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AUE2602 Exam Pack 2014 - Summary of entire course,
chapters covered.
Auditing Corporate Governance In Accounting (University of South Africa)
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2014
AUE 2602 EXAM PACK
EXAM: 15 MAY 2014
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UNIT 1
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Unit 1 – Corporate Governance and statutory matters.
Study Unit 1.1 – The background to corporate governance in South Africa
Define corporate governance and briefly explain why is important to society that companies
operate within the frame work of good corporate governance.
Corporate governance is a system or process whereby companies are directed or controlled. It is about
companies being good corporate citizens and all that this entails. Companies are integral part of the
modern society and it therefore follows that healthy, honest, open, competently and responsible
controlled companies will improve the quality of modern society.
Key aspects of the King III report
1. Leadership
2. Sustainability
3. Corporate citizenship
Three important aspects of sustainability
1. Inclusivity of stakeholders
2. Innovation, fairness and collaboration
3. Social transformation
Application of the code
King III applies to all entities regardless of the manner and form of incorporation. However the size
and nature of the company will determine how the entity applies the reccomnadtions. Further it is
recommended by King III that an entity discloses the practices/principles they chose not to apply and
explain why.
Study unit 1.3 – The King report and code on governance in South Africa
No ‘one size fits all’
Entities and stakeholders will have to develop a deeper understanding of governance issues. This will
enhance their ability to decide how governance principles and practices should be implemented. The
‘one size fits all’ approach will not work.
The challenges will be deciding the optimal level of application required, balancing the costs and
benefits to all stakeholders and being able to disclose such principles and practices in a fair and clear
manner.
Ethical leadership and corporate citizenship
The board should provide effective leadership based on an ethical foundation
Four ethical values underpinning good corporate governance
1. Responsibility – the board should assume responsibility for the assets and actions of the
company and should take corrective action to keep the company on its correct path.
2. Accountability – the board should be able to justify its decisions and actions to all
stakeholders.
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3. Fairness – in its decisions and actions, the board should ensure it gives fair consideration to
the interest of all stakeholders.
4. Transparency – the board should disclose information in a manner that enables all
stakeholders to make informed analysis of the company’s performance.
The board should ensure that the company is and is seen to be a responsible corporate citizen
¾ consider not only on financial performance but also the impact of the company’s operations on
society and the environment;
¾ protect, enhance and invest in the wellbeing of the economy, society and the environment;
¾ ensure that the company’s performance and interaction with its stakeholders is guided by the
Constitution and the Bill of Rights;
¾ stakeholder interaction is very important and the company reporting on its triple bottom line:
o economic aspect relates to financial and non financial information
o environment aspect include the effect of the company’s activities, products and services
on the environment
o the social aspect embraces the values, ethics and relationships with the stakeholders
Board of directors
The board should act as the focal point for and custodian of corporate governance
¾ have a charter setting out its responsibilities;
¾ meet at least four times per year;
¾ monitor the relationship between management and the stakeholders of the company
The board should appreciate that strategy, risk, performance and sustainability are inseparable
¾ inform and approve the strategy;
¾ ensure that the strategy is aligned with the purpose of the company, the value drivers of its
business and the legitimate interests and expectations of its stakeholders;
The board and its directors should act in the best interests of the company
¾ The board must act in the best interests of the company.
¾ Directors must adhere to the legal standards of conduct.
¾ Directors or the board should be permitted to take independent advice in connection with
their duties following an agreed procedure.
¾ Real or perceived conflicts should be disclosed to the board and managed.
The board should consider business rescue proceedings or other turnaround mechanisms as soon
as the company is financially distressed as defined in the Act
¾ The board should ensure that the solvency and liquidity of the company is continuously
monitored;
The board should elect a chairman of the board who is an independent non executive director. The
CEO of the company should not also fulfil the role of chairman of the board
The chairman should be:
¾ Appointed on an annual basis
¾ Independent and not conflicted
¾ The role of the chairman should be formalised.
¾ The chairman’s ability to add value, and his performance against what is expected of his role
and function, should be assessed every year.
¾ Focus on social, sustainability and transformation issues
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¾ The board should ensure a succession plan for the role of the chairman
¾ The chairman should not be:
o Not be a member of the audit committee
o Not chair the remuneration committee
o Not chair the risk committee
o Can be a member of the nomination committee and chair it
¾ A lead independent director should be appointed in the case where an executive chairman is
appointed or where the chairman is not independent or conflicted.
The board should appoint the chief executive officer and establish a framework for the delegation
of authority
The board should:
¾ appoint the CEO;
¾ provide input regarding senior management appointments;
¾ ensure that the role and function of the CEO is formalised and the performance of the CEO is
evaluated against the criteria specified; and
¾ ensure succession planning for the CEO and other senior executives and officers is in place.
¾ The CEO is central to sustainability of the company and should:
o Play a critical and strategic role in the operation of the company
o Ensure a long term strategy and vision of the company is developed and implemented
o Ensure an ethical and positive work climate is maintained
¾ The CEO should not:
o Not be the chairman
o not be a member the remuneration, audit or nomination committee
o not take on membership of other companies
The board should comprise a balance of power, with a majority of non executive directors. The
majority of non executive directors should be independent
Executive Director
¾ is a director who is involved in the management of the company and/or is a full time salaried
employee of the company and/or its subsidiary.
¾ Can be a non executive director of another company, however it should be in accordance with
the board policy and approved by the chairman and CEO.
Non Executive Director
¾ is a director who is not involved in the management of the company
¾ provide independent judgement on issues facing the copmany
An independent, non executive director:
A director who:
¾ is not a representative of a shareholder who has the ability to control or significantly influence
management
¾ Does not have a direct or indirect interest in the company (including its holding or subsidiary
company) which is material to the director or the company. (A holding of 5% or more is considered
material)
¾ has not been employed by the company (or group) in any executive capacity for the preceding
three financial years
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¾ is not a member of the immediate family of an individual who is, or has been during the previous
three financial years, employed by the company (or group) in an executive capacity
¾ is not a professional advisor to the company
¾ is free from any business or other relationship which could be seen to interfere materially with
the individual’s capacity to act independently
¾ Does not receive remuneration contingent upon the performance of the company.
The board should:
¾ Comprise a balance of power,
¾ Consist of individuals with integrity and courage
¾ Have a suitable diversity of academic qualifications, technical knowledge, experience, nationality,
race
¾ Has a minimum a CEO and a Financial director
¾ Have in place s structure program to rotate non executive directors
¾ At least one third of non executive directors should rotate every year
¾ Ensure that the independence of any independent non executive director who severed for more
than 9 years be reviewed rigorously.
Directors should be appointed through a formal process
¾ Procedure should be formal and transparent
¾ The MOI may include any provisions
¾ In the case of a profit company other than a state owned must provide for the election of 50% of
directors by the shareholders
¾ A nomination committee should assist with the process of identifying suitable members of the
board.
¾ Background and reference checks should be performed before the nomination and appointment
of directors.
¾ Ensure that the proposed director is not declared delinquent
The induction of and ongoing training and development of directors should be conducted through
formal processes
¾ a formal induction programme is established for new directors
¾ inexperienced directors are developed through mentorship programmes;
¾ continuing professional development programmes are implemented;
¾ Appointments should be a matter for the board as a whole, assisted by the nominations
committee. minimum of two executive directors of which one should be the CEO and the other
the financial director
The board should be assisted by a competent, suitably qualified and experienced company secretary
¾ The board should appoint and remove the company secretary (direct channel of communication
to the chairman)
¾ The company secretary should:
o have an arms length relationship with the board;
o not be a director of the company;
o assist the nominations committee with the appointment of directors;
o assist with the director induction and training programmes;
o provide guidance to the board on the duties of the directors and good governance;
o ensure board and committee charters are kept up to date;
o prepare and circulate board papers;
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o
o
o
o
elicit responses, input, feedback for board and board committee meetings;
assist in drafting yearly work plans;
ensure preparation and circulation of minutes of board and committee meetings;
assist with the evaluation of the board, committees and individual directors.
The evaluation of the board, its committees and the individual directors should be performed every
year
¾ The groups or individuals been evaluated should be fully aware of what they will be evaluated
against, they must understand their functions and responsibilities.
¾ The board should set benchmarks against which performance appraisal will take place
¾ All directors (executive and non executive) including the CEO as well as company secretary should
be evaluated
¾ Yearly evaluations should be performed by the chairman or an independent provider.
¾ The results of performance evaluations should identify training needs for directors.
¾ An overview of the appraisal process, results and action plans should be disclosed in the integrated
report.
The board should delegate certain functions to well structured committees but without abdicating
its own responsibilities
¾ A board may appoint a number of committees and delegate authority
¾ The committee may include persons who are not directors but they must not be ineligible or
disqualified and may not vote on any matter
¾ King III states that board committees should have formally established terms of reference
covering:
o Composition
o Objectives, purpose and activities
o Delegated authorities to make decisions
o Reporting mechanisms
¾ King III recommends four standing committees:
Audit committee:
¾ Chairman should be an independent non executive director
Remuneration committee:
¾ Chairman should be an independent non executive director
¾ All members should be non executive directors
¾ Majority of which be independent
Nomination committee:
¾ Chairman should be chairman of the board
¾ All members should be non executive directors
¾ Majority of which be independent
Risk committee:
¾ Chairman should be a non executive director
¾ Members should include executive and non executive directors,
senior management and independent risk management experts
were necessary.
¾ A social and ethics committee should be appointed by:
o State owned company
o Listed public company
o Company in the two previous years had a public interest score over 500 points.
¾ A director who is not a member of a specific committee may attend meetings but without the
consent of the chairman will not have a vote
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¾ The committees’ terms of reference should be reviewed yearly and disclosed in the integrated
report.
A governance framework should be agreed between the group and its subsidiary boards
¾ Listed subsidiaries must comply with the rules of the relevant stock exchange in respect of
insider trading.
¾ The holding company must respect the fiduciary duties of the director serving in a
representative capacity on the board of the subsidiary.
¾ The implementation and adoption of policies, processes or procedures of the holding
company should be considered and approved by the subsidiary company.
¾ Disclosure should be made on the adoption of the holding company’s policies in the integrated
report of the subsidiary company.
Companies should remunerate directors and executives fairly and responsibly
¾ Companies should adopt remuneration policies aligned with the strategy of the company and
linked to individual performance.
¾ The remuneration committee should assist the board in setting and administering remuneration
policies.
¾ The remuneration policy should address base pay and bonuses, employee contracts, severance
and retirement benefits and share based and other long term incentive schemes.
¾ 2.25.4. Non executive fees should comprise a base fee as well as an attendance fee per meeting.
Companies should disclose the remuneration of each individual director and certain senior
executives
¾ The remuneration report, included in the integrated report, should include:
o all benefits paid to directors;
o the salaries of the three most highly paid employees who are not directors;
o the policy on base pay;
o participation in share incentive schemes;
o the use of benchmarks;
o incentive schemes to encourage retention;
o justification of salaries above the median;
o material payments that are ex gratia in nature;
o policies regarding executive employment;
o the maximum expected potential dilution as a result of incentive awards.
Shareholders should approve the company’s remuneration policy
¾ Shareholders should pass a non binding advisory vote on the company’s yearly remuneration
policy.
¾ The board should determine the remuneration of executive directors in accordance with the
remuneration policy put to shareholder’s vote.
Audit Committees
The board should ensure that the company has an effective and independent audit committee
¾ Board approve terms of reference for the audit committee
¾ Meetings:
o At least twice a year
o Audit committee should meet with internal and external audit (without management
been present) at least once a year
Audit committee members should be suitably skilled and experienced independent non executive
directors
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¾ All members to be independent non executive directors and at least 3 members
¾ All members collectively have good financial knowledge
¾ At least one third of members must have academic qualifications
The audit committee should be chaired by an independent non executive director
¾ The chairman of the board should not be the chairman of the audit committee, the chairman of
the audit committee should be elected by the board
The audit committee should oversee integrated reporting
¾ The audit committee should have regard to all factors and risks that may impact on the integrity
of the integrated report.
¾ The audit committee should review and comment on the financial statements included in the
integrated report.
¾ The audit committee should review the disclosure of sustainability issues in the integrated report
to ensure that it is reliable and does not conflict with the financial information.
¾ The audit committee should recommend to the board to engage an external assurance provider
on material sustainability issues.
¾ The audit committee should consider the need to issue interim results.
¾ The audit committee should review the content of the summarised information.
¾ The audit committee should engage the external auditors to provide assurance on the
summarised financial information
The audit committee should ensure that a combined assurance model is applied to provide a
coordinated approach to all assurance activities
¾ The audit committee should ensure that the combined assurance is received is appropriate to
address all the significant risks facing the company.
The audit committee should satisfy itself of the expertise, resources and experience of the
company’s finance function
¾ Every year a review of the finance function should be performed by the audit committee.
The audit committee should be responsible for overseeing of internal audit
¾ The audit committee should be responsible for the appointment, performance assessment and/or
dismissal of the CAE.
