1. 1
Accounts
Name of Candidate: Delperio Burrowes
Form: 6B2
Teacher: Mr. Burke
School: The Lodge School
School Centre: 030016
Candidate#: 0300160518
2. 2
Table of Contents
Cover Page……………………………………………………….1
Table of Contents………………………………………………...2
Acknowledgements………………………………………………3
Introduction………………………………………………………4
Literature Review………………………………………………...5
Data Collection…………………………………………………...7
Data Presentation & Analysis…………………………………….8
Evaluation……………….. ……………………………………...17
Recommendations………………………………………………..20
Conclusion………………………………………………………..21
Bibliography……………………………………………………...22
3. 3
Acknowledgements
First of all, I would to thank God for giving me life, good health and
allowing me to carry out this project. Also, I am grateful of the staff of
Chantelle’s Shop for assisting me by completing the questionnaires. As
well as the managers who assisted from the start to the end of the project
and by taking time out of their work to help me. They helped me better
understand the topic of Internal Controls. I am thankful for the managers
explaining the working of the cash flows and works within the business.
Finally, I would like to thank my Accounts teacher, Mr. Burke, for
providing me with the information needed to complete this SBA.
4. 4
Introduction
Aim of the project
To investigate the various internal controls used in Chantelle’s Shop.
Objectives
To describe the various controls used by Chantelle’s Shop over
areas such as stock, cash, account receivable and accounts payable
To understand the importance of internal controls within
Chantelle’s Shop
To assess the effectiveness of the internal controls to the business
5. 5
LiteratureReview
According to Will Kenton (2019),Internal controls are the mechanisms,
rules, and procedures implemented by a company to ensure the integrity
of financial and accounting information, promote accountability and
prevent fraud. Besides complying with laws and regulations, and
preventing employees from stealing assets or committing fraud, internal
controls can help improve operational efficiency by improving the
accuracy and timeliness of financial reporting. Also, quoted by Danielle
Lauren (2017) internal controls help a company present reliable financial
reports to stakeholders to comply with laws and regulations and have
efficient and effective operations. For example, controls can limit the
number of activities in the one employee completes in the company
require management authorization or review of financial statements and
reports.
WHAT ARE THE INTERNAL CONTROLS?
There are mainly 5 internal controls which include:
Establishment of Responsibility- This were a person is given a
responsibility and they are mainly accountable for any changes
within their work area. For example, if one person is working the
cash register then he or she must be able to explain any differences
between cash and records (receipts).
Separation of Duties- Separation of duties involves splitting
responsibility for bookkeeping, deposits, reporting and auditing.
The further duties are separated, the less chance any single
employee has of committing fraudulent acts. For small businesses
with only a few accounting employees, sharing responsibilities
between two or more people or requiring critical tasks to be
reviewed by co-workers can serve the same purpose.
6. 6
Documentation Procedures- These are documents such as sales
and purchase invoices which serve as evidence that a transaction
has taken place. For example, a sales invoice show that the
customer has been billed for their goods and services.
Physical, Mechanical & Electronic Control- These controls are
important because they safeguard assets. These include Safes,
deposit boxes, locked warehouses and even fencing
Internal Check- This is also known as independent internal
verification. This is where there is periodically, ,on a surprise
basis, an independent reviews, checks or verifies the work done by
other employee
Other controls
Competent Personnel, Supervision and Management, Proper
Authorization and Approval- these are used to prevent
employees from getting comfortable or attempting theft and also
safeguarding cash
7. 7
Data Collection
Qualitative research was used on Chantelle’s Shop. Both primary and
secondary sources were implemented in assessing the internal controls
of the company. The primary sources used were interviews with the Sole
proprietor and the manager. Questionnaires were also used for other
employees in the organization. The secondary sources were textbooks
and the web.
The sources were substantial and reliable to a great extent as the data
was current and was obtained from personnel within the business. The
owner and manager would have in-depth knowledge of the daily
activities and the control strategies implemented in the company. The
employees were also relevant as their involvement in the day to day
operations in various aspects of the company which brought forth
detailed information and clarification on certain business processes.
