Internal Control and Accounting Project (1)

Chic Paint Limited (CPL)

Internal Control and accounting systems

This Report is submitted for

assessment of the AAT unit “internal

Control and accounting systems”

5000 AAT: 20061394

Page 1

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List of Contents

Page

CHAPTER ONE

Terms of reference 4

CHAPTER TWO

Executive summary 5

CHAPTER THREE

Introduction to Chic Paints LTD 6

CHAPTER FOUR

Review of Accounting System 8

CHAPTER FIVE

Accounting system Weaknesses 11

CHAPTER SIX

Recommendations 15

CHAPTER SEVEN

Cost of Analysis 19

Ethical

evaluation 8

Sustainability evaluation 9

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Improvement recommendations 10

Appendix

Page

1. Organisation Chart 1

2. Purpose of financial information 2

3. Types /methods of fraud 5

4. Ethical Evaluation 10

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1 Terms of reference

This report has been prepared to cover the assessment requirements of AAT Level 4 Unit

“Internal control and accounting systems”

The objectives of this Report are to:

Analyse the manual accounting system of Chic Paint LTD in order to find areas of

weaknesses

Make recommendations for improving the accounting system through the

introduction of a computer system.

Give an overview of the organisation’s business and its critical external relationships

with stakeholders.

Give an outcome of how the accounting systems are affected by the organisation

structure, systems, procedures and business transactions.

Find solutions to prevent fraud by identifying the external regulations that affect

accounting practices, causes of fraud/weaknesses and the impact of this on the

organisations.

The report also analyses the recommendations made in term of their costs and profits, and

analyses the potential for fraud as a risk to the organisation.

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2 Executive Summary

2.1 This report analyses the internal control within the accounting system of Chic Paints

LTD and give some sort of solutions wherever needed. Internal control can support the

accounting system by implementing some changes appropriately. This will then make

the organisation in progress to improve significantly in regards to credit control function,

relations and payments to suppliers, staff development and specially reducing the risk of

fraud.

2.2 The report instructs on how to conduct an ethical evaluation of the accounting

system into the organisation. Such as Integrity, Objectivity, confidentially and

professional behaviour.

2.3 I will also include the accounts department weaknesses as well as the whole

organisation, and then analyse the outcome solutions to prevent any kind of threats

which can lead the organisation into a loss. To prevent any kind of issues and fraud into

the business I have further made recommendations on each weakness mentioned.

2.4 In the report you will also come across with potential fraud issues such as robbery,

theft threats, stock, credit control etc...

2.5 Furthermore, I have mentioned the cost and benefit of introducing the new up-to

date recommended system in figures for the benefit of the organisation.

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3 Introduction to Chic Paint LTD

3.1 Chic Paint is a large limited private sector Company, dealing with PAINTS. This

company was established many years ago in United Kingdom recognised as Ashtead Plc,

but was six years ago subject of a management buyout (MBO) by five of its directors

(Greg, Dave, Ruth, Ahmed and Susan) after some period Ruth and Ahmed have been

replaced with Collin and Zhang.

3.2 CPL was previously a manufacturer of everything and the managers decided to

change its business model into a special niche product Paints. Now its main business is

to work with special companies involved in the manufacture or repairers such as boats,

cars and industrial machinery. Therefore, the company has no significant competitors

such as in general paint products and the gross profit margin is a lot higher up to 30%.

3.3 The objective aim of CPL is to establish themselves as one of the most expertly

formulated, manufacturer of paints and allied products. Their aim is to sell their

products on an international level to only big companies and not to the general public.

3.4 CPL has a flat structure, where operating divisions are relatively independent; having

their own stand-alone accounting system. A full picture of the structure can be obtained

in Appendix 1 to this report.

3.5 CPL has made profoundly changes since becoming a niche service provider during

the past six years, it complies with different figures in different areas such as follow;

Turnover: have been reduced with a significant amount from £200 to £120

million making quite a big loss over here.