¾ The audit committee should approve the internal audit plan
The audit committee should be an integral component of the risk management process
The audit committee should have oversight of:
¾ Financial reporting risk/internal financial risk
o Audit committee responsible for overseeing risk management controls
o Audit committee should be in a position to assess the company’s risk management
program
o Audit committee should report annually to the board on the effectiveness of the internal
financial controls
¾ Fraud risks
o Audit committee should consider material misstatements in the AFS which may result in
fraud
o Audit committee should review the arrangements made to employees and external
whistle blowers to report concerns
¾ Information technology risks
o The audit committee should play an oversight role regarding IT risk and controls, business
continuity and data recovery, data security and privacy
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The audit committee is responsible for recommending the appointment of the external auditor and
overseeing the external audit process
The audit committee should
¾ Recommend the appointment, re appointment and removal of external auditors
¾ Approve the terms of the external auditors engagement and remuneration
¾ Oversee the planning and execution of the annual external audit
¾ Define and implement a policy fir nature and extent were the external auditor may perform non
audit services
¾ Review any accounting and auditing concerns from the internal or external audit
The audit committee should report to the board and shareholders on how it has discharged its
duties
The report should provide
¾ Summary of the whole committee
¾ Whether the audit committee has adopted final terms of reference
¾ Names and qualifications of all members of the audit committee
¾ The number of audit committee meetings held and who attended
¾ Information on other roles assigned by the audit committee by the board
List functions of the CEO
1) Recommending or appointing the executive team & ensuring proper succession planning &
performance appraisals.
2) Developing the company’s for consideration and approval by the board.
3) Developing & recommending to the board yearly business plans and budgets that support the
company’s long term strategy.
4) Monitoring and reporting to the board the performance of the company and its conformance
with compliance imperatives.
5) Establishing an organisational structure for the company which is necessary to enable
execution of its strategic planning.
6) Setting the tone in providing ethical leadership and creating an ethical environment.
7) Ensuring that the company complies with all relevant laws and corporate governance
principles, and
8) Ensuring that the company applies all recommended best practices and, if not, that the failure
to do so is justifiable explained.
Why should the CEO not fulfil the role of the chairman of the board?
¾ Given the strategic and operational role of the CEO, and to prevent too much power vesting in one
person, this appointment should be separate from that of the chairman of the board.
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Summary of the Audit committee
Audit committee
Chairman
x
Independent non executive director
x
The chairman of the chairman of the board should not be chairman
or member of the audit committee.
Membership
x
All members should be Independent non executive directors
Members
x
Minimum of three members
Meetings
x
Meet at least twice a year
x
Should meet with internal and external auditors at least once a year
without management being present.
Functions
x
Should oversee integrated reporting
x
Should ensure that a combined assurance model is applied
x
Should satisfy itself of the expertise, resources and experience of
the company’s finance function.
x
Should oversee internal audit
x
Should be an integral component of the risk management process.
x
Should recommend the appointment of the external auditor and
oversee the external audit process.
x
Should report to the board and shareholders on how it has
discharged its duties.
The Governance of Risk
Aspect
a) Overall governance
of risk.
Who is responsible
The board
Responsibilities
x
x
x
The boards responsibility should be
expressed in the board charter
The board should be responsible for the
development and approval of a risk
management policy and plan which
should be
o widely distributed throughout the
company
o reviewed once a year, and
o its implementation monitored
continually.
The board should have the responsibility
to ensure that the company has an
implemented an effective ongoing
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b) Designing,
implementing and
monitoring the risk
management plan and
policy.
The board should
delegate to
management
c) Monitoring risk
management process.
The board, risk
committee, audit
committee
x
x
x
x
x
d) Performing an
objective assessment of
the effectiveness of risk
management.
Internal audit
x
process to identify risk, measure its
potential outcome and activate what is
necessary to manage the risks.
Management is accountable to the
board for designing, implementing and
monitoring the process of managing risk
and integrating it into the day to day
activities of a company.
Risks are very diverse but it remains the
responsibility of management lead by
the Chief Executive Officer (CEO) to
manage them. Larger companies may
appoint a Chief Risk Officer (CRO).
The board may appoint a risk committee
specifically to deal with risk
management.
The risk committee should:
o specifically consider the risks that
may affect the sustainability of the
company
o review the risk management
maturity of the company
o consider the risk management
strategies and policies
o monitor the risk management
policies
The risk committee should:
o Be chaired by a non executive
director
o Min of 3 members
o Meet twice a year
o Members should include executive
and non executive directors, senior
management and independent risk
management experts were
necessary (who will not have a vote).
Internal audit’s key responsibility is to
the board. It assist the board in
discharging its governance
responsibilities by:
o performing reviews of the
companies governance processes
including ethics
o performing an objective assessment
of the adequacy and effectiveness of
risk management and internal
controls
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o
o
systematically analysing and
evaluating business processes and
associate controls
providing a source of information
regarding fraud, corruption,
unethical behaviour and
irregularities
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UNIT 2
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Unit 2 – Internal Control
Characteristics of internal controls
Internal control is a process: it is a combination of systems, policies and procedures designed,
implemented and maintained to address the risks of running a business.
Internal control is effected by people: it does not only consist of policies, procedures or manuals it
involves people at every level of the organization carrying out an assortment of tasks
Internal control is not the sole responsibility of management: there is a shared responsibility for the
internal control process, the directors, management and ordinary employees are all in their own
ways responsible
Internal control is not static: It is essentially a response to the risks of operating a business; risk
change, responses must change
Internal control is not fool proof: It provides only reasonable assurance that the risk that threaten
the objectives of the business will be achieved
Internal control is not a case of a single control addressing a single risk: Internal control policies and
procedures must work in conjunction with each other and with the books, records and documents
used. The control is a risk is best achieved by combination of actions policies and procedures.
Internal control can be defined as the process designed, implemented and maintained by those
charged with governance, management and other personnel to provide reasonable assurance about
the achievement of an entity’s objectives with regard to:
¾ the reliability of the entity’s financial reporting
¾ the effectiveness and efficiency of its operations
¾ its compliance with applicable laws and regulations
Definition of assertions of management
Assertions are in effect management’s representations about the company’s assets, equity,
liabilities, transactions and events in the financial reports. Another word for assertions is
representations.
The link between internal control objectives and assertions
Internal control objectives
Assertions
Valid (occurred and authorised)
Actuate
Complete
Occurrence
Existence
Rights and obligations
Accuracy
Classification
Valuation and allocation
Completeness
Cut off
¾ Completeness – all assets, liabilities, transactions or events, have been recorded have been
recorded.
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¾ Occurrence A transaction or event which has been recorded, took place and pertains to the
entity.
¾ Existence – assets, liabilities and equity interests exist at a given date
¾ Cut off – transactions and events have been recorded in the correct accounting period
¾ Accuracy: Amounts and other data relating to recorded transactions and events have been
recorded appropriately.
¾ Classification – transactions and events have been recorded in the proper account
¾ Rights and obligations – the entity holds or controls the rights to assets and liabilities are the
obligations of the entity.
¾ Valuation and allocation – assets, liabilities and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments
(depreciation) are properly recorded.
Limitations of internal controls
Read examples from page 5/4 (In the exam you must be able to give a short explanation of the
above to show you understand the meaning of the above.)
Limitation
Explanation
Internal controls have to be cost effective.
Certain errors or irregularities may go
(Cost must be exceeded by expected benefit).
undetected because management have
decided that the appropriate control is too
costly to implement.
The emphasis of internal controls on routine
Certain unusual transactions may not be
transactions (as opposed to non routine).
subjected to any "normal" controls and thus
could give rise to undetected errors or
irregularities.
The risk of human error due to carelessness,
Most controls require human involvement and
distraction, mistakes of judgement,
errors or irregularities therefore could go
misunderstanding instructions.
undetected as "nobody is perfect".
The potential for collusion where the control
Where one person has to carry out checks on
depends on segregation of duties (with
another’s work the control becomes non
Internal or external parties).
existent if the two people conspire to
circumvent or “beat” the system.
The potential for a member of management to
Very often a member of management may
override a control for which he or she is
abuse the authority he or she has with regard
responsible.
to the exercising or implementing of an internal
control by making a decision or taking action
which makes the control ineffective.
The possibility that internal control procedures The internal controls no longer suit the
become inadequate due to changes in
circumstances in which they were initially
conditions in the business.
established (no longer achieve their objective).
Components of internal control
1
Control environment
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2
3
4
5
Risk assessment
Information system
Control activities (read, but NB difference between Segregation of duties and isolation of
responsibilities
Monitoring of controls (left out)
1. The control environment
It sets the “tone” of the entity and creates the atmosphere in which employees go about their
duties. “Control consciousness” of entity – all are aware of controls implemented and it is being
followed and monitored.
2. The entity’s risk assessment process
¾ Deals with identifying and addressing risks the entity faces
¾ Risk assessment process involves:
o assessing likelihood and frequency of risk identified
o estimating the potential impact if risk was to occur
¾ companies classify or describe risks:
o operations risks: the risks that threaten the entity, its departments and functions
from achieving effective and efficient operations, e.g. the risk of inventory theft
o financial reporting risk: the risk that the entity does not achieve its objective of
having an accounting system which records and process only transactions which
have occurred and have been authorised and which are recorded and processed
accurately and completely, e.g. the risk that fictitious wages will be paid
o Compliance risks: the risk that the entity does not achieve its objectives with
complying with laws and regulations applicable to the entity, e.g. taxation
3. The information system
¾ The objective is to produce information which is valid ( all transactions underlying the
information actually occurred and were authorised), accurate and completed and timeously
produced.
¾ Procedures to deal with(provide guidance) transactions include:
o Initiation of the transaction (receipt for customers order)
o Recording the transaction (entering details of customer in the internal sales order)
o Processing the transaction (picking up the goods from the warehouse and dispatching)
o Posting (transferring the transaction to the general ledger)
¾ Properly designed documents can assist in promoting the accuracy and completeness of
recording transactions:
o Pre printed (minimum amount to be filled in)
o Pre numbered (consecutive pre numbering help find missing documents)
o Multi copied
o Designed in a manner which is logical and simple to complete
o Contain blank blocks or grids which can be used for authorising or approving the
document
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4. Control activities
These are actions supported by policies and procedures which are carried out to manage or reduce
the risks that the objectives of the organisation will not be met. Control activities are closely linked
to the information system and meeting the objectives of processing accurately and completely and
only transactions which have been occurred and been authorised. (See Application controls)
Controls in a computerized environment
General and application controls in a computerised environment are an integral part of the total
system of internal control of an entity and touch on all components of internal control.
The following diagrammatic representation of general and application controls shows that the
general and application controls relate to all the components of internal control
General Controls
General controls are defined as those controls which establish an overall framework of control for
computer activities
Categories of general controls:
1. Control environment
2. Systems development and implementation controls
3. Access control
4. Continuity of operations
5. System software and operating controls
6. Documentation
3. Access Control
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x
x
x
x
Physical access Control
Logical access control
Other access control considerations
Supplementary access control
Physical access control:
x The IT department should be contained in a separate building or wing of a building.
x The building should have a dedicated room in which all the equipment which runs the system
would be housed, for example the CPU and servers.
x Only a limited number of personnel should be allowed access to the data centre.
x Visitors from outside the company to the IT building should be controlled, they should:
o Be required to have an official appointment to visit IT personnel working in the IT
department.
o On arrival be cleared at the entrance to the company’s premises, for example by a phone
call to the IT department.
o Be given an ID tag and escorted to the department.
o Not be able to gain access through the locked door.
o Wait in reception (or be met at the door) for whoever they have come to see.
o Be escorted by a security guard out of the department at the conclusion of their
business.
x Entry to the data centre by company personnel other than IT personnel should be controlled.
x Physical entry to the data centre (dedicated room) should be controlled:
o Only individuals who need access to the data centre should be able to gain entry.
o Access points should be limited to one.
o Access should be through a door which is locked.
o The locking device should be de activated only by swipe card, entry of a PIN number or
scanning of biometric data.
o Entry/exit point should be under closed circuit TV. Remember the data centre is the heart of
the company’s information system.)
x Remote workstations/terminals should be controlled:
o Should be locked and secured to the desk.
o Placed where they are visible but not near a window.
o Offices should be locked at night and at weekends.
o Data cables should be protected to prevent tapping as a means of access to the system.
Logical access control
x identification of users and computer resources
o users – user ID’s, magnetic card or tag, biometric data (thumbprint, facial/voice recognition)
o Terminal identification
x authentication of users and computer resources
o entering a unique password
o Unique identification (RAS token)
x authorisation of the levels of access to be granted
x logging of access and access violations
x access tables
x password controls:
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o
o
o
o
o
o
o
o
o
o
o
o
o
Passwords should be unique to each individual.
Passwords should consist of at least six characters, be random not obvious, and a mix of
letters, numbers, upper/lower case and symbols.
Passwords/user ID's for terminated or transferred personnel should be removed/disabled at
the time of termination or transfer.