The research instruments, questionnaires and the interview schedules
were used. These instruments were relevant to the study as the questions
were directly focused on the areas intended for the research to
investigate, analyze, assess and evaluate the internal controls
implemented in the business. These instruments also allow for a better
understanding and validation of the accounting information presented by
the business. Observation was also useful as it allowed the researcher to
assess the reliability of the data presented by the workers and highlight
other controls that may not have been mentioned by them
8. 8
Data Presentationand Analysis
Internal Control Overstock
The inventories used in the business daily operations are: perishable
food items, liquor, juices, snacks, cigarettes, phone cards, bleach, all
kinds of meat, etc. These are materials that are generally purchased on a
weekly basis depending on the supply and demand level of the goods.
In order to prevent or minimize theft or tampering of stock from
occurring, management may implement internal control measures. In the
business staff is rotated in order for workers to understand what the
other positions are lie and necessarily to reduce fraud caused by being
too comfortable in the position. Only the manager and owner are
allowed to access certain high level security areas. Stock requisition and
purchases movements are authorized and approved by the owner and
manager therefore reduces stealing. The owner orders stock based on the
supply available on generally on a weekly basis approves all orders
requisitioned and authorizes the payments made for the stock
requisitioned. The manager records all the stock documentations
necessary and organizes all the documents such as purchase requisitions
and invoices related to stock .The manager also records the stock
purchased, physically verifies the quantity and document the stock
quantities. These activities performed by the manager pertaining to stock
are overseen by the owner who verifies the inventory records based on
the source document and the entries recorded by the manager.
9. 9
In order to prevent stocks from being ordered for personal use under
the business name, the owner makes direct contact with the suppliers.
The source documents are filed, and then the copies are processed and
kept in the owner’s office. The records of the stock is stored on a
computerized system which is entered by the manager and overseen by
the owner. The computerized system is secured by a password which is
only accessible to the owner and the manager. A back up copy of these
files is stored off location. In addition to this, the business property is
securely fenced to prevent unauthorized access.
10. 10
Internal Controlsover Cash
All transactions involve authorization and approval, custody of both
filled and current assets and recording of the transaction. In order to
ensure that all transactions are recorded, they are authorized and
approved by the owner only. Only the manager is authorized to handle
cash receipts before properly being accounted for in the books. All
business cheques used in the business are pre-numbered and the
sequence in which they are used, is recorded at the bank so if there are
discrepancies, they can be identified or verified and reported to the
business.
Source documents are kept safely in the locked cabinets or drawers
which only the owner and the manager has access to. It is the duty of the
manager to lock away the cheques each night and only the manager and
the owner have access to the safe. Only the owner is authorized to sign
cheques.
Cash in hand is reconciled with copies of the receipts collected from
customers by the manager and also with records entered in the cash
books. The owner performs all reconciliation on a weekly basis with the
records provided by the manager. During the week, while the company
operates cash is locked away safely in locked cash box and is only
accessible by the manager and the owner. It is sent to the bank and a
bank reconciliation statement is prepared and done monthly by the
owner. The manager to employee ratio is 1:9.
11. 11
Internal Control over Accounts Receivable
Chantelle’s Shop offers goods on a credit based system. Most
customers are regarded as debtors; therefore their personal information
is collected such as their address, contact number, occupation to ensure
creditworthiness and ability to repay their debt. This is stored on the
computer in a customer database which is backed up monthly and is
done by electronic mail.
Customers receive a receipt of their transaction which includes the
amount that they have paid for their goods and the outstanding balance
owing. A copy of this receipt is kept and monitored by the manager who
is responsible for securing it away in the locked cabinets, thus reducing
fraudulent interference within the business. These records are recorded
in the accounts receivable book by the manager. When debtors pay their
balance, the receipt book is updated showing the date of payment and
the amount paid. The accounts receivable book is also updated with the
amount paid for by the respective debtor.
The accounts receivables are an asset which is susceptible to fraud
and so is closely monitored by the manager and supervised by the
owner. The accounts receivables are recorded by the manager in an
accounts receivable book which is locked away by the manager in file
cabinets each day. The only authorized persons are allowed to view
these documents are the manager and the owner.
The manager responsible for the accounts receivables ledger is
independent of the owner who manages the general ledger with the
debtors control accounts. The accounts receivables are monitored by the
manager. These records are transferred to the owner who is responsible
for preparing the proper accounting statements and ensures that the
debtor’s ledger control account is consistent with the accounts receivable
figures.