Net Asset: have been increased since the last few years from £20 to £25

million.

Workforce: employees have gone down from 500 to 350. This means 150

fewer employees are working under CPL directors.

3.6 External legislations that can affect CPL if they are not fulfilled:

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3.6.1 The Companies Act 2006 – this legislation sets out the format in which CPL financial

statements should be made.

3.6.2 Data Protection Act 1998 – This policy regulates how CPL process and keep all the

information of customers, suppliers and employees securely. CPL needs to ensure its

accounting system are fulfilling the Act and if not the company can be in risk of

having to pay a penalty.

3.6.3 Employment Rights Act 1996 –This regulation states that the CPL should comply in

regards to employee’s rights such as working time regulation, dismissal/unfair

notice, redundancy payment, employer insolvency, etc...

3.6.4 Environmental Care – CPL should try not to affect the environment to a maximum

level wherever possible.

3.6.5 Health and Safety – CPL will need to comply with various health and safety

principles, and to train the staff with some first aiders and safe working place for

staff.

3.6.6 Late payment Law Act 1998 – CPL will need to ensure that it does not delay

payments to its creditors beyond the time agreed.

3.7 CPL’s potential external stakeholders;

3.7.1 Customers: the customers of CPL are big companies who are trying to purchase the

service to paint their equipment. The primary concern they’ll have is whether they

will get a good service, quality and quantity at the lowest price possible.

Furthermore, they will be looking at credit terms. Financial information will provide

them with the sales price list as well as credit terms prolongation.

3.7.2 Suppliers: the main suppliers of CPL are merchandise manufacturers or importers.

These goods will be pints’ pots. The only things suppliers will be concerned about are

the payment for the goods exported. CPL Financial information will help them to

decide whether to continue supplying the goods. CPL will need to pay the invoices on

time if the discount is required.

3.7.3 Banks: Bank is the most important stakeholder for the organisation. CPL will require

them the most as it uses the over-draft and loan facility which needs to be paid on

monthly basis with additional agreed % interest.

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4 Review of accounting system

4.1 CPL accounting information system is a method of collecting, storing and processing

financial and accounting data that is used by decision makers.

4.2 CPL accounts department’s main aim is to complete all activities relating to the

production of the accounts including customer receipts, supplier’s payments, banking

and payroll procedures.

4.3 Under accounting department of CPL there are eight employees working. Full

structure image of the team can be found on appendix 1.

4.3.1 Finance Director recently appointed director is responsible for planning and

managing the financial strategy of the Business such as Taxation etc... In addition, his

role is to produce annual company report, including statutory accounts and finance

issues.

4.3.2 Chief Accountant is the line manager his responsibility is to supervise the

accounts work transaction that other clerks do such as in payables, receivable,

payroll and personnel. In addition, the clerk produces the annual budget and co-

ordinate the process, manage the company’s cash flow on the daily basis and

approve the payments to suppliers.

4.3.3 Payable Clerk is responsible of account payable ledger for entering invoice data,

credit notes and to control credit payment.

4.3.4 Receivable Clerk is responsible in operating receivable ledger accounts as well as

credit control by setting up a credit limit. Furthermore, runs all trade credit accounts

of the organisation reconciling debtors’ payments.

4.3.5 General Ledger Clerk is responsible to input all general ledger data, recommends

monthly provisions figures for prepayments, accruals and inventory. He also handles

the company’s cash book and petty cash.

4.3.6 Costing Technician previously trained to this role by different company is now

responsible to find out the costs of the paint range as well as costing the product

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range; he also let the sales force know the minimum selling price. He is an Economic

degree holder with enthuse to undertake further personal development.

4.3.7 Payroll Clerk is responsible to prepare monthly wages and weekly salaries of staff

as well as issue different forms required by HMRC.

4.4 Review of CPL’s IT system

4.4.1 The IT system of CPL is using forty-two stand-alone computers. Eight are being used

in accounts department for full time members.

