This section is divided up into the areas of activity
usually found in a business. We look at the control objectives in each area and
some example of control procedures which will enable the organization to
achieve those objectives.
usually found in a business. We look at the control objectives in each area and
some example of control procedures which will enable the organization to
achieve those objectives.
Students should be familiar with the term ‘control
objectives’ which is fairly self
objectives’ which is fairly self
explanatory and simply refers to what the
control procedure is designed to do.
Internal
control generally
control generally
Control
objectives
objectives
·
To
carries on the business in an orderly and efficient manner.
To
carries on the business in an orderly and efficient manner.
·
To ensure
adherence to management policies;
To ensure
adherence to management policies;
·
Safeguard
its assets; and
Safeguard
its assets; and
·
Secure
the accuracy and reliability of the records.
Secure
the accuracy and reliability of the records.
Control procedures
·
An
appropriate and integrate system of accounts and records.
An
appropriate and integrate system of accounts and records.
·
Internal
controls over those accounts and records.
Internal
controls over those accounts and records.
·
Financial
supervision and control by management, including budgetary control, management
accounting reports, and interim accounts.
Financial
supervision and control by management, including budgetary control, management
accounting reports, and interim accounts.
·
Safeguarding
and, if necessary, duplicating records.
Safeguarding
and, if necessary, duplicating records.
·
Engaging,
training, allocating to specific duties staff that is capable of fulfilling
their responsibilities. Rotation of duties and cover for absences.
Engaging,
training, allocating to specific duties staff that is capable of fulfilling
their responsibilities. Rotation of duties and cover for absences.
Purchases and creditors system
Control objectives
·
To ensure
that goods and services are only ordered in the quantity, of the quality, and
at the be t terms available after appropriate requisition and approval’s
To ensure
that goods and services are only ordered in the quantity, of the quality, and
at the be t terms available after appropriate requisition and approval’s
·
To ensure
that goods and services received are inspected and only acceptable items are accepted.
To ensure
that goods and services received are inspected and only acceptable items are accepted.
·
To ensure
that all invoices are checked against authorized orders and receipt of the
goods and services in good condition.
To ensure
that all invoices are checked against authorized orders and receipt of the
goods and services in good condition.
·
To ensure
that all goods and services invoiced are properly recorded in the books.
To ensure
that all goods and services invoiced are properly recorded in the books.
Control procedures
·
There
should be procedures for the requisitioning of goods and services only by
specified personnel on specified forms with space for acknowledgement of
performance.
There
should be procedures for the requisitioning of goods and services only by
specified personnel on specified forms with space for acknowledgement of
performance.
·
Order
forms should be pre-numbered and kept in safe custody. Issue of blank order
form books should be controlled and recorded.
Order
forms should be pre-numbered and kept in safe custody. Issue of blank order
form books should be controlled and recorded.
·
Sequence
checks of order forms should be performed regularly by a senior official and
missing items investigated.
Sequence
checks of order forms should be performed regularly by a senior official and
missing items investigated.
·
All goods
received should be recorded on goods received notes (preferably pre-numbered)
or in a special book.
All goods
received should be recorded on goods received notes (preferably pre-numbered)
or in a special book.
·
All goods
should be inspected for condition and agreement with order and counted on
receipt. The inspection should be acknowledged. Procedures for dealing with
rejected goods or services should include the creation of debit notes
(pre-numbered) with subsequent sequence checks and follow-up of receipt of
suppliers’ credit notes.
All goods
should be inspected for condition and agreement with order and counted on
receipt. The inspection should be acknowledged. Procedures for dealing with
rejected goods or services should include the creation of debit notes
(pre-numbered) with subsequent sequence checks and follow-up of receipt of
suppliers’ credit notes.
·
At
intervals, a listing of unfulfilled orders should be made and investigated.
At
intervals, a listing of unfulfilled orders should be made and investigated.
·
Invoice
should be checked for arithmetical accuracy, pricing, correct treatment of VAT
and trade discount, and trade discount, and agreement with order and goods-in
records.
Invoice
should be checked for arithmetical accuracy, pricing, correct treatment of VAT
and trade discount, and trade discount, and agreement with order and goods-in
records.
·
These
checks should be acknowledged by the performer preferably on spaces marked by a
rubber stamp on the invoices.
