Internal controls for the accounting function(contd.

)
Areas to cover:
1.Examples of accounting subsystems
2. Internal controls in accounting journals, ledger, source
documents and books of original entry
3.Internal controls in Purchasing , receiving and accounts
payable
4. Internal controls in sales and accounts receivable
5.ICs in cash payments and short term liabilities
6.ICs in payrol and human resource services
7.ICs in cash receipts and liquid assets
8.ICs for inventories
9.ICs for non current assets
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Internal controls for the accounting
function(contd.)
An accounting system is the system used to
manage the income, expenses, and other
financial activities of a business.
It consists of subsystems .
These subsystems directly link with other
operating functions because of the
complementary nature of the activities.

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This topic covers the common aspects of accounting
controls for the various accounting activities for any
organization.
The accounting system must be able to satisfy the basic
internal control objectives,which are:
-ensure that all transactions are recorded
-record only transactions that are valid
-authorise only valid transactions
-value transactions correctly and protect records from errors
-classify entries in accordance with the chart of accounts
-record transactions in a timely manner,and
-include all transactions in the relevant subsidiary ledgers
The accounting controls will help achieve the above
objectives
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Examples of accounting subsystems include :
1.Journals, source documents and books of original
entry
2.Purchasing ,receiving and accounts payable
3.Sales and accounts receivable
4.Cash payments and short term liabilities
5.Payroll and human resources
6.Cash receipts and liquid assets
7.Inventory and stock control
8.Non current assets
9.Internal controls and information technology
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In all the accounting subsystems, the
objectives of internal control and types of
internal controls are more or less common.
The types of internal controls include:
segregation of duties, physical controls,
authorization and approval, arithmetic and
accounting controls, personnel controls,
supervision, management control, performance
and quality assurance reviews,
reconciliations, independent or internal
checks, records and documentation, cash counts
and physical inventory counts.

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1. Internal controls in accounting journals,
ledger,source documents and books of original entry
Accounting journals include general journals, cash journals,
sales and sales returns journals, purchases and purchases
returns journals, etc.
Source documents include invoices, credit notes, costing
records etc.
Internal controls in journal entries is meant to ensure:
- the accounting period is identified
- the narration identifies the source data for the entry
-the journal is posted ,the journal is authorized
-the journal is sequentially numbered. Alphanumeric
numbering or check digits can also be used.
-source document sequences are complete
-cancelled documents sets are intact
-the journal’s column totals balance
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2. Internal controls in Purchasing , receiving and
accounts payable .
i) Account payables
The objective is to:
Ensure - completeness and accuracy of the creditors balances.
- That all creditors exist and are genuine liabilities of the entity.
- Creditors are properly presented and disclosed in the financial
statements.

The internal controls here involve:

Documentation as evidence of existence of creditors and their
disclosure –purchase requisition/purchase order, goods received
report, goods inspection report, suppliers invoice, supplier’s
statement, purchases journal , accounts payable ledger, trial
balance.
To ensure completeness, all valid credit purchases transactions
should be recorded in the accounts payable ledger accounts.
Authorization-ensure purchase orders meet established levels of
authority and review controls are adequate for all transactions.
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ii) Internal control procedures for purchasing system

- The company should have clear division of

duties(segregation) between the various departments
i.e. the manufacturing department, stores department
and factory department.
-A responsible official should be charged with the duty
of overseeing purchase of raw materials in the
company and should report to the managing director
or other appropriate senior level of management.

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The company should establish the re-order levels for
purchase of all materials used in production.
When the re-order level is reached a purchase
requisition should be raised and must be authorized
by the factory managers. This should then be sent to
the purchasing department.
Upon receipt of the purchase requisition, it should be
checked to confirm that the transaction is authorized.
 Another person should prepare a purchase order and
submit this together with the purchase requisition for
the authorization by purchasing manager.

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Upon delivery an official from stores department
must inspect the goods for quality and quantity.
All units received should be recorded in a suitable
documentation e.g. a goods received note (GRN)
which store’s staff and supplier’s staff should counter
sign.
The goods received note and the suppliers invoice
should be taken to the accounts department where an
independent person should post the entries to the
purchases ledger.
 Before payments are made to the suppliers, supplier’s
statement should be reconciled to the ledger balance.