4.4.2 The rest of the computers are shared between part-time members.

4.4.3 Majority of the computers systems use up-to-date Microsoft Office 2013 version

while the other ones to record main financial accounting system and all inventory

and other transactions are using 2010 version.

4.4.4 The payroll procedure is processed on sage 50 payroll systems.

4.5 Review of CPL’s IT policy

4.5.1 All CPL’s computer systems can only be used for business purpose and nothing else.

4.5.2 No member is allowed to enter and use unauthorised devices, such as discs, memory

sticks and hard drive into the systems unless given permission by their line manager.

4.5.3 CPL’s computer system must always remain protected with each individual

password. Line manager of an individual password must also know it.

4.5.4 Each employee using the computer must ensure that he comply with current

legislation.

4.5.5 All the IT systems data are to be backed up twice a day.

4.6 Review of CPL’s working practices

4.6.1 CPL’s purchase ledger managers are now dealing with 30 suppliers to understand

them into more detail.

4.6.2 CPL’s aim is to use the best available technology for end user customers.

4.6.3 Employ a team of highly experienced, dedicated and customer-oriented employees

to ensure process and product excellence.

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4.6.4 Its mission statement is to operate to the highest standards of business ethics in

dealing with customers, suppliers, employees and the wider community.

4.6.5 CPL is committed to operate their business in a sustainable manner; reducing

environmental impact wherever possible.

4.7 Review of CPL’s principles of credit control.

4.7.1 Credit of up to £25,000 have been issued to customer in a month without

considering and looking any kind of information.

4.7.2 Credit control is not limited for customers, there have been cases when the credit

limit was extended (even after been advised) without looking any prior record of the

customer.

4.7.3 Extra inventory is being ordered by the department manager for his personal use.

4.7.4 Wages are being paid to a different clerk instead of the one deserved.

4.8 There are various sustainability issues that CPL is not fulfilling;

4.8.1 Employees Lack of control over power usage, there isn’t any instruction notice for

staffs to turn off the computers and lights at the end of the day.

4.8.2 Unnecessary printing out and reading of financial reports which could be distributed

electronically and viewed onscreen.

4.8.3 CPL’s purchasing managers rejected to buy the new environmental friendly “ultra-

green” biodegradable paint pots. Going against their own mission statement

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5 Accounting System Weaknesses

5.1 There are many weaknesses in CPL’s accounting system.

5.2 CPL is in many cases going against ethical evaluation laws like as follow;

5.2.1 CPL directors are purposely delaying payments to the creditors to misuse the figures

to impress the bank for company’s overdraft purpose. This is to be recognised as an

unethical and fraudulent action.

5.2.2 CPL accounts department is using 40 Microsoft Office legal computers with an

appropriate license however there are two been running without the actual license.

5.2.3 Personal individual salary package of staff has been given to a different clerk without

his actual permission. This can be recorded as going against the confidentiality

ethical law of others.

5.2.4 The organisation is breaking the law of integrity against their suppliers by making

excuses to them when payment is due.

5.2.5 CPL were agreed to sponsor the local “Ashton Wanderers” football club and pay for a

full time kit. And finally when payment was due decided not to support the team for

their bad performance. This is going totally against the social equality.

5.2.6 Store manager can inform the company personal data to a third party by saving all

the data into his personal memory card.

5.3 Very few controls have been set up in regards to the cash been used in the

organisation, therefore CPL’s record keeping system for cash handling and payments is

almost non-existent.

5.3.1 Cash is passed from the tills to the safe payroll assistant with no transaction record

of any kind being made.

5.3.2 There isn’t any control in place to manage petty cash system.

5.3.3 There appears to be no checking system for cash counting and no accounting entries

appear to reflect the movements in cash.

5.3.4 Invoicing is carried out on World pro-format rather than a more sophisticated

computer accounting program.

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5.3.5 Cheque controls are inadequate and ineffective. Most of the ongoing working

methods are manual, which may lead other staff members making errors.