Passwords should be changed regularly and users should be forced by the system, to change
their password.
The first time a new employee accesses the system, he/she should be prompted to change
his initial password.
Passwords should not be displayed on PCs at any time, be printed on any reports or logged in
transaction logs.
Password files should be subject to strict access controls to protect them from unauthorised
read and write access.
Personnel should be prohibited from disclosing their passwords to others and subjected to
disciplinary measures should they do so.
Passwords should be changed if confidentiality has been violated, or violation is expected.
Passwords should not be obvious, e.g. birthdays, names and name backwards.
Two passwords from two separate personnel should be required to gain access to the bank
account.
The passwords should only be valid and accepted by the system during business hours of the
company.
Failed password login attempts should be logged and investigated.
Other access control considerations
x Data communication – relates to transmission of information from a sender to a receiver:
o Controls include:
ƒ The implementation of specialised software which is responsible for:
ƒ Controlling access to the network
ƒ Network management (controlling traffic flow)
ƒ Data file transmission (controls the transfer of data and files)
ƒ Error detection and control
ƒ Data security (protects data from unauthorised access during data transmission)
x Firewalls: combination of hardware and software between the companies’ network and the
external network and are access control gateway which restricts what traffic can flow in and
out. (prevention of incoming transmissions from undesirable sites
x Libraries – can be in electronic or physical and either way the library must be protected.
x Root access/system wide access/super user privileges – this allows users unlimited power to
access and change without trace
Supplementary access controls
x Automatic lock out, in the event of an access violation, e.g. incorrect password entered three
times.
x “Time out” facilities which automatically log out the user from the system, for example: if a
period of more than three minutes expires during which there has been no activity.
x Automatic logging by the computer, reviews of the logs, and follow up of access and access
violations by a senior personnel / management.
x Encryption of confidential and critical information.
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x
x
x
Sensitive functions and facilities can be afforded extra protection by requiring two or more
passwords (from different people) in order to gain access.
Use of “once off” passwords to supplement an existing user ID and password to protect sensitive
transactions such as a transfer out of a bank account.
Combinations of passwords and devices such as “dongles” and random number generators.
Application controls
Any control within an application which contributes to the accurate and complete recording and
processing of transactions which have actually occurred, and have been authorised (valid, accurate
and complete information).
TYPE
Approval, authorisation
¾ Management authorizes employees to perform certain tasks within certain parameters.
Things that could go wrong(risks)
Credit sales could be made to customers who
are not creditworthy and who cannot pay their
account, if a credit sale is not approved by the
credit controller first.
Internal control objective at risk
Occurred and authorised are at risk as a sale
could take place that was not valid.
Segregation (division) of duties
¾ Various actions or procedures that are carried out in respect of a transaction be divided amongst
the employees, and the custodian of the entity’s assets should not be responsible for records
relating to the asset.
¾ Collision – when management or employees work together intentionally
Typical purchase transaction:
¾ Initiating and approving the purchase (from the warehouse)
¾ Executing the order (approved supplier, chief purchases officer)
¾ Custody (warehousing, receiving section)
¾ Recording (accounting function)
¾ Review (independent)
Things that could go wrong(risks)
Goods purchased could be stolen if no
segregation of duties exists between the
authorisation, the placing of an order and the
issuing of the goods received note, as the
purchase clerk could order the goods for
himself at the company’s expense.
Internal control objective at risk
Occurrence is at risk as a purchase transaction
that does not pertain to the entity has taken
place.
Accuracy is also at risk as incorrect amounts
and other data may be recorded. The inventory
could be overstated by the stolen goods.
Isolation of responsibility
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For internal controls to work effectively one should be aware of their responsibilities and be
accountable for their performance. Once a document was signed it isolates the responsibility of who
was responsible for carrying out some control activity.
Things that could go wrong(risks)
Internal control objective at risk
An incorrect number of goods could be
Validity, accuracy and completeness are at risk
as goods could be over or understated,
received if a supplier delivered goods to a
depending on whether too many or too few
company and the receiving clerk did not count
the goods and sign the supplier’s delivery note. items are received.
The clerk could not be held responsible and the
mistake could be repeated.
Access/custody (security)
¾ Policies and procedures which protects the company’s assets (wide context)
¾ Access controls are designed to:
o Prevent to damage to physical assets by proper treatment and storage
o Prevent deterioration of non physical book assets by ensuring debtors to fall behind to
pay
o Prevent unauthorised use of physical assets by proper security measures
Things that could go wrong(risks)
Internal control objective at risk
Physical inventory could be stolen if not stored Accuracy is at risk as the inventory figure in the
properly, for example if not protected by a
financial statements is incorrect and is
security guard at the inventory warehouse
overstated by the stolen inventory.
entrance.
Comparison and reconciliation
¾ Is a comparison of two different set of recorded information or of recorded information, e.g. the
cash journal to the bank statement.
¾ Identify, investigate and resolve differences were necessary
Things that could go wrong(risks)
Internal control objective at risk
The balance of the cash receipts and payments Validity, accuracy and completeness are at risk
journal could be incorrect if it is not regularly
if the cash receipts and payments journal
compared with and reconciled to the balance
balance is incorrect, depending on whether it is
on the bank statement.
over or understated.
Performance reviews
Reviews of performance provide a basis for identifying problems
When carrying out a review the reviewer is looking for consistency and reasonableness
Things that could go wrong(risks)
Internal control objective at risk
An abnormal increase in transport costs as a
Validity (occurred and authorised) is at risk as
result of the theft of fuel could go undetected if purchase transactions take place for transport
management fails to compare the actual cost
costs that do not pertain to the entity.
figure with the budgeted transport costs.
Preventative, detective, corrective controls
Preventative Controls
Detective Controls
Corrective Controls
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¾ Put in place to minimize
error or illegal events from
occurring.
¾ They include physical
controls over assets
(custody controls),
approval and authorisation
and segregation of duties.
¾ Examples are cheques be
signed by two employees
or valuable inventory are
locked
¾ Designed and
implemented to identify
error, thefts, omissions
which get through first line
of defence, there it is
second line of defence.
¾ Recons and reviews are
common examples
¾ Implemented to resolve
errors and problems
identified by detective
controls
¾
A transaction follow 3 stages:
x Input – read in sales transaction
x Processing – calculation on VAT on sales transaction
x Output – printout of invoice on sales transaction
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UNIT 3
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STUDY UNIT 3.1
8
BUSINESS CYCLES
INTRODUCTION
In topic 2 we explained that management wants to achieve UHOLDEOH¿QDQFLDO
reporting by ensuring that transactions which are initiated, recorded, processed
and reported are valid (occurred and have been authorised), accurate and complete. It is the accounting system which provides the foundation for achieving
WKHVHREMHFWLYHVRILQWHUQDO¿QDQFLDOFRQWURO,QRWKHUZRUGVLQWHUQDOFRQWUROLV
designed and implemented over the accounting system.
3.1.1
THE ACCOUNTING SYSTEM AND BUSINESS CYCLES
Your textbook, Jackson & Stent, (2012:5/12) describes an accounting system as
a series or collection of tasks and records by which transactions are processed
to create ¿nancial records$QDFFRXQWLQJV\VWHPLGHQWL¿HVDVVHPEOHVDQDO\VHVFDOFXODWHVFODVVL¿HVUHFRUGVVXPPDULVHVDQGUHSRUWVWUDQVDFWLRQVDQG
other events. The major elements of the accounting system are people who
carry out procedures, for example write out a credit sales invoice, calculate a
price, enter the invoice in a sales journal; etc, and paper such as order forms,
ledgers, lists, invoices etc, which facilitate the initiation, execution and recording
of the transaction.
The accounting system consists of various business cycles, namely:
1.
2.
3.
4.
5.
The revenue and receipts cycle
The acquisitions and payments cycle
The inventory and production cycle
The payroll and personnel cycle
7KH¿QDQFHDQGLQYHVWPHQWF\FOH
The functions and actions in the business cycles, as well as the control activities
in each cycle, will be explained in detail in the topics to follow.
3.1.2
FINANCIAL STATEMENTS
$VPHQWLRQHGDERYH¿QDQFLDOUHFRUGVUHODWHWRWKHEXVLQHVVF\FOHV7KH¿QDQFLDO
records are summarised in a company’s ¿nancial statements. In other words,
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WKHEDODQFHVDQGWRWDOVRIWKHWUDQVDFWLRQVLQWKHEXVLQHVVF\FOHVDUHUHÀHFWHG
LQWKH¿QDQFLDOVWDWHPHQWV
,Q\RXU¿QDQFLDODFFRXQWLQJFRXUVHV\RXPD\DOUHDG\KDYHVWXGLHGWKHGUDIWLQJ
RIFRPSDQ\¿QDQFLDOVWDWHPHQWV7RJLYH\RXDFRPSOHWHSLFWXUHZHKDYHUHSHDWHGDFRQGHQVHGH[DPSOHRIWKH¿QDQFLDOVWDWHPHQWVRIDFRPSDQ\ZKLFKLV
trading as a commercial enterprise.
7KHSXUSRVHRIWKHH[DPSOHLVWRLQGLFDWHWKHWUDQVDFWLRQVDQGEDODQFHVLQ¿QDQcial statements for the purpose of illustrating the business cycles. For the detailed
¿QDQFLDOVWDWHPHQWDQGGLVFORVXUHUHTXLUHPHQWVSOHDVHUHIHUWR\RXU¿QDQFLDO
accounting study material.
XY LTD
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X1
Notes
20X1
R’000
20X0
R’000
16 069
16 069
14 696
14 696
192 085
418 465
–
610 550
626 619
149 002
222 833
1 465
373 300
387 996
147 834
8 500
5 000
22 192
183 526
40 125
223 651
147 834
–
2 000
18 375
168 209
32 000
200 209
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Revaluation surplus
General reserve
Retained earnings
Non-controlling interest
Total equity
Non-current liabilities
Long-term borrowings
Deferred taxation
Current liabilities
Trade payables
Current portion of long-term borrowings
Shareholders for dividends
Bank overdraft
236 000
28 875
264 875
108 297
23 100
131 397
Total liabilities
35 990
83 042
17 409
1 652
138 093
402 968
20 145
24 639
11 606
–
56 390
187 787
Total equity and liabilities
626 619
387 996
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XY LTD
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR
ENDED 31 DECEMBER 20X1
Notes
Revenue
Cost of sales
*URVVSUR¿W
Distribution costs
Administrative expenses
Other expenses
Finance costs
Pro¿t before ta[
Income tax expense
Pro¿t for the year
Other comprehensive income for the
year after tax
Revaluation surplus
Other comprehensive income for the
year, net of tax
Total comprehensive income for the
year
3UR¿WDWWULEXWDEOHWR
– Owners of the parent
– Non-controlling interest (given)
Total comprehensive income attributable to:
– Owners of the parent
– Non-controlling interest
20X1
R’000
20X0
R’000
1 287 052
(1 098 187)
188 865
(25 741)
(28 813)
(48 881)
(39 264)
46 166
(10 927)
35 239
902 052
(819 939)
82 113
(14 010)
(10 345)
(22 237)
(20 862)
14 659
(6 148)
8 511
10 625
10 625
–
–
45 864
8 511
28 039
7 200
35 239
1 711
6 800
8 511
36 539
9 325
45 864
1 711
6 800
8 511
7KHIROORZLQJDUHFRPSRQHQWVLQWKH¿QDQFLDOVWDWHPHQWV
6WDWHPHQWRI¿QDQFLDOSRVLWLRQ 6WDWHPHQWRIFRPSUHKHQVLYHLQFRPH
‡
‡
‡
‡
‡
‡
‡
‡
‡
‡
‡
property, plant and equipment
investments
loans granted
inventories
trade receivables
cash and cash equivalents
share capital
reserves
retained earnings
long-term borrowings
trade payables
‡ revenue (credit and cash sales)
‡ cost of sales (inventory)
‡ purchases
‡ distribution costs
‡ administrative expenses
‡ other expenses
‡ ¿QDQFHFRVWV
‡ other income
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ACTIVITY 1
1. ,GHQWLI\WKH¿YHEXVLQHVVF\FOHVZKLFKDUHJHQHUDOO\DSSOLFDEOHWRFRPPHUcial enterprises.
2. Based on the business cycles in an accounting system, identify the statePHQWRI¿QDQFLDOSRVLWLRQEDODQFHVDQGVWDWHPHQWRIFRPSUHKHQVLYHLQFRPH
classes of transactions that relate to one another.
FEEDBACK ON ACTIVITY 1
1. The business cycles which are generally applicable to commercial enterprises are:
1.
2.
3.
4.
5.