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Internal controls in sales and accounts receivables

a.) Customers should be approved

before a credit facility is granted.
b.) Customers should be approved for
sales only when the customer’s credit
limit has not been exceeded.
c). Goods only be dispatched against a
valid and an authorized sales order.
d). All dispatches of goods and return
inwards should be accurately recorded
e.) All dispatches should be invoiced.
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f). Invoices and credit notes should be accurately
prepared from approved price list and all discounts or
price deduction should be properly approved.
 Price list and all trade discounts and price deduction
should be properly authorized.

h). All bad debts written off should be properly

authorized and recorded.
 Persons involved with original authorization of sales
and granting credit to customers should not be involved
in the authorization of bad debts write offs.
i). Stock’s records should be accurately updated with all
sales and sales returns.
j.) All transactions should be accurately posted to the
ledger

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k.) Sales ledger balances should be regularly
reconciled to sales ledger control balances to ensure
completeness and accuracy of the ledger.
l). Sales ledger balances should be periodically aged
and reviewed by the credit control staff. Overdue
accounts should be identified and followed up for
collection.
The aged list of debtors would assist management
and the auditors in assessing adequacy of bad debt
provisions.

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Key objectives in sales and accounts receivables internal control
system

- Credit should be extended to credit worthy customers.

- Goods should not be dispatched without an invoice
being raised.
- Overdue accounts should be promptly followed up.
-Receipt from cash sales should be properly controlled.
- No unauthorized credit entries should be made to
debtors’ account balances.
- There should be sufficient segregation of duties between
sales function and credit control function in an entity.

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 4. Internal controls in Cash payments and short term liabilities

Depending on the size of the business, cash expenditure activities may

involve:
 -payment of wages, payment of suppliers ,petty cash re-imbursements
 -payment of company credit cards, payment of mobile phone accounts
 -payment for expenses that may not have purchase orders such as county
government rates, water rates, electricity
 The accounting documents may include: cash forecasts, cash summaries,
various service invoices, credit cards, mobile phone accounts.
 The journals may include cash payments journal and petty cash .The
ledgers may include general ledger and accounts payable ledger.
 The accounting reports may include bank reconciliation, general ledger
trial balance, monthly accounts payable ,cash forecasts, petty cash
summary. Operating reports include daily cash received and daily cash
balance.

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The main Internal controls objectives in Cash
payments and short term liabilities are to ensure:
a) liabilities shown in the balance sheet are genuine
obligations of the company.
b. the correctness or accuracy of the money amount
of such liabilities
c. the appropriateness of the description given in the
accounts and the adequacy of the disclosure.
d. that all existing liabilities are actually included in
the accounts i.e. completeness
e) support documents are valid and have been
verified to be correct by relevant controls
f)cheque forms are used only for valid transactions

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5.Internal controls in Payroll and human resources
The internal controls for this subsystem are divided between
the accounting function of payroll and the operating
function of human resources.
 Payroll spreadsheets are famous for containing errors
(especially tax calculations) and even fraud in the form of
‘ghost employees’.
 Payrolls should be checked and authourised by someone
other than the preparer.
 For large payrolls it can be useful to provide a summary of
changes from last month’s payroll total to this month’s
total, which focuses the reviewer’s attention on joiners,
leavers and salary changes.
Non payment of taxes or social security contributions is a
common problem, that may result in penalties and fines.
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Controls in hiring may involve checking of references,
checking of qualifications, psychological profiling,
technical assessment, complying with equal opportunity
and anti-discrimination legislation, providing the
employee with a list of unacceptable business practices.
Exit controls may include exit interviews to determine the
reasons for resignation.
Retrenchment and dismissal controls should be in place to
ensure retrenched staff are treated compassionately and
within legislative and union guidelines.
 An independent appraisal of the reasons for dismissal
should be discussed and explained to the departing
employee.

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6. Internal controls in cash receipts and liquid
assets
a) Keep cash transactions to an absolute minimum
-Avoid all the risks associated with cash by making as
many payments as possible by cheque or transfer.
Cash should only be used to make payments when all
other methods are not possible.
b)Use an ‘imprest’ system-This involves having a
fixed float . This system is good because the risk is
limited to the value of the float.
Any problems with expenditure get spotted very
quickly, because all the receipts are reviewed at each
top up.

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c) Restrict access to petty cash and the safe-Keys to
the petty cash box and the safe should be given only
to authourised individuals.
d) Cash count reconciliations-The petty cash should
be counted and reconciled to the cashbook balance at
least weekly.
 e)Keep money coming in separate from money going
out-It is better to deposit cash received intact (ie
untouched) straight to the bank, rather than spending
it directly.