5.3.6 Sage 50 is not integrated within the accounting system, which makes a clerk to put

the information manually into the system; this could lead to wrong information

provided and is also very time-consuming operation.

5.3.7 Untrained staffs for Excel and other software’s are most likely to make errors when

using them and can get unnoticed, this can lead to inefficacies.

5.3.8 There only one employee who knows to use Sage payroll which leads to some very

unconventional accounting practices.

5.3.9 Gross pay is calculated manually, which increases the risk of errors.

5.4 The IT policy and password system is another very lax part at CPL:

5.4.1 CPL line manager can access to the any computer of the organisation in the face of

others as he is aware of all the passwords.

5.4.2 The same password is used for a variety of different purposes.

5.4.3 There is no sign that the password is ever changed.

5.4.4 There is open opportunity for fraud: Human resources have authorisation to access

Sage 50 payroll system; they can easily misuse this accessibility, and theft of cash is

easily possible.

5.4.5 All computer systems are stand-alone and not linked to each other for data

interchange.

5.4.6 Every employee should get permission from his line manager to load any software

into the computer instead of the IT manager.

5.4.7 The IT system must be backed up twice a day however not any individual is pointed

out to do so. This can put the organisation at risk of losing important data.

5.5 CPL’s internal control is very unceremonious; almost everything is based on trust.

The most important CPL’s internal control weaknesses are:

5.5.1 Cheques received by post can be stolen or missed, they are also not recorded on the

system, and therefore this could lead into incomplete records.

5.5.2 Wages have been collected by unauthorised employees on behalf of their

colleagues, for example, when Onslow Brown had collected Stan’s wage packet to

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recover his landed money while he was sick, which is clearly a violation of internal

control.

5.5.3 Working out wages by guesswork without using timesheets is unacceptable practice.

5.5.4 Many staff members are not fully trained which makes the organisation more

unable. Although Microsoft Excel gives suppleness it raises the possibility to make

errors due to the lack of control in the software application.

5.5.5 No extra staffs are available to cover and computerise an urgent work for the ones

who are absent.

5.5.6 A flat structure of the organisation may lead to lack of co-ordination between

different functions.

5.5.7 There could be a lack of communication between the part and full time employees.

This can therefore lead the organisation into inefficiency if the work is shared.

5.5.8 When inventory is delivered from suppliers the quantity of goods is not physically

checked by the store manager before making the record into the system. Instead

they are sometimes checked before they are dispatched.

5.6 CPL’s payrolls system has a significant number of weaknesses and this could easily

lead into a fraud action:

5.6.1 Cash wages are not double checked and countersigned to prevent errors/fraud.

5.6.2 No records have been made into patty cash while withdrawing cash from the bank

for hourly-paid employees.

5.6.3 When the cash is kept in the accounts office overnight there is no recording of cash

balances and cheques.

5.6.4 Payroll procedure, where employees are being paid on a cash basis with a threat of

getting nicked.

5.6.5 Wages been paid in cash can also result of paying more than the clerk deserves,

owns or shows on the wage slip unlike those who are receiving the wage trough

BACS.

5.6.6 When processing wages they are not required to be authorised by the senior

manager.

5.6.7 Cheques are not kept in safe place and this can result of losing them.

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5.6.8 There is no control to re-new the supplier contract this can therefore lead staff to

defraud the company by setting up a fake seller and making payments to it.

5.6.9 There is no control to re-new the customer contract this can therefore lead staff to

defraud the company by setting up a fake buyer and sending stock to them cheaper

or even free.

5.6.10 There is an open invitation to theft of inventory.

5.6.11 There is also not any control to set up a new-employee this can also let the staff give

a chance to misuse and set up a non-existing employee for his personal benefit.

5.7 The current organisation potential level of risk improvements recommendation can

be found on next Recommendations chapter five.

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6 Recommendations

6.1 The report analyses and reviews the accounting system in accordance within Chic

Paints Limited and give recommendations to enhance the system.