These
checks should be acknowledged by the performer preferably on spaces marked by a
rubber stamp on the invoices.
·
Invoices
should have consecutive numbers put on them and batches should be pre-listed.
Invoices
should have consecutive numbers put on them and batches should be pre-listed.
·
Purchase
invoices should be pre-listed before entry into the accounting system and the
pre-list total compared independently with the total of the invoices entered
into the system.
Purchase
invoices should be pre-listed before entry into the accounting system and the
pre-list total compared independently with the total of the invoices entered
into the system.
·
Totals of
entries in the invoice register or day book should be regularly checked with
the pre-lists.
Totals of
entries in the invoice register or day book should be regularly checked with
the pre-lists.
·
Responsibility
for purchase ledger entries should be vested in personnel separate from
personnel responsible for ordering, receipt of goods and the invoice register.
Responsibility
for purchase ledger entries should be vested in personnel separate from
personnel responsible for ordering, receipt of goods and the invoice register.
·
The
purchase ledger should be subject to frequent reconciliations in total by, or
be checked by, an independent senior official.
The
purchase ledger should be subject to frequent reconciliations in total by, or
be checked by, an independent senior official.
·
Ledger
account balances should be regularly compared with suppliers’ statements of
account.
Ledger
account balances should be regularly compared with suppliers’ statements of
account.
·
All goods
and service procurement should be controlled by budgetary techniques.
All goods
and service procurement should be controlled by budgetary techniques.
·
Orders
should only be placed that are within budget limits. There should be frequent
comparisons of actual purchases with budgets and investigation into variances.
Orders
should only be placed that are within budget limits. There should be frequent
comparisons of actual purchases with budgets and investigation into variances.
·
Cut-off
procedures at the year end are essential.
Cut-off
procedures at the year end are essential.
·
A proper
coding system is required for purchase of goods and services so that the
correct nominal accounts are debited.
A proper
coding system is required for purchase of goods and services so that the
correct nominal accounts are debited.
Payments
Control
objective
objective
·
To
prevent unauthorized payments being made from bank accounts.
To
prevent unauthorized payments being made from bank accounts.
Control
activities
activities
·
Control
over custody and issue of unused cheques. A register should be kept if
necessary.
Control
over custody and issue of unused cheques. A register should be kept if
necessary.
·
Individuals
responsible for the preparation of cheques or credit transfers should be
different to the individuals who process invoices and enter them into the
purchase ledger system.
Individuals
responsible for the preparation of cheques or credit transfers should be
different to the individuals who process invoices and enter them into the
purchase ledger system.
·
Rules
should be established for the presentation of supporting documents before
cheques, cheque requisitions or payment lists are to be signed. Such supporting
documents may include invoices, a copy of the payroll, purchase account
reconciliations, aged creditors listing, etc.
Rules
should be established for the presentation of supporting documents before
cheques, cheque requisitions or payment lists are to be signed. Such supporting
documents may include invoices, a copy of the payroll, purchase account
reconciliations, aged creditors listing, etc.
·
Establishment
of who can sign by at least two persons, with no person being permitted to sign
if they are a payee.
Establishment
of who can sign by at least two persons, with no person being permitted to sign
if they are a payee.
·
All
cheques should be restrictively crossed.
All
cheques should be restrictively crossed.
·
The
signing of blank cheques must be prohibited.
The
signing of blank cheques must be prohibited.
·
Special
safeguards should be implemented where cheques have pre-printed signatures
including controls over unused and spoilt cheques.
Special
safeguards should be implemented where cheques have pre-printed signatures
including controls over unused and spoilt cheques.
·
Rules to ensure prompt dispatch and to prevent
interception or misappropriate ion.
Rules to ensure prompt dispatch and to prevent
interception or misappropriate ion.
·
Special
rules for authorizing and checking direct debits and standing orders.
Special
rules for authorizing and checking direct debits and standing orders.
Wages and salaries
Objectives
·
To ensure
that wages and salaries are paid only to actual employees at authorized rates
of pay.
To ensure
that wages and salaries are paid only to actual employees at authorized rates
of pay.
·
To ensure
that all wages and salaries are computed in accordance with records of work
performed whether in respect of time, output, sales made or other criteria.