The revenue and receipts cycle
The acquisitions and payments cycle
The inventory and production cycle
The payroll and personnel cycle
7KH¿QDQFHDQGLQYHVWPHQWF\FOH
2. 7KHEDODQFHVLQWKHVWDWHPHQWRIWKH¿QDQFLDOSRVLWLRQDQGWKHFODVVHVRI
transactions in the statement of comprehensive income that relate to the
business cycles are:
Statement of
¿nancial position
(account balances)
Business cycle
Revenue and
receipts cycle
‡
‡
Acquisitions and
payments cycle
Inventory and
production cycle
Payroll and
personnel cycle
Accounts
receivable
Cash and cash
equivalents
‡
Accounts payable
‡
Inventory
‡
‡
Bank and cash
Accounts
payable
(Accumulated leave,
unclaimed
wages,
SARS, pension funds,
medical aids and other)
Statement of
comprehensive income
(classes of transactions)
‡
‡
‡
‡
‡
‡
‡
‡
‡
‡
‡
‡
‡
‡
Credit sales
Sales returns
Discount allowed
Credit losses
Interest received
Cash sales
All receipts (revenue and
other)
Credit purchases
Cash purchases
Purchase returns
Discount received
Interest on late payments
Expenses
Cost of sales
Wages and salaries (net of
employee deductions such
as PAYE, UIF, SDL, pension
fund, medical aid and other)
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Statement of
¿nancial position
(account balances)
Business cycle
Finance and investment cycle
‡
‡
‡
‡
‡
Share capital
Reserves
Long-term loans
Property, plant and
equipment
Investments
Statement of
comprehensive income
(classes of transactions)
‡
‡
‡
‡
‡
Dividends paid
3UR¿WRUORVV UHVHUYHV
Interest paid
3UR¿WRUORVVRQVDOHRI
asset
3UR¿WRUORVVRQLQYHVW
ment
SUMMARY
,QWKLVVWXG\XQLWZHLGHQWL¿HGWKHGLIIHUHQWEXVLQHVVF\FOHVDQGH[SODLQHGWKHDFcounting system over which internal controls are implemented. The transactions
DQGEDODQFHVLQWKHVWDWHPHQWRI¿QDQFLDOSRVLWLRQDQGVWDWHPHQWRIFRPSUHKHQsive income were also related to the various business cycles.
SELF-ASSESSMENT
After having worked through the study unit and the references to the prescribed
study material, see whether you are able to do the following:
1. Identify the different business cycles.
2. Explain what an accounting system entails.
3. 5HODWHWKHWUDQVDFWLRQVDQGEDODQFHVLQWKHVWDWHPHQWRI¿QDQFLDOSRVLWLRQ
and the statement of comprehensive income to the various business cycles.
CONCLUSION
In this topic, Business cyclesZHLGHQWL¿HGWKHYDULRXVEXVLQHVVF\FOHVDQG
explained what an accounting system entails. The balances in the statement of
¿QDQFLDOSRVLWLRQDQGWKHWUDQVDFWLRQVLQWKHVWDWHPHQWRIFRPSUHKHQVLYHLQFRPH
were related to the various business cycles.
In the next topic we will explain and apply the revenue and receipts business
cycle as well as the applicable internal controls in the cycle.
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UNIT 4
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Unit 4: Revenue and Receipts Cycle
1. Credit Sales
2. Cash Sales
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CREDIT SALES
Functional areas within credit sales:
x Receiving customer orders (ordering function)
x Sales Authorization (Order department)
x Warehouse function
x Dispatch function
x Invoicing function
x Recording of sales function
x Receipts Mail room/cashier function
x Recording of receipts function
x Goods returned by customer function
x Credit management function
The table will take you through each function, specifically highlighting the purpose of the function, the
documentation involved, how the function is performed, and the related risks and controls.
RECEIVING CUSTOMER ORDERS (ORDER DEPARTMENT)
Functions
x Record orders from customers and fill them in
x Orders will be received in document form (customer order) or over the telephone.
x Persons receiving the order need to Check: customer is a valid, details of the order are accurate and
complete e.g. description, quantity, delivery address.
Documents
x Customer order
x Internal sales order (ISO)
x Price Lists
Risk
Order may be accepted from a non account
holder. May result in sales to customer
who does not pay his account
Orders may not be acted upon timeously or
at all, resulting in a loss of sales and
customer goodwill.
Inaccurate or incomplete order details may
be recorded which will result in incorrect
deliveries, returns and customer
dissatisfaction.
x
x
x
x
x
x
x
x
x
Internal Control
Order clerk will check approved customer list
Request customer's account number (Telephone)
Order clerk to sign all ISOs to indicate performance of
control activities
Record all orders on sequentially numbered internal
sales orders.
On a regular basis, ISOs to be sequence checked (for
completeness), and matched to delivery notes.
attach customer order to internal sales order and have
second staff member cross check detail
request customer's order reference
confirm all order details, including delivery address and
price of goods, by reading order details recorded back to
customer
order clerk to sign all ISOs to indicate performance of
control activities
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
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SALES AUTHORISATION (ORDER DEPARTMENT)
Functions
x To assess whether orders should be accepted.
x The intention is to determine whether the customer is creditworthy and has not exceeded his
credit limit.
Documents
x Credit application
x Debtors ledger
Risk
A sale will be made to a customer who is
not creditworthy
Internal Control
x The credit controller (department) to establish:
* that the customer has not supplied fictitious details
* customer's credit status is satisfactory by reference to the
customer's details, e.g. his account balance and credit
terms held on file and/or in the debtors ledger
x ISOs (picking slip) to be authorised by signature of the credit
controller before being sent to the warehouse
x Where the order is from a prospective customer, credit
application procedures must be conducted before
x the order is filled:
* the credit application form must request the customer to
provide banking details, trade references, income and
expenditure details
x the credit controller must follow up by contacting trade
references and credit bureaux and assessing customer
liquidity
x terms and limits must be set by the credit controller and
approved by the financial manager
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
Warehouse
Functions
x To fill accepted orders promptly and accurately and to ensure only authorized orders are acted upon.
x This is the manual function of picking the goods from the warehouse using a signed copy of the ISO
(picking slip), and creating a delivery note.
x Goods which cannot be picked because they are out of stock will also be identified and a back order
note created.
Documents
x Picking slip
x Delivery note
x Back order note
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x
x
x
x
x
Risk
Valid ISO/picking slips may not be
acted upon.
Goods may be removed (picked)
from inventory for
fictitious/unauthorized sales.
Incorrect items and quantities may
be picked.
"Out of stock" items may not be
identified on the picking slip.
Customer not notified of "out of
stock “Items resulting in loss of the
sale and customer goodwill.
x
x
x
x
x
Internal Control
Picker to initial the picking slip for each item picked and
identify on the picking slip, items which cannot be supplied
(out of stock)
Supervisory checks should be carried out by the warehouse
foreman to ensure that all goods picked are supported by
signed picking slips.
Warehouse clerk to
* check goods picked to picking slip
* prepare delivery note from picking slip (delivery note
cross referenced to picking slip)
* prepare back order note from the picking slip and cross
reference both documents (see also control
* send copy of the back order note to order clerk to enable
the order clerk to notify customer
* send copy of the back order note to the buying department
Order clerk to follow up back orders regularly and frequently.
When inventory becomes available, order 'clerk should
confirm that the customer still requires the goods and, if so,
make out an ISO to initiate the sales process. (The back order
note in effect becomes the customer order)
Delivery notes and picking slips to be matched and filed
numerically. Unmatched picking slips to be followed up to
determine whether goods have been picked.
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
DISPATCH
Functions
x To ensure that only goods supported by properly authorised picking slips, and accompanied by
accurate and complete delivery notes, are despatched.
x To ensure prompt despatch of goods which have been picked, to the correct customer.
x Once the goods have been picked and delivery notes made out, they are transferred to despatch to
be packed, labelled arid delivered.
x Controls must be sound because, by this stage, the goods have left the custody of the warehouse
and are thus susceptible to theft. In addition, the goods are moving between a number of parties,
e.g. isolation of responsibility is very important.
Documents
x Delivery Note
x List of deliveries
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x
x
Risk
Theft may be facilitated by
uncontrolled despatch.
despatch errors may occur
* incorrect goods or quantities
despatched
* goods delivered to wrong
customer
x
x
x
x
x
Customers may deny having
received goods.
x
x
Goods released from the warehouse
were never dispatched.
x
Internal Control
On receipt of the goods, picking slip and delivery notes from
the warehouse, the dispatch clerk should
* check quantities and description of goods against the
authorised picking slip and delivery note
* sign picking slip and delivery note to acknowledge
receipt of goods
* retain two copies of the delivery note and return the
signed picking slips to the warehouse
The goods picked should be checked to the picking slip and
delivery note as they are packed into a box for delivery. The
address on the box should be checked against the delivery
address on the documentation and the box sealed
immediately
Dispatch clerk should prepare a two part list of deliveries to
be made. The list should be matched to the delivery notes
and the physical goods loaded onto the vehicle e.g. delivery
note P 1234 4 boxes
delivery staff should supervise loading the truck and sign a
copy of the delivery list to acknowledge receipt of the
delivery notes and the corresponding goods
* driver to retain one copy of delivery list, and the
delivery notes
* dispatch clerk to retain signed copy of delivery list
on delivery, the customer should sign both copies of the
delivery note (having checked the goods), retain one copy
and return the other copy with the driver
Gate controls e.g. security, should check all goods to be
delivered, appear on the delivery list and are supported by
delivery notes. Both copies of each delivery note should be
date stamped by gate control (gate controls can be
impractical if they are, then dispatch controls must be very
tight)
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
Invoicing
Functions
x To notify the customer promptly of amounts due for goods supplied.
x On return of the signed delivery note from the customer it should be matched with the customer it
should be matched with the sales order and an invoice should be generated.
Documents
x Sales Invoice
x Print List
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x
Risk
Goods despatched may not be
invoiced.
x
x
x
x
x
invoices may be inaccurately
prepared/misstated (prices,
quantities, descriptions, discounts,
VAT)
Internal Control
copy of the internal sales order should be held in numerical
order in a temporary file in the "invoicing section"
(accounting department)
as signed delivery notes are received they should be
matched to their ISO and filed sequentially by delivery note
number.
on a frequent and regular basis, ISOs remaining on the
temporary file should be investigated
the file of matched delivery notes should be sequence
tested and gaps in sequence investigated
x
the invoice clerk should:
* compare details on the ISO and delivery notes
* check prices quoted to the customer, and entered on
the ISO, against official price lists and discount
Schedules
* prepare a numerically sequenced invoice and cross
reference it to the delivery note/customer order
x second employee (supervisor) to check and sign invoice
after checking :
* prices, extensions, casts
* discount and VAT calculations
* customer details
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
Recording of sales
Functions
x The purpose of this function is to record the sales made and to raise the corresponding debtor
promptly.
x Invoices must be recorded accurately and entered against the correct debtor in the debtor’s ledger.
x Total sales for the period must also be posted to the sales and debtors control accounts in the
general ledger.
Documents
x Invoice
x Sales Journal
x Debtors ledger
x General ledger
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x
x
x
Risk
invoices are omitted from sales
journal
invoices are duplicated in the sales
journal
invoices are inaccurately entered in
the sales journal e.g. R4325.50
entered as R432.55
x
x
x
x
Invoice entered against incorrect
debtor when posting (transferring)
to the debtors ledger accounts.
x
Internal Control
invoices to be entered in the sales journal in numerical
sequence
* sequence to be continued period to period
* the numbers of any cancelled invoices to be
recorded in the sales journal and marked
"cancelled"
prior to entry in the sales journal, invoices to be added to
obtain control total. This control total is then compared to
the total in the sales journal after entry of individual
invoices (batch control system).
independent staff member to:
* sequence check sales journal entries and follow up on
any missing invoices
* compare customer name and amount entered in sales
journal to the invoice for accuracy
* check postings (transfers) from the sales journal to the
debtors ledger (individual debtors) and general ledger
Reconciliation of the debtors ledger to debtors control
account in the general ledger on a regular basis, to be
conducted by an independent employee.
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
Receipts Mail room/Cashier
Functions
x The arrival of a payment from a debtor is recorded and prepared for banking.
x Receipts should be made out for all cash received and possibly for cheque payments as well.
Documents
x Remittance register
x Customer remittance advice
x Receipts
x Bank deposit slip
x
Risk
payments received may not be x
banked due to theft or carelessness. x
x
x
x
x
Internal Control
post must be opened by two people
all payments received in the post should be recorded in a
remittance register by those responsible for opening the
post and a receipt should be made out for each payment
received
prenumbered receipts should be issued for all payments
received
all amounts received should be banked daily
deposit slip to be made out by the cashier, not the
employees opening the post
cashier to reconcile cheques and cash to remittance register
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and receipts before accepting them for banking (remittance
register should be signed by the cashier to acknowledge
acceptance of the cash and cheques)
x the remittance register and receipts issued should be
reconciled to bank deposits by an independent supervisory
employee
x bank deposits should be reviewed regularly and gaps in daily
banking, investigated by management
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
Recording of receipts
Functions
x The role of this function is to record the receipts from debtors in the cash receipts journal and credit
the debtors' accounts promptly. Receipts must be recorded accurately and entered against the
correct debtor.
x The total amount received from debtors for the period must also be posted to the debtors control
account in the general ledger.