6.2 It is very important that the directors of CPL improve its system by following the

recommendations that I will discuss below. There many recommendations that can be

given to better manage the accounting system of the business and prevent fraud where

possible.

6.3 All new updates will significantly affect the staff; they will feel more challenged and

threatened to commit any kind of fraud.

6.3.1 To begin with, CPL Company is a large company the directors should introduce

Hierarchical Structure this will help to control employees of different level in all

aspects. However, there may be a poor communication in between all of the

employees after the structure is placed.

6.3.2 Directors should consider to buy a more sophisticated accounts package to better

and easily manage the records using the least possible time possible. Moreover, local

area networking will require staff to obtain appropriate training and know how to

run and maintain the networking.

6.3.3 The current stand-alone computer then would need to be networked so every

employee can use the most of the new software program by accessing the same

files. This will then allow the organisation to have central integrated accounting

records. Central networking will also allow CPL to print less and save resources,

which will make Cpl practices more sustainable.

6.3.4 Staff morale and motivation should always steadily be ready to learn new skills as

they will be using an effective system with some structure information. The new

system will therefore reduce the manual labour and this will lead making fewer

errors, benefitting the organisation and the staff.

6.4 Staff will acquire the necessary skills and knowledge so they can use the revise

system effectively.

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6.4.1 All CPL’s staff should be fully trained and ready to face the challenging use of the

system to operate it effectively and efficiently. This will improve their personal skills

and motivate them more for work than just typing the same thing over and over.

This will also save time of the staff; they can therefore use that time in work more

important.

6.4.2 Internal training courses and external training courses

6.4.3 “Teach yourself” facilities such as manual, DVDs, online tutorials and the “help”

menus provided with the computer software.

6.4.4 Telephone support lines made available by the software provide.

6.5 Internal accounting system improvement recommendations;

It is mentioned in the report that the system will backed-up twice a day however

there is no back-up procedures detailing who is responsible to complete this work at

the end of each working day. This will prevent the organisation lose important key

data in cases when the systems fail.

6.5.1 Computer systems should use similar or identical computers, all with the same

operating system. Using the same loaded software version for processing text,

spreadsheets and database records.

6.5.2 There should be definitely some arrangements of formal accounting training for all

the employees in the company. This will resemble them with more effectiveness,

motivation and effectiveness of a much better understanding of the control. This will

in return benefit CPL.

6.5.3 It is very important to review the staff timing, for example; how many hours they

should work, at what time they should arrive at their office, lunch time etc...

6.5.4 A formal training procedure for staff to cover for each other absence. This will

improve the ability to wide extend the variety in their work as staff will be more

trained and would be appropriate to cover other role places.

6.5.5 Office including all department doors must always remain closed and an effective

card code open access be used when required. After the access code is required

inform all staff of the need to control for security reasons. This will prevent

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unauthorised member to enter into the building and will also reduce the risk of been

victims of fraud from strangers.

6.5.6 Password required when using CPLs computers must follow this steps;

Not contain a name of any member working in to the organisation.

Always use a capital latter on your first word of your password.

Be at least six to ten characters long.

Contain at least one number and one special character.

Change the password every twelve months.

Not writing the password at any visible place.

Control should prevent the re-use of any password that has been

used within the last year.

This will surely reduce chances for unauthorised members to enter into the system.

6.5.7 Payments made through BACS should be expanded, every single payment made

from the company to the suppliers, HMRC or employees will be recorded

automatically this will make directors easy to review the records when needed. This

will also reduce the risk of fraud together with the risk of theft of cash and errors in

calculations when paying cash wages through the bank.

6.5.8 It is also recommended to senior accounts clerk to be responsible for management

of control system implemented in the organisation.

6.5.9 Regular payments should be checked on a regular basis to find out that nothing is

missing and everything is according to what it should be.

6.5.10 To set up a new employee into a payroll system senior accounts should firstly collect

his specific documentary evidence and must not obey this regulation. Furthermore, if

the existing employee wish to change his details there must an authorisation of the

senior manager before it is done.