12. 12
Internal Control over Accounts Payable
The business accounts payable system is mainly monitored by the
owner. The owner is the only person that controls the crediting of
supplies and goods used in the business. Only authorized personnel
allowed to see these documents are the manager and the owner. Copies
of these documents include receipts and invoices which are stored in a
locked cabinet. The owner implement the following internal control
methods to reduce fraudulent actions, these methods are: separation of
duties, rotation of employees, documentation and proper authorization.
The accounts payable accounting records is done independently keeping
the general ledger with the creditor’s control account.
Copies of these receipts and invoices from the suppliers are also sent
to the manager. Some creditors are paid by cash and some by cheque.
The manager makes the payment which is authorized by the owner.
13. 13
Internals
Controls
1 2 3 4 5
Establishment
of Clear
Responsibilities
x
Segregation of
Duties
x
Physical
Controls
x
Proper
Authorization
and Approval
x
Proper
Documentation
and Records
x
Competent
Personnel
x
Supervision
and
Management
x
Internal Check x
Figure 1
The effectiveness of the internal controls in Chantelle’s Shop are
shown below with 1 being the most effective and 5 the least effective.
The table shows all the internal controls used by Chantelle’s Shop are
effective to a small extent. It show that establishing clear responsibilities
and competent personnel are the most effective internal control. Physical
controls, proper authorization and approval, proper documentation and
records are lacking to an extent. Segregation of duties and supervision
and management are not as effective. Lastly, figure 1 shows that internal
check is the least effective internal control.
14. 14
Figure 2
This chart shows the ratio of superiors to employees is 1:9. There are
18 employees and 2 supervisors. This can relate to the effectiveness of
supervision and management in the business because there are only 2
people having to supervise 18 people at once and this lacking of
supervision can result in slacking of employees and theft of products by
customers or even employees. On the other hand, it is cost effective.
Supervisors
10%
Employees
90%
The Ratio of Supervisors comparedto
Employees
Supervisors
Employees
15. 15
Figure 3
This chart shows the importance of internal controls as it pertains to
employees in the organization. The majority said Establishment of Clear
Responsibilities was the most internal control while least said internal
checking at the least important. Proper Documentation and records are
also viewed as an important to a large extent as well as competent
personnel, supervision and management and physical controls.
0 1 2 3 4 5 6
Supervision and Management
Proper Documentation and Records
Physical Controls
Establishment of Clear Responsibilities
Internal Checking
Proper Documentation and Records
Competent Personnel
Importantanceof Internals Controls to Employees
Importance
16. 16
Figure 4
The chart above shows overall focus of internal controls in the
business. Cash is the main focus of the organization pertaining to
internal control and accounts payable is the least important focus of all
the internal controls while cash and accounts receivable are considered
the most and stock is also considered a high focus.
0
1
2
3
4
5
6
7
Cash Stock Accounts Receivable Accounts Payable
OverallFocus of InternalControls
Rating
17. 17
Evaluation
The internal controls at Chantelle’s Shop are overall effective to a
small extent. The level of competence of the workers is poor and does
not help to ensure that the internal controls of the company are
maintained and as a result this may ultimately affect the profitability of
the firm. The segregation of duties in the organization is extremely poor
in various areas there is moderate control when it comes to the security
of the stocks in the organization however this is not very effective or
efficient as there have been reports of attempted break-ins despite the
lock placed on the cabinet. An efficient security system should be
present as proper measures should be in place to safeguard assets.
There is an efficient way of ensuring that all transactions are recorded
and the cash is safeguarded against theft which is in keeping with the
controls, however the segregation of duties are lacking in this area. The
sole trader is responsible for handling the receipts, cash register as well
as entering in the respective books; thus increases the possibilities of
errors and inaccuracy of financial statements in the organization.
The manager has the opportunity to defraud the company to a large
extent as he or she is responsible for a wide range of activities. It is also
unsafe to have cash on the premises for such a long period of time as this
increases the opportunity for theft and other fraudulent activities in the
business as cash should be put away in a shorter period of time.