Documents
x Bank deposit slip
x Cash receipts Journal (CRJ)
x Debtors ledger
x General ledger
Risk
Deposits may never be recorded/not x
recorded timeously.
x
recorded deposits may be :
* inaccurate (errors)
* overstated (fictitious deposits)
* credited to the wrong debtor
x
Internal Control
the cash receipts journal should be written up on a daily
x
basis by date and receipt number (if receipts are issued)
supervisory staff should review cash receipts journal for
x
missing dates and gaps in sequence of receipt They should
also test postings to the debtors ledger
the "cash book" should be reconciled to the bank statement
every month by an employee independent of the
banking/recording of cash. The bank reconciliation should
be reviewed by a senior (financial) employee
x queries from debtors should be investigated by an employee
independent of debtors and banking
x reconciliation of the debtors ledger to the debtors control
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
Good returned by customer
Functions
x The role of this function is to control goods that have been returned by customers.
x The goods must be recorded on their return and the debtor's account must be credited.
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x
This requires the creation of two documents, a goods returned voucher, and a credit note. Credit
notes will be recorded in a returns and allowances journal. Particular attention must be given to the
control of credit notes
Documents
x Goods returned Vouchers
x Credit note return and allowances journal
x Debtors ledger
x General ledger
Risk
the description and quantity of
goods returned may be incorrect
resulting in an incorrect credit note
being passed.
a credit note may be passed for
goods which have not been
returned.
Internal Conmtrol
x all goods returned must be received by the company's goods
x
receiving department
x the goods receiving clerk must:
* count and check the description of the goods being
x
returned (check also for damage)
* make out a goods returned voucher, cross referencing it
to customer documentation
* sign and retain a copy of the customer documentation
x
and attach it to the goods returned voucher
x on transfer of goods from receiving into the warehouse, the
stores clerk must:
* check description and quantity of physical goods to
goods returned documentation
* sign to acknowledge the transfer of the goods into his
custody
x credit notes to be:
* made out by accounting department
* cross referenced to original invoice voucher and
customer
* presented to a supervisory employee (with signed
goods returned note and customer documentation).
This staff member must be satisfied that granting of the
credit note is valid and that the company's policies have
been adhered to e.g. the goods cannot be returned say,
after 30 days from purchase date
x credit notes may be inaccurately
x credit notes to be entered sequentially in returns and
recorded and credited to the
allowances journal and normal control procedures over
incorrect debtor.
recording to be put in place
x Senior (financial) manager should review this journal
frequently and follow up on suspicious credit notes, e.g.
large amounts, credit notes to the same customer on a
regular basis
Note: care must be taken to identify goods returned which are defective/damaged as these should not
be returned to the inventory of saleable items. Defective/damaged goods will be received from the
customer in the manner described (this facilitates the credit note) but must be carefully identified as
damaged/defective.
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Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
Credit Management
Functions
x The purpose of this function is to limit the loss from bad debts and to encourage debtors to pay
promptly.
x The function is closely linked to sales authorisation and as explained under that unction, the process
begins with sound controls over the acceptance of new customers and the extent of credit granted
to them.
x Credit management should also identify debtors to be handed over to lawyers and subsequently
written off if necessary.
Documents
x All records in the cycle are relevant
x Monthly statements
x Age analysis
x Credit bureau information
Risk
debtors do not pay at all or pay late
debtors are prematurely or
inappropriately written off
debts are written off without
authority.
Internal Control
x
x credit application controls as discussed under sales
authorisation
x
x monthly statements should be sent promptly to debtors by
the debtors section (accounting dept)
x
x monthly age analysis of debtors and immediate follow up by
phone or letter if credit terms are exceeded
x if this is not successful, the credit controller should
personally contact the customer to (possibly) renegotiate
credit terms or threaten the handing over of the debtor to a
lawyer for collection
x if still no success, the debtor must be handed over before
too long a period has elapsed
x if the debt cannot be recovered, the debt write off must be
recommended by the credit controller and authorised by an
independent senior financial employee after review of the
supporting documentation
x credit manager should reconcile all bad debt write offs after
they have been entered in the journal to supporting
documentation
x senior (financial) manager should be provided regularly with
sufficient information to effectively manage the debtors,
inter alia, list of debtors over their limits and how they are
Note: employees must sign documentation/records to acknowledge the control procedures they have
conducted
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Computerised Controls in the revenue and receipts cycle
Activity
Control
The Debtors masterfile
What is a Masterfile?
The masterfile contains the “Permanent” or “Semi permanent” info.
e.g. Debtors masterfile would contain inter alia:
•The customer’s name
•The customer’s account number
•The customer’s ID number / Company registration number
•The customer’s physical and postal address
•The customer’s credit limit as determined by credit controller /manager
•The customer’s repayment terms (E.g. 30 days, 60 days etc.)
Record all master file amendments in a source x All amendments to be recorded on
hardcopy masterfile amendment forms
document
MAFs
Authorise MAF (Masterfile amendment form) x MAFs to be pre printed, sequenced and
designed in terms of sound document
design principles
Enter authorised masterfile amendments on
x The MAFs should be
the system accurately and completely
x signed by two reasonably senior
employees in the section (e.g. credit
controller and senior assistant) after
they have agreed the details of the
amendment to the supporting
documentation, e.g. the approved credit
application document for the addition of
a new customer
x Cross referenced to the supporting
documentation.
Review masterfile amendments they
x Restrict write access to the debtors
masterfile to a specific member of the
occurred, were authorised and accurately and
section by the use of user ID and passwords
completely processed
x
All masterfile amendments should be
automatically logged by the computer on
sequenced logs and there should be no
write access to the logs
x
To enhance the accuracy and completeness
of the keying in masterfile amendments and
to detect invalid conditions, screen aids and
programme checks can be implemented.
screen aids and related features
x Minimum keying in of information
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x
x
screen formatting, screen looks like MAF,
screen dialogue
the account number for a new debtor is
generated by the system
programme checks,
x verification/matching checks to validate a
debtor account number against the debtors
masterfile
x alpha numeric checks
x range and/or limit/data approval checks on
terms and credit limit field
x field size check and mandatory/missing
data checks, e.g. credit limit and terms must
be entered
x sequence check on MAFs entered
x
The logs should be reviewed regularly be a
senior staff member and the sequence of
logs themselves should be checked against
missing logs
x
Each log amendment should be checked to
confirm that it is supported by properly
authorised MAF and the details are correct
x
The MAF themselves should be sequenced
checked against the log to confirm that all
MAFs was entered
Receiving and recording payments from debtors
Accessing the bank account
The access controls that should be implemented
to ensure good control
over the bank account are:
x The terminal onto which the bank’s
software is loaded should be in the debtors’
section, usually the terminal of the senior
debtors’ clerk.
x Access to the bank’s site should be gained in
the normal manner, but to access the
company’s bank account, the senior
debtors’ clerk should be required to enter a
PIN and a password.
x If this identification and authentication
procedure is successful, a menu of the
functions available should be displayed, one
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of which will be “download bank
statement”.
x This function should be linked to the senior
debtors’ clerk’s user profile to enable him or
her to initiate the download.
Unauthorised access to the sale application
x
x
x
x
x
Access to the sales application should be restricted to the terminals of only those who need
access to the application to perform their functions, e.g. sales personnel, financial accountant
and credit controller by the use of terminal identification controls.
Access to the sales application should be restricted at systems level to only those users who
need access to the application to perform their function by the use of user identification and
password controls.
o There should be sound controls over passwords e.g. unique to users, minimum six
characters, not obvious, kept confidential.
At application level users should be restricted to only those programme functions which they
require to perform their functions on a “least privilege” basis. (For example: Sales personnel
do not require any access to the masterfile amendment module of the application.
o Sales personnel may be given “read only” access to the debtors masterfile (customers
may enquire about their account balance before making a purchase) but will definitely not
be given “write access” to the masterfile.
There should be a “time out” facility on the sales personnel computers, which is activated
after a set period of inactivity.
There should also be automatic shutdown in the event of access violation.
Processing Controls in the revenue and receipts cycle
Segregation (division) of duties
Separate functions e.g ordering, warehouse, receipts
Separate responsibilities within functions receive
orders, picking, invoicing
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Isolation of responsibility
x
x
Granting access privileges – only credit controller
can approve credit sales
Dispatch clerk controller to sign the picking slip
Approval, authorisation
Custody
x
Access to debtor information on the system is
restricted
x
Access to the companies bank account is strictly
protected by pins, user ids and passwords
x
Information/access to the debtors master file is
also protected with passwords to restrict
unauthorized amendments
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Access Control
x
All users must identify must identify an
authenticate themselves by id’s and passwords
Comparison and reconciliation
x
System reconcile the receipts to the debtor in the
debtors ledger to the amount of deposits in the
company’s bank statement
x
System compares info to corresponding prior
period info
x
The sales order pending file show management
how a sale order is progressing
The manager can check the sales pending file to
check if the credit controller is dealing with sales
order speedily
Performance reviews
x
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Control techniques and application
controls
Screen aids and related features:
x Min entry (only customer acc no required)
x Screen formatting (on the picking slip)
x Mandatory fields (customer purchase reference)
Program related features:
x Validation check on customer number
x Alphanumeric on quantity field
Logs and reports
Output control
x Master file amendment logs are checked against
sourced documents
x Access to debtor information on the system is
restricted
x Logs of changes made by picking control clerk to
picking slips on system
x
Daily reports of sales order received, debtors
exceeding credit limits or terms
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UNIT 5
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Unit 5: Acquisitions and payments
Functional areas within the acquisitions and payments
x Ordering of goods
x Receiving of goods
x Recording of purchases
x Payment preparation
x Actual payment and recording
The table will take you through each function, specifically highlighting the purpose of the function, the
documentation involved, how the function is performed, and the related risks and controls.
ORDERING OF GOODS (AND SERVICES)
Functions
x The purpose of this function is to initiate orders so that items/services required to maintain optimum
conditions within the organization, are always available, e.g. manufacturing does not run out of raw
materials or parts, or a retailer does not run out of goods to sell.
x This functions is also responsible for placing official orders with suppliers having established that
delivery, quality, quantity and price requirements have been satisfied.
Documents
x Requisition
x Purchase order form
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x
x
x
x
x
x
x
Risk
ordering of incorrect or unnecessary x
goods, resulting in liquidity problems
and wastage
ordering unauthorized goods resulting in
losses to the company through fraud
requisitions not acted upon or orders
not placed timeously or at all
orders placed with suppliers not filled/
not timeously filled
order forms misused e.g. for placing x
orders for private purchases
Internal Control
order clerks should not place an order without receiving
an authorized requisition
o the order should be cross referenced to the
requisition
o Prior to the requisition being made out,
stores/production personnel should confirm that the
goods are really needed especially where preset re
order levels and re order quantities are used as the
basis for the requisition.
Before the order is placed, a supervisor/senior buyer
should:
o check the order to the requisition for accuracy and
authority
o review the order for suitability of supplier,
reasonableness of price and quantity, and nature of
goods being ordered (are the)' items used or sold by
the company).
x The ordering department should file requisitions
sequentially by department (each department will have
own book of requisition forms) and should frequently
review the files for requisitions which have not been cross
referenced to an order.
x A copy of the order should be filed sequentially and the
file should be sequenced checked and frequently cross
referenced to goods received notes, to confirm that
goods ordered have been received. Alternatively the
pending file of purchase order forms in the receiving bay
can be reviewed for orders which are long outstanding.
x Blank order forms should be subject to sound stationery
controls.
obtaining inferior quality goods
x The company should preferably have an approved
supplier list to which the buyer should refer when
paying unnecessarily high prices for
ordering
goods
o if the company does not have approved suppliers the
buyer should seek quotes etc. from a number of
suppliers before placing the order
o Even when ordering from an approved supplier, the
buyer should contact the supplier to confirm
availability and delivery dates.
Note: Before the supplier is approved, senior personnel
should carefully evaluate the company in respect their
reliability and the quality and price of their goods.
Note: whenever a control procedure is carried out, the employee responsible for the control should sign
the relevant document record.
RECEIVING OF GOODS
Functions
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x
The purpose of this function is to accept and acknowledge deliveries of valid orders from suppliers
and to record the delivery (goods received note).