To ensure
that all wages and salaries are computed in accordance with records of work
performed whether in respect of time, output, sales made or other criteria.
·
To ensure
that payrolls are correctly calculated.
To ensure
that payrolls are correctly calculated.
·
To ensure
that payments are made are made only to the correct employees.
To ensure
that payments are made are made only to the correct employees.
·
To ensure
that payroll deductions are correctly accounted for and paid over to the appropriate
third parties.
To ensure
that payroll deductions are correctly accounted for and paid over to the appropriate
third parties.
·
To ensure
that all transactions are correctly recorded in the books of accounts.
To ensure
that all transactions are correctly recorded in the books of accounts.
Control procedures
·
There
should be separate records kept for each employee. The records should contain
such matters as date of employment, age, next of kin, agreed deductions,
skills, department, and specimen signature. Ideally these records should be
maintained by a separate HR department.
There
should be separate records kept for each employee. The records should contain
such matters as date of employment, age, next of kin, agreed deductions,
skills, department, and specimen signature. Ideally these records should be
maintained by a separate HR department.
·
Procedures
for employment, retirements, dismissals, fixing and changing rates of
pay-procedures should be laid down for notification of these matters to the
personnel and payroll preparation departments.
Procedures
for employment, retirements, dismissals, fixing and changing rates of
pay-procedures should be laid down for notification of these matters to the
personnel and payroll preparation departments.
·
Time
records should be kept for hourly paid staff on time based payments (e.g.
part-time staff) as opposed to a regular monthly salary. These can take the
form of clock cards or electronic swipe cards. There should be supervision of
the time recording system to ensure that staff does not abuse the system by
getting other staff to clock them in or out.
Time
records should be kept for hourly paid staff on time based payments (e.g.
part-time staff) as opposed to a regular monthly salary. These can take the
form of clock cards or electronic swipe cards. There should be supervision of
the time recording system to ensure that staff does not abuse the system by
getting other staff to clock them in or out.
·
Time
records should be approved before preparation of salaries and wages. All
overtime should be authorized.
Time
records should be approved before preparation of salaries and wages. All
overtime should be authorized.
·
Output or
piecework records should be properly controlled and authorized and procedures
should exist for reconciling output or piecework records with production
records.
Output or
piecework records should be properly controlled and authorized and procedures
should exist for reconciling output or piecework records with production
records.
·
Procedures
should be established for dealing with advances, holiday pay, lay-off pay, new
employees, employees leaving, sickness and other absences and bonuses.
Procedures
should be established for dealing with advances, holiday pay, lay-off pay, new
employees, employees leaving, sickness and other absences and bonuses.
·
Starters
and leavers should be dealt with by the HR department and details passed to
payroll separately. These should be follow up to ensure that leavers have been
removed from the payroll and starters brought on at the correct time for the
correct amount.
Starters
and leavers should be dealt with by the HR department and details passed to
payroll separately. These should be follow up to ensure that leavers have been
removed from the payroll and starters brought on at the correct time for the
correct amount.
·
The
payroll should be approved by a senior official prior to wages being paid. If
this is not practical arrangements should be made for managers to confirm the
employees entered on the payroll at fixed dates to ensure only bona fide
employees are being paid.
The
payroll should be approved by a senior official prior to wages being paid. If
this is not practical arrangements should be made for managers to confirm the
employees entered on the payroll at fixed dates to ensure only bona fide
employees are being paid.
·
Deductions
such as PAYE, national insurance, pension contributions and other authorized
deductions should be subject to prompt payment over to the institutions concerned.
Control totals subject to frequent review should be kept.
Deductions
such as PAYE, national insurance, pension contributions and other authorized
deductions should be subject to prompt payment over to the institutions concerned.
Control totals subject to frequent review should be kept.
·
Regular
independent comparisons should be made between personnel records and wages
records, in particular direct bank transfer (such as BACS payments) lists.
Regular
independent comparisons should be made between personnel records and wages
records, in particular direct bank transfer (such as BACS payments) lists.
·
Regular
independent comparisons of payrolls at different dates and reconciliation of
numbers.
Regular
independent comparisons of payrolls at different dates and reconciliation of
numbers.