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f) Always give receipts for money received-Receipts
should be written in ink, and a duplicate copy made (eg
with carbon paper).
Ideally receipts should be printed and pre-numbered, and
stamped and signed by the person issuing the receipt.
Unused receipt books should be kept under lock and key
and carefully controlled using a register.
g) Always obtain receipts for money paid out-no receipt
means there is no proof that the purchase was made. If no
receipt is available , the cost of each transaction should be
noted down straight away so that the amounts are not
forgotten
h) Pay surplus cash into the bank-Having cash lying
around in the office is a temptation to a thief
i) Having a safe – or a safe place – to keep cash, cheques
books, legal documents, etc. is an important consideration.
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 7. Internal control for inventories and stocks
It is very important that stock are properly tracked.
A stock record should be maintained for each type of stock
showing amounts in, out and balance, with each entry
referenced to a supporting document giving detail about the
receipt or issue of goods.
Stock counts should be carried out periodically (say monthly)
and reconciled to the expected balances shown in the stock
records.
The stock counts should not be done by the same person who
has custody of the stock (segregation of duties).
Stock discrepancies need to be investigated promptly as they
could be an indication of stock being stolen.
A system needs to be put in place to ensure that older items
are issued first, to reduce the risk of obsolescence or expiry.
A system also needs to be put into place to ensure that new
supplies are ordered before stock levels run too low.
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 8. Internal controls for non current assets

Non current assets (eg land, buildings, vehicles, machinery

and office equipment) are often not properly tracked, and the
risks of assets being stolen are often high.
 The controls over non-current assets include: maintaining an
assets register, verifying the existence and condition of assets
periodically, regular maintenance, insurance and developing
policies for authorization of asset disposal.

An Assets Register should be established with an entry or

record sheet for each asset.
The register will contain information about where and when
the item was purchased; how much it cost; how much it is
insured for; repair history; reference number, serial numbers
and details of guarantees or warranties.
It may also contain information on depreciation, if that is
relevant.

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The record sheet should also state where the item is
held and who is responsible for its maintenance and
security.
The Assets Register should be checked by a senior
manager or committee member every quarter and any
discrepancies reported and appropriate action taken.
Maintenance-Regular maintenance (eg of buildings
and equipment) helps to improve safety and prolongs
the life of the assets, as well as preserving their value.

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Office equipment such as photocopiers and electrical
equipment should also receive regular services by
qualified technicians.
Insurance-Insuring your assets against theft or
damage is an easy way to transfer the risk of asset
loss.

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Management establishes and maintains internal
controls through :
• -communication and enforcement of integrity and
ethical values
• -attitude, awareness and actions, and commitment
to competence
• -management operating style and philosophy
• -assignment of authority and responsibility
• -human resource policies and practices and
organization structures
• -information and communication-internal and
external(procedure manuals, newsletters, accounting
reports etc)
• -audit committees
• -segregation of functions

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Conditions that increase the risk of fraud in an
organization

• -Lack of integrity and /or competence among management

• -Evidence of living standards higher than would be expected for
staff in that position
• -High volumes of transactions at month end especially cash
related transactions
• -The business handles a lot of cash or has a high volume of cash
transactions
• - Pressure and strict deadlines imposed on employees as well as
market pressures
• -Fewer employees than workload requirements
• -Staff performing overlapping and incompatible duties

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• Weak internal controls
• -Complex management structures and confusion on
levels of authority and responsibilities
• -High staff turnover, especially in the accounting
function
• -Payments are made for goods and services that seem
overpriced
• -There are high volumes of transactions with
altered ,duplicate or missing documents
• -Reconciliations for control accounts or subsidiary
ledgers are not completed, or never balance.

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General Characteristics of a potential fraudster in an organization

• i) male
• ii)living beyond the salary and expected income level
of the position ,with frequent overseas trips ,and
regular new cars
• iii)disgruntled at work or a complainer
• iv)greedy, with a probable drug and /or gambling
problem
• v)suffering stress from a personal crisis such as
financial problems or bad marriage
• vi)a risk taker willing to push limits and take chances
• vii)intelligent but challenged by ‘secure’ systems and
bored with routine tasks

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• viii)egotistical and disrespectful of “dumb” managers
and obvious control weaknesses
• ix)inquisitive and wanting to break the vulnerability
of the system
• x)a “hard worker ‘ who is first to arrive in the morning
and last to leave at night ,is rarely absent ,sick or on
leave and is always there for end –of-month
processing.
• xi)a ‘know-all’ whose way is better, who takes short
cuts and self justifies infractions or laws or rules,
because they take longer than his ‘his way’

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Thank you

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