Prior to acceptance, physical checks on quantity, quality and description of goods should be carried
out.
x
Documents
x Supplier delivery note (DN)
x Goods Received
Risk
x
x
x
x
x
acceptance of
o short deliveries as full deliveries
o damaged and broken items
o items not ordered
x
o goods not of the required type or
quality
goods received notes not made out
accurately or completely
no goods received note made out
theft by employees or outside parties
e.g. collusion with supplier delivery
personnel
x
Internal Control
the responsibility for receiving goods should be designated to
a goods receiving section which should be physically secured
and access controlled
on arrival of the delivery vehicle, goods should be offloaded
in the presence of a goods receiving clerk who should:
o obtain the supplier delivery note from the delivery
personnel and by referring to the order number
thereon, locate the purchase order (which should have
been filed numerically)
o check the quantity and description of goods delivered
against the purchase order and the customer delivery
note
o perform at least a superficial test of the condition of
the goods delivered e.g. broken or wet boxes.
o reject all incorrect deliveries and clearly identify
rejections on both copies of the delivery note and
purchase order
o accept goods short delivered but identify such goods
clearly on the delivery notes and purchase order (the
quantity actually accepted must be clearly identified)
o include only those goods which have been accepted on
the goods received note
o ensure that suppliers personnel sign both copies of the
delivery note including all amendments e.g.
identification of short deliveries
o sign the supplier delivery note
on transfer of the goods to stores (custody), the stores clerk
should compare the physical goods to the goods received
note and acknowledge receipt by signing the GRN. Any
discrepancies should be reported to the stores controller
immediately
Note: Because collusion in this cycle is a major problem for many
companies, isolation of responsibilities, sound personnel
practices and independent physical controls should be
implemented by all companies in the supply chain e.g.
surveillance cameras, tracing devices on supplier vehicles, should
be implemented.
Note: whenever a control procedure is carried out, the employee responsible for the control should sign
the relevant document record.
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RECORDING OF PURCHASES
Functions
x The purpose of this function is to raise the purchase and the corresponding liability in the accounting
records. The recording of all purchases and trade
x Liabilities should be carried out by the (creditors) recording function so that controls are not
bypassed e.g. by the raising of liabilities through the general journal by other departments.
Documents
x Purchase invoice (PI)
x Credit Note (CN)
x Creditors Statements
x Purchases journal
x Purchases returns & allowances journal
x Creditors ledger
x General ledger
Internal Control
the purchase invoices received from the supplier should be:
o matched to the corresponding goods received note,
delivery note and purchase order for:
ƒ quantity and description of goods
ƒ correct prices and discounts (from order or supplier
price lists)
o reviewed to confirm that the amounts on the invoice
have been allocated to the correct account e.g.
inventory,
consumables, stationery.
x
x Were a requisition is made out to initiate an order, the
account to which the purchase must be allocated in the
purchase journal should be selected from the "official list of
accounts" and entered onto the requisition and then
transferred to the order. (If this is not done, the clerk
responsible for the allocation of the purchase will not know
x
which account to allocate it to).
x all casts, extensions and calculations on the invoice should
be reperformed.
x a specific employee should be designated the responsibility
of ensuring, by scrutiny of dates of goods received notes and
invoices in the pending file, that purchases are timeously and
accurately recorded in the purchase journal and correctly
posted to the creditors ledger.
x As the rendering of services by a supplier does not usually
result in a GRN, the supplier invoice will normally be signed
by the head of the section/department to whom the service
was rendered, as proof and approval of the service rendered.
Note: whenever a control procedure is carried out, the employee responsible for the control should sign
the relevant document record.
x
Risk
the recording of incorrect amounts
arising from incorrect purchase
invoices:
o quantity, quality and type not as
ordered or received
o prices of goods not as quoted
o calculation errors e.g. casts,
extensions, VAT
The raising of fictitious
purchases/creditors by the
introduction of invoices which are
for goods never ordered or received
by the company. (Results in invalid
flows if cash leaving the company
*delays, misallocation and posting
errors when entering details into
accounting records resulting in
reconciliation problems and failure
to make use of favorable settlement
terms
x
PAYMENT PREPARATION (requisitioning)
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Functions
x The role of this function is to ensure that only valid creditors are paid and that they are paid the
correct amount, on time. The function will produce a cheque requisition.
x The cheque requisition will initiate the preparation of the cheque to be sent to the creditor
Documents
x Remittance advice (RA)
x Cheque requisition
Internal Control
The monthly creditor’s statement sent by the supplier
should be reconciled to the supporting documentation, e.g.
invoices, payments etc, and the creditor’s clerk should
ensure that the invoices were subjected to accuracy controls
before being recorded.
x The individual creditor's accounts in the creditor’s ledger
should be reconciled with the monthly creditor’s statements
sent by the suppliers.
x A creditor’s clerk should identify those creditors who must
be paid at month end to comply with the suppliers' credit
terms and to ensure that discounts available for early
settlement, are deducted.
x Cheque requisitions should be sequenced and preprinted
and unused requisitions subject to sound stationery
controls.
x Cheque requisitions should include details of the cheque
being requested and should be authorized by the preparer
of the requisition. (There may also be a review or second
authorization procedure by another employee).
x The cheque requisitions and supporting documentation
should be presented to the cheque signatories (simple batch
controls may be put in place if cheque requisitions are
numerous).
Note: whenever a control procedure is carried out, the employee responsible for the control should sign
the relevant document record.
x
x
x
x
Risk
payment to fictitious creditors
payment of incorrect amounts
unauthorised payments
discounts lost due to late payment
x
ACTUAL PAYMENT (preparing the cheque) AND RECORDING
Functions
x The purpose of this function is to produce a valid, accurate and authorised cheque and to record all
cheque payments accurately and timeously in the accounting records.
Documents
x Cheque
x Returned paid cheque
x Bank statement
x Cash payments journal (CPJ)
x Creditors and general ledger
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Internal Control
There should be two cheque signatories for all cheque
payments.
x cheque signatories should agree details on the cheque, i.e.
date, amount, payee, to the supporting documentation
x
(invoice, goods received note, remittance advice)
x
x Cheque signatories should cancel (by stamp or crossing) all
documentation so that it cannot be presented again in
support of a payment.
x All cheques should be made out in a manner which makes
subsequent tampering with the cheque very difficult e.g.
o use of permanent ink
o no gaps into which additional detail can be inserted to
change the amount or payee
o writing out the payee's name in full
o crossing cheques "not transferable"
x cheque books and cheques should be issued in strict
numerical sequence and if possible, restricted to only one in
issue at any time, and should be subject to strict stationery
controls.
x if a cheque is incorrectly made out, the face of the cheque
should be stamped "cancelled" and the signature torn off.
The cheque should be retained not thrown away. Note:
banks will not accept cheques with alterations due to the
high incidence of cheque fraud.
x signed cheques should not be returned to the preparer but
should be mailed by an independent employee.
x all cheques should be recorded in numerica(sequence in the
CPJ
x the CPJ should be reviewed regularly, by management, for
missing cheque numbers and unusual payments
x reconciliation of the cash book to the bank statement
should be performed and reviewed monthly, by staff who is
independent of banking functions, and the creditors
department.
x returned paid cheques should be
o filed in numerical sequence
o reviewed for suspicious endorsements, payees,
amounts by someone independent of the initial
preparation of the cheque. This is an additional and
simple detection check on the payment system as a
whole.
Note: whenever a control procedure is carried out, the employee responsible for the control should sign
the relevant document record.
x
Risk
invalid payments may be made (e.g.
cheques may be incorrectly made
out (e.g. wrong payee, amount)
invalid payments may be made (e.g.
fictitious creditors, overpayments)
payments may be recorded
inaccurately (errors) or may be
intentionally misstated to hide
fraud.
x
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Computerised Controls in the payments and acquisitions cycle
Activity
Control
The Creditors masterfile
What is a Masterfile?
The masterfile contains the “Permanent” or “Semi permanent” info.
e.g. Creditors masterfile would contain inter alia:
•The supplier’s name
•The supplier’s account number
•The supplier’s ID number / Company registration number
•The supplier’s physical and postal address
•The s supplier’s credit limit as determined by credit controller /manager
•The supplier’s repayment terms (E.g. 30 days, 60 days etc.)
Record all master file amendments in a
source document
x
All amendments to be recorded on
hardcopy masterfile amendment forms
MAFs
Authorise MAF (Masterfile amendment
form)
x
MAFs to be pre printed, sequenced and
designed in terms of sound document
design principles
Enter authorised masterfile amendments on
the system accurately and completely
x
The MAFs should be
Review masterfile amendments they
occurred, were authorised and accurately
and completely processed
x
x
signed by two reasonably senior
employees in the section (e.g. creditors
section head and financial accountant
after they have agreed the details of
the amendment to the supporting
documentation > MAF checked against
the written notification from the
supplier that the company’s bank
account details have changed
x
Cross referenced to the supporting
documentation.
Restrict write access to the creditors
masterfile to a specific member of the
section by the use of user ID and passwords
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x
All masterfile amendments should be
automatically logged by the computer on
sequenced logs and there should be no
write access to the logs
x
To enhance the accuracy and completeness
of the keying in masterfile amendments
and to detect invalid conditions, screen aids
and programme checks can be
implemented.
screen aids and related features
x
Minimum keying in of information
x
screen formatting, screen looks like MAF,
screen dialogue
x
the account number for a new creditor is
generated by the system
programme checks,
x
verification/matching checks to validate a
creditor account number against the
creditors masterfile
x
alpha numeric checks
x
range and/or limit/data approval checks on
terms and credit limit field
x
field size check and mandatory/missing
data checks, e.g. credit limit and terms
must be entered
x
sequence check on MAFs entered
x
The logs should be reviewed regularly be a
senior staff member and the sequence of
logs themselves should be checked against
missing logs
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x
Each log amendment should be checked to
confirm that it is supported by properly
authorised MAF and the details are correct
x
The MAF themselves should be sequenced
checked against the log to confirm that all
MAFs was entered
Explain in your own words why the creditors’ masterfile is central to the acquisition and
payments system.
The accurate and complete processing of authorised purchases and payments depends to a
great extent on the integrity of the masterfile. The creditors’ masterfile will contain information
relating to the suppliers of the company, the terms that affect payments, balances and the
banking details required to make EFT payments to creditors.
Explain in your own words what the term “preventative” means in this context.
This means that application controls are implemented to prevent mistakes from happening in
the first place
Provide an example of a preventative application control.
Restrict write access to the creditors’ masterfile to a specific member of the section by means of
a user ID and passwords. This will prevent/deter unauthorised users from gaining access and
making amendments to the masterfile.
Provide an example of a detective control.
Each logged amendment should be checked to confirm that it is supported by a properly
authorised masterfile amendment form (MAF). This will enable management to detect any
unauthorised amendments to the masterfile.
Name a few logs and reports that are used as part of detective controls over masterfile
amendments.
The masterfile amendment log is the main log used when making amendments to the
masterfile. Various other logs and reports issued in the course of the acquisitions and payments
cycle could be used to detect errors during masterfile amendments, such as the masterfile
access violation reports and creditors’ ledger exception reports, for example invalid account
numbers.
Describe the application controls that should be implemented to prevent and detect errors
during amendments made to the creditors’ masterfile in a computerised environment.
REFER TO THE ABOVE
Payment of creditors by electronic funds transfer
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Accessing the bank account
x
x
x
x
x
The bank’s EFT software is loaded only on a
limited number of terminals
The entry of the employees’ user ID and
password will be sufficient to get the
employee to the bank’s webpage (but no
further).
The entry of an additional PIN number
provided by the bank) and unique password
by the employee will provide access to the
company’s bank account.
o This additional PIN will only be made
available to the employees who need
access to the bank account to perform
their function.
Once access has been gained to the bank
account, a menu of the functions available
will be displayed and the access which is
given to the employee will be linked to the
employees’ user profile. For example, at
this stage the cashbook clerk, having
identified and authenticated herself
successfully may be authorised by her user
profile to download bank statements but
not authorised to do anything else.
To make an EFT payment, an additional
authentication procedure is required and
this procedure is achieved by requiring the
employee to insert the “dongle” in the USB
port of the employee’s terminal. This is in
effect an additional password which works
in conjunction with the employees other
identification and authentication
requirements:
o The privilege of being able to gain
access to this payment function will
again be given to only those employees
who need this access. (A limited
number of “authorising” senior
employees.)
o The “dongle” will be registered to the
specific employee and will only operate
on a terminal which has the bank’s
software loaded on it.
o All PINs, and passwords must be kept
confidential and the dongle must be
used solely by the employee to whom it
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x
x
is given and must be kept safe at all
times.
There should be automatic shutdown of the
site after three unsuccessful attempts to
access the bank account.
As a detective measure, attempts at
unauthorised access to this function (and
the bank account itself) should be logged
and followed up.
Processing Controls in the acquisitions and payments
Segregation (division) of duties
Isolation of responsibility
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Approval, authorisation
Custody
Access Control
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Comparison and reconciliation
Performance reviews
Control techniques and application
controls
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Logs and reports
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UNIT 6
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Unit 6: Inventory and Production
Safe keeping of inventory (Inventory Controls)
Recording of cost were a production process occurs (Warehousing Controls)
Documents used in the cycle:
Warehousing
Functions:
The purpose of this function is to
1. Control the transfer of goods in and out of all warehousing facilities, e.g. goods received from
"receiving" to the warehouse storage or finished goods received from production into the
finished goods store.
2. Physically protect inventory in all warehouses. "Inventory" in production will also need
protection but this is likely to be the responsibility production personnel (these employees
will be part of the cycle).