·
Regular
independent comparisons of wages paid with budgets and investigation of
variances.
Regular
independent comparisons of wages paid with budgets and investigation of
variances.
·
Surprise
investigation of wage records and procedures by internal audit or senior officials.
Surprise
investigation of wage records and procedures by internal audit or senior officials.
·
A wages
supervisor should be appointed to be responsible for setting queries and
dealing with some control procedures.
A wages
supervisor should be appointed to be responsible for setting queries and
dealing with some control procedures.
Sales and debtors
Control objectives
·
To ensure
that all customers orders are promptly executed.
To ensure
that all customers orders are promptly executed.
·
To ensure
that sales on credit are made only to bona fide good credit risks.
To ensure
that sales on credit are made only to bona fide good credit risks.
·
To ensure
that all sales on credit are invoices, that authorized prices are charged and
that before issue all invoices are checked as regards price, trade discounts
and VAT.
To ensure
that all sales on credit are invoices, that authorized prices are charged and
that before issue all invoices are checked as regards price, trade discounts
and VAT.
·
To ensure
that all invoices raised are entered in the books.
To ensure
that all invoices raised are entered in the books.
·
To ensure
that all customers’ claims are fully investigated before credits notes are
issued.
To ensure
that all customers’ claims are fully investigated before credits notes are
issued.
·
To ensure
that every effort is made to collect all debts.
To ensure
that every effort is made to collect all debts.
·
To ensure
that no unauthorized credits are made to debtors accounts.
To ensure
that no unauthorized credits are made to debtors accounts.
Control Procedures
·
Incoming
orders should be recorded, and if necessary, acknowledged, on pre-numbered
order forms. Orders should be matched with invoices and lists prepared at
intervals of outstanding orders for management action. Sequence checks should
be made regularly to ensure no orders are missing.
Incoming
orders should be recorded, and if necessary, acknowledged, on pre-numbered
order forms. Orders should be matched with invoices and lists prepared at
intervals of outstanding orders for management action. Sequence checks should
be made regularly to ensure no orders are missing.
·
Credit
control: there should be procedures laid for verifying the credit worthiness of
all person or institutions requesting goods on credit. For existing customers,
credit worthiness data should be kept up-to-date and checks made that
outstanding balances plus a new sale does not cause the pre-set credit limit to
be exceeded. For new customers, investigative techniques should be applied
including enquiry of trade protection organizations, credit rating agencies,
referees, the company’s file with the registrar of companies, etc. a credit
limit should be established. This may be fixed at two levels, a higher one such
that further sales are not made and a lower one such that managements are
informed and a judgment made on granting credit.
Credit
control: there should be procedures laid for verifying the credit worthiness of
all person or institutions requesting goods on credit. For existing customers,
credit worthiness data should be kept up-to-date and checks made that
outstanding balances plus a new sale does not cause the pre-set credit limit to
be exceeded. For new customers, investigative techniques should be applied
including enquiry of trade protection organizations, credit rating agencies,
referees, the company’s file with the registrar of companies, etc. a credit
limit should be established. This may be fixed at two levels, a higher one such
that further sales are not made and a lower one such that managements are
informed and a judgment made on granting credit.
·
Selling
prices should be prescribed. Policies on credit terms, trade and cash
discounts, and special prices should be established and communicated to all the
relevant staff in writing.
Selling
prices should be prescribed. Policies on credit terms, trade and cash
discounts, and special prices should be established and communicated to all the
relevant staff in writing.
·
Dispatch
of goods should only be on properly evidenced authority. Goods out should be
recorded by using pre-numbered dispatch notes.
Dispatch
of goods should only be on properly evidenced authority. Goods out should be
recorded by using pre-numbered dispatch notes.
·
Unissued
sets of dispatch notes should be safeguarded and issue of sets recorded.
Unissued
sets of dispatch notes should be safeguarded and issue of sets recorded.
·
Sequence
checks of dispatch notes should be made regularly by a senior official.
Sequence
checks of dispatch notes should be made regularly by a senior official.
·
Acknowledge
of receipt of goods should be made by customers on copy dispatch notes and
these should be retained as proof of delivery.
Acknowledge
of receipt of goods should be made by customers on copy dispatch notes and
these should be retained as proof of delivery.
