, selling the company or at year end for bonuses
Misappropriation of Assets
Theft of assets
Misstatement of Assets
Assets not correctly stated / valued
Most commonly inventory
Financial Impact of Fraud
The monetary amount
Non-Financial Impact of Fraud
Reputation
Relationships
Trust
Fraud Triangle
Opportunity - There is a problem with the controls in the business
Motivation - Desperation, greed, revenge
Rationalisation - Dishonest
NEED ALL 3 POINTS FOR FRAUD TO OCCUR
Cyber Attack
Hacker wanting to gain access or damage a system / network
Ransomware
System taken over by an attacker and only released after payment of a ‘ransom’
Payment normally in crypto
Man In The Middle Attack
Logging into a false middle website which gives the hacker access to see everything you are doing
Malware
Virus which is a malicious software
Can disrupt, damage or gain access to a system
Phishing
False emails asking for card details, etc.
Denial of Service Attack
Over powering a website in order to crash it
Data Protection Act 2018
Data needs to be kept secure - password protection, change regularly
Can’t keep data any longer than needed
Keep data accurate, update when necessary
Data Analytics
Analyses large amounts of data to find trends / patterns
Seeks out odd results
Predictive Data Analytic
Predicting what’s going to happen next
Diagnostic Data Analytic
Diagnosing
Why has it happened?
Prescriptive Data Analytic
How are we going to fix it
Descriptive Data Analytic
Description of what has happened
Parallel / Dual Changeover
2 systems running alongside each other
Direct Changeover
Switch old one off, switch new one on
Phased Changeover
Change over in stages, department by department
Pilot Before Changeover
Trial new system in a department to see how it goes before changing over
Change Agent
External service who deals with the changeover
Useful for overcoming staff resistance to change
Non Financial Considerations On Change
Staff reluctant to change - creatures of habit, scared for job security, can’t see need for change
Can be slower at first
More queries
Staff frustration
Customer frustration
Staff concerned for job security
SWOT Analysis
Strengths - In our control, what its good at, INTERNAL
Weaknesses - In our control, what we can improve on, INTERNAL
Opportunities - Chances to improve (based on weaknesses), EXTERNAL, PESTLE
Threats - Out of your control, Competitors, PESTLE, EXTERNAL
Monitor, Review & Report
Monitor - what are you aiming to keep an eye on?
Review - how are you going to monitor?
Report - report your findings, imagine presentation
2 Main Types Of Fraud
Misappropriation of Assets
Misstatement of Financial Statements