Documents:
x
x
x
x
x
x
x
x
Goods received notes
Material (components) requisitions
Picking slip
Material (components) issue note
Delivery note
Transfer to finished goods note
Perpetual inventory records
Inventory count documentation
Risks:
x
Goods received from suppliers are not transferred into the warehouse timeously or at all (stolen)
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x
x
Inventory (in whatever form) is stolen or lost
Inventory deteriorates in value due to
o inadequate physical controls, e.g. gets wet
o its nature, e.g. foodstuffs, chemicals
x No record is created of goods or components physically moved
x The goods or components issued are incorrect resulting in lost sales or production delays
x Inventory shortages (including theft) are concealed.
Controls:
Controlling the movement of goods, components and finished goods.
x
x
x
x
x
No movement of inventory should take place without an authorizing document, e.g. picking slip,
material requisition.
No movement of inventory should take place without the movement being recorded e.g. a delivery
note and material issue note.
Whenever there is a transfer of inventory between sections, e.g. receiving section to warehouse,
production to finished goods, both the deliverer and the receiver should acknowledge the transfer
by, for example, signing the transfer document after having checked the description quality and
quantity of the items being transferred against the source documents. For example warehouse
personnel and production clerks to sign the material issue note after checking the quality and
description of goods being transferred (isolation of responsibilities)
Documents should be sequenced and filed numerically
Documents must be sequenced checked and missing documents investigated, e.g. a missing GRN in
the warehouse will probably indicate that the goods have not been transferred to the warehouse.
Controlling damage, theft and loss of inventory in all forms, i.e. In warehouses and during
production.
Physical controls (the nature and value of the company’s inventory will determine the physical
controls which are put in place)
Entry and exit
Controlled entry and exit
Minimum entry and exit points
Swipe, cards, keypads, turnstiles, gate control,
biometric readers, security guards, X ray (e.g.
jewellery manufacture
e.g. buying clerks not permitted to enter stores
unaccompanied, only production employees
allowed in production facility
minimum number of windows, solid structure
Areas to be dry, clean, neatly packed, pest free
and temperature controlled where necessary
Cameras/video recording over production
(items are easily stolen off the production line),
receiving and dispatch areas.
Restricted entry
Secure building’s
Environmental
surveillance
Comparison and reconciliation
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x
x
x
x
Physical inventory (in all its forms) is compared to theoretical inventory per the perpetual
inventory (see point 8 below for a discussion of cycle counts and inventory counts).
Actual production is compared to the manufacturing or production schedules
Actual production is compared to budgets
All material variances should be investigated.
Production: Planning, controlling and recording costs
Functions:
The purpose of production is to manufacture the
company's products. Production is essentially a production cycle, the production department will be
required to:
x
x
x
x
x
Requisition and receive components from the warehouse.
Control costs during manufacture.
Record actual costs.
Account for the items produced and transfer the items to a warehousing facility.
Compare actual and budgeted costs.
Documents:
x
x
x
x
x
x
Materials requisitions
Materials issue notes
Job cards
Production schedules
Production reports
Transfer to finished goods notes
Risks:
x
x
x
x
x
Unauthorized requisitioning of issue of materials (theft)
Requisitioning or Issue of incorrect materials resulting in losses from wastage/delays
Failure to budget costs properly resulting in selling prices which are too low and subsequent losses
Failure to monitor actual expenditures and identify variances between actual and budget
Failure to control the transfer of finished goods to the finished goods store (manufactured items
stolen, damaged or lost).
Controls:
x
A costing schedule (budget) must be prepared for all products to be manufactured whether on a
''job cost basis" or a "process costing basis".
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These schedules should be carefully compiled by costing personnel and should contain detailed
listings of all materials to be used, expected labour costs and an allocation of production
overheads.
o The schedules should be sequenced, dated and approved by production personnel (signature).
o The schedules may be used as the source document for purchase requisitions.
x For job orders (job costing) the details on the costing schedule
o should be transferred to "job cards" (job sheet) which
ƒ Are sequenced and dated
ƒ Contain a list of materials to be used
ƒ Are cross referenced to a customer order/quote
ƒ Are cross referenced to a materials requisition and materials issue note
ƒ Are cross referenced to the daily production schedule
ƒ Are authorized by the production manager.
o No materials should be issued from inventory without a materials requisition which has been
checked against the authorized job card.
o Whilst the job is in production, the job card should be held in a pending file and updated
for labour hours as they are incurred.
o On completion of the job, a sequenced “transfer to finished goods form" should be made
out. This will:
ƒ accompany the goods to the finished goods store
ƒ be cross referenced to the job card
ƒ be used to write up the finished goods perpetual inventory.
o the job cards for completed jobs should be removed from the pending file and "costed" e.g.
material prices and labour costs allocated and an overhead allocation made
o all calculations should be checked by a second clerk
o the job card should then be filed numerically
o on a frequent and regular basis, supervisory staff or the production manager should sequence
test the completed job card file to confirm that:
ƒ Each card is cross referenced to a "transfer to finished goods note" and to a sales
invoice.
ƒ Missing job cards are for jobs still in the production stage.
o Management should compare completed job cards to quotes and costing schedules and
investigate variances.
x For process costing
o all process runs must be recorded on manufacturing or production schedules which are:
ƒ sequenced and dated
ƒ cross referenced to production plan
ƒ cross referenced to material requisitions
ƒ authorized by the production manager
o As items come off the production line, a sequenced "transfer to finished goods form" should
be completed for each day's production or for every say 100 items produced. The "transfer to
finished goods note" should:
ƒ accompany the goods to the finished goods store
ƒ be cross referenced to the production schedule
ƒ be used to write up the finished goods perpetual inventory.
o Performance reports should be used to measure performance by production shift e.g.
wastage, quantities produced, damaged items.
o Completed production schedules and performance reports should be sent to "costing" for the
allocation of labour and overhead costs as well as for pricing of materials. (The normal method
for doing this is by the allocation of standard material, labour and overhead costs).
o
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o
o
o
o
o
on a frequent and regular basis, management should date and sequence test the cos ted
production schedules to confirm that:
ƒ the full quantity of production has been cross referenced to "transfer to a finished
goods form"
ƒ Missing schedules are for goods still in production.
Management should review performance reports to evaluate the production activity and
should follow up on inefficiencies, wastage.
Actual costs should be compared to standard costs and variances should be evaluated.
the following posting should be made from signed, costed production schedules:
ƒ Raw material costs, direct labour and manufacturing overheads to the debit of work
in progress.
ƒ cost of goods manufactured to the credit of work in progress and the debit of finished
goods
All casts, extensions and calculations should be checked before posting.
Note: again this may be a computerized system but the principles described above remain the
same.
Fraud in the cycle
Fraud in this cycle can occur through:
x
x
Fraudulent financial reporting
Misappropriation of assets
Inventory Counts
The differences between a cycle count and an annual count:
Cycle counts
More regular – e.g. once every 3 weeks
Only some inventory is counted – e.g.
high value items
Comparisons to perpetual inventory
records
Annual count
Only at financial year end
All inventory must be counted
Comparison to theoretical inventory
records (not necessarily perpetual
records)
For both counts
Sound count controls and method of physical counting is the same
Discrepancies must be thoroughly investigated and followed up on
It is very NB for you to read the question carefully – answer what was asked!!!
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Cycle Count
x
x
x
x
x
x
x
x
The timing of each count should be planned at the start of the year, e.g. two days every three
weeks, or at the end of every third month. (In very large companies such as motor
manufacturers, cycle counting can be almost a daily exercise.)
The items to be counted must be identified. There are a number of ways in which this selection
can be done:
o Random samples can be selected from the perpetual inventory records
o Items which are susceptible to theft or have some other identifying characteristic can be
chosen
o High value items can be selected or
o The entire to inventory population can be divided into sections so that all items are counted
at regular intervals during the year
o A particular section of the warehouse may be chosen
Once these matters have been settled, the physical inventory will be counted using an
acceptable method of counting and sound count controls.
The physical count quantity for each item counted will be compared to the theoretical quantity
on the perpetual inventory records and all count discrepancies will be entered into a sequenced
inventory adjustment form
All discrepancies must be thoroughly investigated preferably by internal audit and the inventory
controller.
o Results of the investigations should be recorded on the inventory adjustment form
o The warehouse manager should review the forms and authorize the adjustments by signing
the form
o Inventory adjustment forms should be filed numerically and should be sequenced checked
regularly
The adjustment to the records should be made by a clerk who is independent of the custody,
receiving the issue.
The perpetual inventory records should be reviewed periodically by senior warehousing
personnel and the adjustments to be records traced back to the authorized inventory
adjustment form.
An overall analysis of the discrepancies over a period should be conducted to identify any trends
e.g. frequent discrepancies in a particular section of the warehouse, so that suitable preventive
measures can be put in
Year end Invenotry Count
Planning and preparation this must take place timeously and should cover:
x
x
x
date and time of the count
method of counting : how the inventory will be counted and recorded e.g. tag system, all
Items counted twice.
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x
x
x
x
x
x
staff requirements : how count teams are made up e.g. one person from the warehouse one
person independent of the warehouse (e.g. accounting department), how many teams are
necessary
Supervision: who will act as count controller.
preparation of the warehouse : tidying racks, packing out half empty boxes onto racks,
Marking damaged goods, stacking like goods together, etc.
drafting of warehouse floor plan to identify count areas for count teams
Identifying all locations and categories of inventory.
Design of stationery various documents are used and they should be designed along standard
stationery design principles
x
x
x
x
Inventory sheets: printed, numerically sequenced, reflect the inventory item number, category and
location of the inventory in the warehouse, and have columns for first count, second count,
discrepancies, and columns for prices and extensions. (In many companies, counters may need to
insert descriptions etc. particularly where there is no form of perpetual inventory).
in theory, quantities per the perpetual inventory should not be entered on the inventory sheet
prior to the count (this forces counters to actually count to arrive at a quantity) but it may not be
practical due to time constraints.
Inventory tags
Inventory adjustment forms.
Written instructions count information and instructions should be provided (in writing) for all
members directly and indirectly involved in the count. The written instructions should cover:
x
x
x
x
x
x
the identification of count teams and the responsibilities of each member of the team
the method of counting to be used e.g. tags, double counts, marking counted inventory in two
colours with chalk (reflecting the double count)
identification of slow moving or damaged inventory as well as consignment inventory
controls over issues to and returns of inventory sheets to the count controller
Procedures to be adopted if problems arise during count e.g. particular inventory items cannot be
found, deliveries of inventory during the count.
Detailed instructions concerning dates, times, locations.
Conducting the count there are a number of variations on how the inventory count should be
conducted but the following procedures should be followed:
x
x
x
The count staff should be divided into teams of two, with one member of the team being
completely independent of all aspects of inventory.
All teams should be given a floor plan of the warehouse which should clearly demarcate the
inventory locations for which they are to be held accountable.
All inventory should be counted twice. One of the following methods can be adopted:
ƒ One member of a team counts and the other records, swapping roles thereafter and
performing a second count in the same section to which they were assigned.
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ƒ
x
x
x
x
x
x
x
x
x
x
Count teams complete their first counts, hand their inventory sheets back to the count
controller and sign for the inventory sheets of another section, thereby doing their second
counts on a section already counted by another count team.
As items are counted they should be neatly marked by the counters.
Where count teams identify damaged inventory these inventory items must be marked as such on
the inventory sheets.
The contents of boxes where the packaging appears to have been tampered with, should be
counted and the details noted on the inventory sheet.
A few boxes should be selected at random in each section and the contents compared with the
description on the label to confirm that the contents have not been changed/removed and the seal
replaced.
The count controller (and assistants) should:
ƒ Walk through the warehouse once the count is complete and make sure all items have
been marked twice.
ƒ Examine the inventory sheets to make sure that first and second counts are the same and
agree to the quantities recorded on the perpetual inventory system if there is one.
ƒ Instruct the count teams responsible for sections where discrepancies are identified to
recount the inventory items in question.
The count controller should obtain the numbers of the last goods received note, invoice, delivery
note and goods returned note used up to the date of the inventory count.
No dispatches of inventory should take place on the date of the inventory count.
Any inventory received after the count has begun should be stored separately in the receiving bay,
until the count is complete and must not be put into the stores. This inventory must be counted
and added to the inventory sheets after the count is complete.
ƒ The counters responsible for the count sheets should draw lines through the blank spaces
on all inventory sheets, and sign each count sheet and all alterations.
The inventory controller should check that this procedure has been carried out and should
sequence test the inventory sheets to ensure that all sheets are accounted for.
Count teams will only be formally dismissed once the count is complete and all queries have been
attended to.
Computerized controls for the inventory and production cycle
There are no separate section with the computerized controls for this cycle, however, the principles of
the manual controls remain the same.
Some examples to consider:
x
x
x
Re order levels held in inventory masterfile
Production in manufacturing co e.g. automatic creation of production schedules, costing schedules,
etc
Point of Sales systems e.g. perpetual inventory system.