·
Invoices
should be pre-numbered and the custody and issue of unused invoices controlled
and recorded. Sequence checks should be regularly made and missing or spoiled
invoices investigated.
Invoices
should be pre-numbered and the custody and issue of unused invoices controlled
and recorded. Sequence checks should be regularly made and missing or spoiled
invoices investigated.
·
All
invoices should be independently checked for agreement with customer order,
with the goods dispatched record, for pricing, discounts, VAT and other
details. All actions should be acknowledged by signature or initials.
All
invoices should be independently checked for agreement with customer order,
with the goods dispatched record, for pricing, discounts, VAT and other
details. All actions should be acknowledged by signature or initials.
·
Accounting
for sales and debtors should be segregated by employing different staff for
sales receipts, from those responsible for invoices, sales ledger entries and
statement preparation.
Accounting
for sales and debtors should be segregated by employing different staff for
sales receipts, from those responsible for invoices, sales ledger entries and
statement preparation.
·
Sales
invoices should be pre-listed before entry into the accounting system and the
pre-list total independently compared with the total of the invoices entered
into the system.
Sales
invoices should be pre-listed before entry into the accounting system and the
pre-list total independently compared with the total of the invoices entered
into the system.
·
Customer
claims should be recorded and investigated. Similar controls (e.g.
pre-numbering) should be applied to credit notes. At the year end, unclear
claims should be carefully investigated and assessed. All credit notes should
be subject to acknowledged approval by a senior official.
Customer
claims should be recorded and investigated. Similar controls (e.g.
pre-numbering) should be applied to credit notes. At the year end, unclear
claims should be carefully investigated and assessed. All credit notes should
be subject to acknowledged approval by a senior official.
·
A control
account should be regularly and independently prepared.
A control
account should be regularly and independently prepared.
·
Procedures
must exist for identifying and chasing slow payers. This is normally done via
an aged debtors listing. Very overdue balances should be brought to the
attention of management for legal or other action to be taken.
Procedures
must exist for identifying and chasing slow payers. This is normally done via
an aged debtors listing. Very overdue balances should be brought to the
attention of management for legal or other action to be taken.
·
All
balances must be reviewed regularly to identify and investigate overdue
accounts, debtors paying by installments or round sums, and accounts where
payments do not match invoices.
All
balances must be reviewed regularly to identify and investigate overdue
accounts, debtors paying by installments or round sums, and accounts where
payments do not match invoices.
·
Bad debts
should only be written off after due investigation and acknowledge
authorization by senior management.
Bad debts
should only be written off after due investigation and acknowledge
authorization by senior management.
·
Also at
the year end, cut off procedures will be required. Particular attention will be
paid to orders dispatched but not invoiced.
Also at
the year end, cut off procedures will be required. Particular attention will be
paid to orders dispatched but not invoiced.
Cash sales and collections
Control objectives
·
To ensure
that all cash, to which the enterprise is entitled, is received.
To ensure
that all cash, to which the enterprise is entitled, is received.
·
To ensure
that all such cash is properly accounted for and entered in the records.
To ensure
that all such cash is properly accounted for and entered in the records.
·
To ensure
that all such cash is deposited promptly and intact in the bank.
To ensure
that all such cash is deposited promptly and intact in the bank.
Control activities
·
Prescribe
and limit the number of persons who are authorized to receive cash, e.g. sales
assistants, cashiers, collectors, sales representatives, etc.
Prescribe
and limit the number of persons who are authorized to receive cash, e.g. sales
assistants, cashiers, collectors, sales representatives, etc.
·
Establish
a means of evidencing cash receipts, e.g. pre-numbered duplicate receipt forms,
cash registers with sealed till rolls. Nay duplicate receipt form books should
be securely held and issue controlled.
Establish
a means of evidencing cash receipts, e.g. pre-numbered duplicate receipt forms,
cash registers with sealed till rolls. Nay duplicate receipt form books should
be securely held and issue controlled.
·
Ensure
that customers are aware that they must receive a receipt form or ensuring that
the amount rung up on the cash register is clearly visible to the customer.
Ensure
that customers are aware that they must receive a receipt form or ensuring that
the amount rung up on the cash register is clearly visible to the customer.