In addition to this, the same employee may be allowed to make entries
in both the purchases ledger, sales ledger and the general ledger. This
invites fraud, inaccuracy of data presented in the income statement and
balance sheet and also breaks down the ability to detect errors readily as
this will cause irregularities.
18. 18
The manager is responsible for operating the cash register, entering
transactions in the books, preparing receipts, controlling the accounts
receivable, collects and verifies the stock. This is a violation of the
segregation of duties in the organization as the manager is able to
completely defraud the business. The manager is also responsible for too
many duties such as controlling the accounts payable, authorization,
approval and stock requisition. This is not efficient as the manager may
not always be present to play all these roles or act out these
responsibilities.
Employees are fully aware of their duties and responsibilities in the
establishment however some employees fail to fulfil or carry out their
respective duties therefore leaving most of the workload on the manager.
There is not an effective switch over system from electronic to manual
in the case that the electricity goes. This may result in incorrect
information being put into the system, errors such as miscalculation of
figures, delay of relevant information then leading to inaccurate
information presented in the income statement and balance sheet.
Limitations of having a computerized or an electronic internal system,
will lead to big problems if a power outage should occur and so there
might be no evidence that the transactions had taken place and it would
not be properly documented and recorded and would ultimately lead to
an error in the financial statements.
The organization has a direct backup system for its files which
employees are able to use and so increases the availability of obtaining
the information at their convenience. The employee to supervisor ratio is
quite distant. As a result, workers may not be monitored as is necessary
and may get the opportunity to collude and will be able to defraud the
company.
Chantelle’s Shop does not have regular internal checks as a result, no
verification occurs of the work done by the employees in the business,
which does not allow for discrepancies to be discovered.
19. 19
The financial statements reliability and validity are strongly affected by
the assessment made on the internal controls. The stock figures (opening
and closing) in the balance sheet may be incorrect as the current internal
control does not properly safeguard the stock in the business. The cash,
accounts receivables and accounts payable figures may also be
unreliable. The accounts receivable figure in particular may be
unreliable to a great extent as the segregation of duties is highly lacking
in this area .The turnover figure in the final accounts could also be
affected due to the poor separation of duties.
20. 20
Recommendations
The weaknesses found in Chantelle’s Shop can be addressed to
improve the financial state of the organization.
In order to improve the reliability and consistency of the financial
statements of the business, the relevant internal control system for each
asset studied should be chosen for the most secure and effective means
of security for the business. It is also highly recommended that there
should be internal checks implemented on a regular basis to verify the
work done by employees in the organization, also the internal systems
should be modified for effective security measures.
It is also very important that the basis allocated to the manager should
be divided so that she does not have full control over every aspect of the
business. Cash and inventory count should be done on a regular basis by
another employee hired for that purpose. It is also advised that cash
should be removed from the premises in a shorter period such as each
day. Employees should be officially provided with job responsibilities.
The accounts receivable could be managed electronically, to minimize
errors and shorten completion time; also files can be acted up regularly.
The password to the computer should also be regularly changed.
Additionally, the owner should ensure that the manager gets more
leisure days for all the being done. It is better if another employee who is
independent of the general ledger records be responsible for doing so.
21. 21
Conclusion
After conducting a thorough investigation on the internal control
systems used in Chantelle’s Shop, the researcher concluded that there
are good methods of internal control in place for each prominent asset
but these methods need modifications in order to be more effective in
securing these assets, reducing fraud and inaccurate financial data that
can jeopardize a business financial standing and performance.
In assessing this business it is clear that specific duties and
responsibilities must be trusted upon other employees, for having a big
workload on one main employee will lead to stress, insufficient data and
inaccurate information being input whether in a computerized or manual
accounting systems.
There are different control methods for inventory, cash, and accounts
receivable and payable such methods are segregation of duties, adequate
documentation, independent internal verification, proper authorization,
competent personnel with clear responsibilities, and physical safeguard
of assets and rotation of employees. Each method can be broken down to
work as effective as possible for each asset and should be carefully
analyzed before being implemented.
After implementing the most effective and efficient control system,
the owner and manager should regularly evaluate and assess the control
systems to ensure maximum and optimum effective security of all assets,
hence reducing the risk of fraud, theft, inaccurate or unreliable
information. This will help in keeping proper financial records for the
business.