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UNIT 7
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Unit 7 Payroll and Personnel Cycle
Functions and documents
Functional areas within the payroll and personnel cycle
x Personnel (Human resources)
x Time Keeping
x Payroll Preparation
x Payment preparation and payout
x Deductions: Payment and Recording
The table will take you through each function, specifically highlighting the purpose of the function, the
documentation involved, how the function is performed, and the related risks and controls.
PERSONNEL (HUMAN RESOURCES)
Functions
x To assist with all personnel matters so as to ensure optimum efficiency from the work force, by
controlling:
o recruitments
o dismissals
o wage negotiations
o labour disputes
o staff development
x To maintain accurate, complete and valid records for all employees and in doing so to provide the
information necessary to produce valid clockcards e.g. if an employee is dismissed no clockcard
should be available as this increases the risk of creating fictitious employees.
x Likewise the list of employees' details must be accurate and valid e.g. correct wage rates.
Documents
x Payroll amendment form (PAF)
x Employee's file
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x
x
List of employees
Employee register
x
x
x
x
Risk
Recruiting/retaining unsatisfactory or x
unnecessary employees.
incorrect dismissal procedures
unauthorised amendments to employee
records
x
o fictitious additions
o Unauthorised changes in wage rates.
inaccurate or incomplete records
x
x
x
x
x
x
Internal Control
all requests for the appointment or dismissal of
employees should originate from the section making
the request, e.g. factory, stores, administration, etc,
and should be in writing and a motivation provided.
requests should be signed by the section head and
countersigned by the section manager after reference
to the budget. Specifications of the position and the
skills required will be agreed by the section and
personnel.
changes to pay rates, promotions to higher
employment grades and any other changes in service
conditions, should be decided upon by the personnel
department/wage committee after :
o due consultation with interested parties, e.g. the
union representatives
o consideration of relevant laws and regulations, e.g.
overtime, pay rates, minimum wage regulations
Such changes should be documented and authorised
by the authorising body (e.g. wage committee)
all amendments to employees details arising from 1 to
4 above, should be promptly committed to sequenced
payroll amendment forms which should be cross
referenced to the supporting documentation and
authorised by a senior member of the personnel
section
o from time to time the file of PAF's should be
reviewed for validity and gaps in sequence
sound personnel practices should be followed to obtain
honest, competent personnel
o interviews, background checks, etc.
a file should be kept for each employee and should
include
o copies of relevant PAF's
o the employment contract
o performance appraisals and disciplinary warnings
o personal details including qualifications,
background information.
Pre printed, properly designed (preferably sequenced)
clockcards should be prepared for each employee on
the valid employee list. Blank clockcards should be
subject to strict stationery controls.
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TIMEKEEPING
Functions
x This function is required to keep an accurate and complete record of valid hours worked for which
the company must remunerate employees.
x A system which requires the employee to pass a clockcard through a clocking device to record arrival
and departure times is commonly used in manual systems.
x Daily hours clocked will be calculated and totaled for the period before being sent to payroll
preparation.
Documents
x Clock cards
x Batch control sheet
x Batch register
Risk
x invalid hours recorded by e.g.
x
o clocking a card for a fictitious
employee
o employees clocking for absent fellow
employees
x
o employees clocking in and leaving the
premises
x Hours
on
clockcard
incorrectly
calculated for normal and/or overtime. x
o normal hours countered as overtime
hours (which have a higher rate of pay)
x
Internal Control
entry and exit points to work area to be:
o limited (preferably one)
o protected by a "turnstyle" type mechanism
o supervised during clocking periods
clockcards to be prepared by the personnel
department, strictly in terms of the authorised
employee list, and placed on racks at the entry point
at the end of a wage period, the section administration
clerk should collect all clockcards for the period and:
o agree number of cards to list of employees in the
section
o calculate ordinary time
o calculate overtime
o divide cards into workable batches (e.g. 25)
o complete a batch control sheet by:
ƒ entering batch identification (section and
period) details
ƒ entering control totals, i.e. record count
(number of clockcards ), total hours, normal
and
ƒ overtime
ƒ signing to acknowledge responsibility
o before the batch of clockcards is transferred to
payroll preparation, the section head(s) should
o check calculations
o authorise overtime (the need to work overtime
should be confirmed before it is worked)
o check, and sign the batch control sheet
details of the batch should be entered in a batch
register, and securely transferred to payroll
preparation.
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PAYROLL PREPARATION
Functions
x The role of this function is to calculate gross wages and make deductions from employees which
must be subsequently paid over, to arrive at net wages, and i.e. create a payroll.
x The employee's authorized hours must be multiplied by the employee's authorized normal and
overtime rates. The appropriate deductions e.g. PAYE, must be extracted from authorized, up to
date tables. This is all recorded on the payroll, which is also referred to as the wages journal.
Documents
x Clock cards
x Deduction tables
x Payroll
x Updated list of employees
x
x
Risk
inclusion of fictitious employees
o use of incorrect or unauthorised pay
Rates, hours or deduction tables.
o Cast and calculation errors.
x
x
x
x
Internal Control
on receipt of the batch of wage cards from
timekeeping (the section administration clerk), the
wage clerk should check details of batches received,
e.g. number of batches, number of cards, and sign the
register to acknowledge receipt of the batches
the wage clerk should prepare:
o the payroll
o a coinage schedule
o a reconciliation of the difference between the prior
periods wages and the current periods wages for
the number of employees and amounts for net
wages and deductions e.g. if the number of
employees for period 1 was 250 and for period 2 it
was 275, the wage clerk must reconcile the
difference of 25. The difference could be 4
dismissals and 29 appointments giving a net
change of 25 employees. Obviously there should
be authorised payroll amendment forms to
support the dismissals and appointments.
o a record of control totals including normal hours
and overtime hours per section
a supervisor or second wage clerk should:
o verify hours and rates used in compiling the payroll
against the clockcards and the employee list
o verify deductions against the relevant tables
o verify amendments to the payroll against the PAFs
and vice versa
o reperform calculations and the wage reconciliation
o sign the payroll
the head of payroll preparation should carefully review
and sign the payroll and period to period reconciliation,
e.g. he may verify a sample of amendments to the
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x
authorised PAFs and vice versa
the cheque for wages should be presented with the
payroll and period to period reconciliation, to two
cheque signatories who should:
o review the payroll for unusual items, e.g. large
amounts, excessive overtime
o inspect for the presence of control signatures and
o sign the payroll and reconciliation.
PAYMENT PREPARATION AND PAYOUT
Functions
x The purpose of this function is to prepare paypackets containing cash and details of how cash is
made up. The paypackets are then distributed at the respective sections (paypoints) to employees.
Unclaimed wages must also be recorded. Wages must also be recorded.
Documents
x Payroll
x Payslips
x Paypackets
x Unclaimed wages register
x
x
Risk
errors or theft of cash during:
o drawing of cash,
o making up of paypackets, and
o at the payout.
misappropriation of unclaimed wages.
x
x
x
x
x
x
x
Internal Control
wage packets should be made up by two wage
department members (physical security over all
aspects of cash handling should be extremely tight)
on delivery of the payroll and paypackets to a section;
the section head should:
o agree the number of paypackets to the payroll
o agree control totals e.g. number of cards, total
hours, on the payroll to the batch register and
o sign the payroll to acknowledge receipt
the paypackets and payroll should be locked away until
payout
the wage payout should be conducted by at least two
employees, e.g. an independent paymaster and the
section foreman, both to be present at all times
employees should:
o present identification e.g. official staff card, prior
to receiving their paypackets
o acknowledge receipt of their wage packet by
signing the payroll
o count their cash and immediately report any
discrepancies to the paymaster. These should be
recorded on the payroll
in principle, employees should not be allowed to
accept a paypacket on behalf of another employee
at the conclusion of the payout, the paymaster and
foreman who have conducted the payout, should:
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agree all unclaimed paypackets to the payroll
(employees who have not signed)
o identify clearly on the payroll, all employees for
whom there is an unclaimed packet
o enter the details of unclaimed wages in an
unclaimed wage register
o sign the payroll to acknowledge this control
procedure
the unclaimed paypackets and payroll should be
retained by the paymaster who should lock them away
when employees wish to collect their unclaimed
wages, they must identify themselves to the paymaster
and acknowledge receipt of their paypackets by signing
the unclaimed wage register
regular independent reconciliations of unclaimed
paypackets on hand and the unclaimed wage register
should be performed and the unclaimed wage register
reviewed for unusual occurrences, e.g. trend of more
unclaimed wages in a section, same employee name
appearing frequently
any wages remaining unclaimed after two weeks,
should be banked and a copy of the deposit slip
attached to the unclaimed wage register and cross
referenced to the relevant entries.
o
x
x
x
x
DEDUCTIONS: PAYMENT AND RECORDING
Functions
x The purpose of this function is to record liabilities in respect of deductions from employee
remuneration and to pay these over to the relevant authorities timeously.
x Deductions are made from employees wages on behalf of outside bodies e.g. PAYE is deducted on
behalf of the South African Revenue Services and therefore as the deduction is made the liability
should be raised and then settled within the stipulated period. Companies will be required to
complete a return to accompany the payment.
Documents
x General ledger
x Payroll (wage journal)
x Cash payment journal
x Return form
x
x
x
x
Risk
penalties due to non payment, late x
payment or underpayment.
criminal/civil
charges
due
to x
nonpayment (this is theft)
incomplete, inaccurate amounts paid
over and/or
return forms incorrectly completed.
Internal Control
isolation of responsibility to one employee for raising
and paying over deductions.
a strict monthly schedule for:
o posting the entries to raise the liabilities for the
deductions
o making the necessary payments on a timeous
basis, and conducting
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supervisory checks on the above activities should
be prepared.
the payroll and return forms should be presented to
signatories for their scrutiny before the deduction
cheques are signed. They should check the return
carefully to see that it has been accurately and
properly filled in (payments to SARS can be made on
their e filing system).
Independent timeous scrutiny of the general ledger
accounts for deductions to confirm that tbey are being
promptly cl eared, should be carried out by the
financial accountant.
o
x
x
Computerised Controls in the payroll and personnel cycle
Controls which should be carried out when new employees are added to the employees’
masterfile.
x Record all masterfile amendments on a source document
o The details of each employee to be added to the employee masterfile, should be recorded
on a hardcopy masterfile amendment form (MAF).
o The MAF should be preprinted, sequenced and properly designed.
x
Authorise the MAF
o The MAF should be signed by two senior employees (for example the human resource
manager and factory manager) after having agreed the details to the supporting
documentation which should include a letter of appointment and engagement contract.
x
Enter only authorised MAFs onto the system, accurately and completely
o Write access to the employee masterfile should be restricted to a specific member of the
human resource section by the use of user IDs and passwords.
o All masterfile amendments should be automatically logged by the system on sequenced
logs, and there should be no write access to the logs.
o To enhance the accuracy and completeness of the keying in of the masterfile amendments
and to detect invalid conditions, screen aids and programme (automated) checks will be
implemented, for example screen formatting …
ƒ on accessing the masterfile amendment module, the screen will come up formatted as
the masterfile amendment form, or as an employment record. The fields to be
completed should be clearly identified, for example the employee name, taxation
number.
ƒ the employee number should be generated by the system.
ƒ where possible, “drop down” lists should be in use, for example the employee grade and
cost centre.
ƒ programme (automated) checks.
ƒ mandatory fields on employee identity number and income tax number as well as full
banking details.
ƒ alphanumeric checks and field size checks on, for example, identity number field and tax
reference field.
ƒ range check, limit check and dependency check on wage rate field (programme controls
which make use of the relationship between grade of employee and the wage rate).
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o
x
On screen checking/approval of the MAF could be carried out by a second employee in the
human resource department (no write access).
Review masterfile amendments to ensure that they occurred, were authorised and were
accurately and completely processed
o The logs of masterfile amendments should be reviewed by someone independent of the
employees who authorised the amendment, for example the financial accountant.
o The sequence of logs themselves should be checked and any missing logs should be followed
up.
o Each additional employee amendment on the log should be checked to confirm that it is
supported by a properly authorised MAF and that the details entered, are correct.
o The MAFs themselves should be checked against the log to confirm that all MAFs were
entered.
Programme controls which should be carried out to ensure that hours are only entered by the
wage clerk for valid employees, and that hours entered are accurate and complete.
x Screen formatting: The screen is designed to facilitate accurate and complete entry.
x Minimum entry: The wage clerk is only required to enter the employee number to bring up the
other details of the employee.
x Validation clerk: The system will compare the employee number entered to the employee
masterfile. If there is no match, the wage clerk cannot continue.
x Alphanumeric check: For example, the entry of an alphanumeric character in the hours worked
field (a numeric field) will be rejected.
x Limit check: For example, normal hours entered in excess of the accepted 40 hours norm, will be
rejected.
x Mandatory field: The process will not continue if the mandatory normal hours field is not
entered.
x Batch control totals: The entry of batch control totals prior to keying in, and the comparison by
the system of these control totals after keying in, will identify inaccurate or incomplete entry.
x Access control: Restricting access to the “enter hours module” to the wage clerk will contribute
in a general sense to control in this function.
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