·
Appoint
persons with responsibility for emptying cash registers at prescribed intervals,
and agreeing the amount present with till roll totals or internal registers.
Such collections should be evidenced in writing and be initialed by the
assistant and the supervisor.
Appoint
persons with responsibility for emptying cash registers at prescribed intervals,
and agreeing the amount present with till roll totals or internal registers.
Such collections should be evidenced in writing and be initialed by the
assistant and the supervisor.
·
Immediate
and intact banking. Payments out should be from funds drawn from the bank using
an impress system.
Immediate
and intact banking. Payments out should be from funds drawn from the bank using
an impress system.
·
Investigation
of ‘shorts’ and ‘over’s’ in excess of an agreed limit should be carried out
promptly.
Investigation
of ‘shorts’ and ‘over’s’ in excess of an agreed limit should be carried out
promptly.
·
Independent
comparison of agreed till roll totals with subsequent banking records.
Independent
comparison of agreed till roll totals with subsequent banking records.
·
Persons
handling cash should not have access to other cash funds or to purchase or
sales ledger records.
Persons
handling cash should not have access to other cash funds or to purchase or
sales ledger records.
·
Rotation
of duties and cover for holidays (which should be compulsory) and sickness.
Rotation
of duties and cover for holidays (which should be compulsory) and sickness.
·
Collection
by collectors and sales representatives should be banked intact daily. There
should be independent comparison of the amounts banked with records (e.g.
duplicate receipt books) of the collectors and sales staff.
Collection
by collectors and sales representatives should be banked intact daily. There
should be independent comparison of the amounts banked with records (e.g.
duplicate receipt books) of the collectors and sales staff.
Payments into bank
Control objectives
·
To ensure
that all cash and cheques received are banked intact.
To ensure
that all cash and cheques received are banked intact.
·
To ensure
that all cash and cheques received are banked without delay at prescribed
intervals, preferably daily.
To ensure
that all cash and cheques received are banked without delay at prescribed
intervals, preferably daily.
·
To ensure
that all cash and cheques received are accounted for and recorded accurately.
To ensure
that all cash and cheques received are accounted for and recorded accurately.
Control procedures
·
Cash and
cheques should be banked intact.
Cash and
cheques should be banked intact.
·
Cash and
cheques should be banked without undue delay.
Cash and
cheques should be banked without undue delay.
·
The bank
paying-in slip should be prepared by an individual with no access to cash
collection points, purchase or sales ledgers.
The bank
paying-in slip should be prepared by an individual with no access to cash
collection points, purchase or sales ledgers.
·
Banking
should be made with security in mind, e.g. for large cash sums, security guards
should be used.
Banking
should be made with security in mind, e.g. for large cash sums, security guards
should be used.
·
There
should be independent comparison of paying-in slips with collection records,
post lists and sales ledgers.
There
should be independent comparison of paying-in slips with collection records,
post lists and sales ledgers.
Cash and cheques received by post
Control objectives
To ensure that all cash and cheques received by
post are accounted for and accurately recorded in the books.
post are accounted for and accurately recorded in the books.
To ensure all such receipts are deposited in the
bank promptly and intact.
bank promptly and intact.
Control procedures
·
Measures
to prevent interception of mail between receipt and opening.
Measures
to prevent interception of mail between receipt and opening.
·
Two
persons to be present at the opening of the post.
Two
persons to be present at the opening of the post.
·
All
cheques and other negotiable instruments to be immediately given a restrictive
crossing, e.g. account payee only, not negotiable.
All
cheques and other negotiable instruments to be immediately given a restrictive
crossing, e.g. account payee only, not negotiable.
·
Immediate
entry of the details of the receipts (date, payer, amount, cash, cheque, or
other) in a ‘rough cash book’ or post list of money received. The list should
be signed by both parties present.
Immediate
entry of the details of the receipts (date, payer, amount, cash, cheque, or
other) in a ‘rough cash book’ or post list of money received. The list should
be signed by both parties present.
·
Regular
independent comparison of the post list with banking records. The test should
be of total, detail and dating to detect teeming and lading (chapter 20) at a
later stage in the processing.
Regular
independent comparison of the post list with banking records. The test should
be of total, detail and dating to detect teeming and lading (chapter 20) at a
later stage in the processing.