6.5.11 A reasonable petty cash should be implemented and recorded accordingly. This will

reduce the risk of theft and fraud occurred through petty cash because of

inadequate record kept.

6.5.12 There should be a control in the organisation for an additional new employee,

supplier and sellers to the accounting system with a proper authorisation only from a

Director or senior managers.

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6.5.13 Bad debts should be kept to the lowest possible; the organisation should then check

more on customers before allowing a credit limit of such a large amount of £25,000.

This will reduce the risk of not getting the money back from customer who can’t pay

and granting to only those who are likely to be able to pay their debts.

6.5.14 Obtain at least three quotes from a new none approved supplier. The company that

provides the cheapest and quality inventory should be selected.

6.6 CPL should also not let down its local football team by not supporting them this is

also going against their own made mission statement.

6.7 CPL director should also consider their organisation mission statement by taking care

of the environment in buying a well-established ultra-green biodegradable paint pots

which are beneficial to the environment.

6.8 Staff training workshops are essential to help employees working on an accounting

system to understand policies and procedures of CPL and how to comply with these

procedures. CPL must ensure that staff handouts manuals and all necessary written

information have been produced and circulated to all staff members.

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7 Cost of Analysis

7.1 A cost involved to implement all the recommendation made above, might be a bit

too high however implementing centralised accounting system will benefit CPL by

making every work a lot easier.

7.2 Training of the staff is also another main point that will consume a lot of cost. I will

below discuss all the outcomes of both Costs and Benefits into more detail.

7.3 Costs

7.3.1 There various different and similar software packages released on the market, the

one I would recommend to buy is sage accounts professional, this would suit the

most as this is specifically made for large and medium size organisation like CPL. The

cost involved to buy this reputable, proven package with multiple user licenses

would be around £3,500 including all manual instructions of how to use it.

7.3.2 Old computers will need to be changed if fast service is required with an ultimate

best hardware available in the market with an approximate cost of £5,000.

7.3.3 CPL would also need to purchase a support package to make the most use of the

software purchased. This will cost an additional £800 annually if the software is

upgraded every year.

7.3.4 Staff training is also very important to use the new software therefore an

appropriate training is required. CPL will need to make sure which place is more

suitable for training, it could be outside the company building for example rent a

class room from a college which would approximately cost £400 - £600 per staff

member, or internally in the boardroom re-arranging extra time for all the clerks at

once, this would approximately cost £3,000.

7.3.5 CPL will need to decide whether staff will be trained under the working hours or out

of them. If it is done under working hours this will cost the time taken for employ to

learn on wage salary and will also miss to complete the work given.

7.3.6 Extra computer networked equipment is also required for computers to be linked to

each other. This can be decided whether to use cables or be networked and

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therefore prices can vary from £600 - £1700. This will also avoid more wastage of

paper and printer being used.

7.3.7 If cables are preferred, then this can cause some disruption in the office while being

installed however they will be more accurate after being installed. But until the work

is not finished this disruption will incur some additional cost like for example; staff

time taken to enter customers, suppliers and employee’s data to the system to make

it fully functional and up to date. Anticipating that the work will last one week this

will require an extra fifty paid hours costing approximately £800. If networked is

being chosen, then it will save time and some additional costs for extra hours

however this can afterwards make some delays on the system as it is not as reliable

as cables.

7.3.8 Average image of estimated cost analysis is as below;

Installation of a new computer system in the accounts department

- Hardware cost £5,000- Software cost £3.500- Installation cost £1,500- Cost of training £3,000- Annual maintenance £800- Insurance for hardware and loss of data £1,250

Total Cost £15,050

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7.4 Benefits

7.4.1 The most and first benefit that CPL will receive by implementing all this features

would be the ability to produce reports with a complete financial information

performance of the organisation. This will allow the director and senior managers to

review on a daily, weekly, monthly and annually basis, basically whenever they fell

like it.

7.4.2 The second most important benefit is relating to cash flow. This will help to manage

the cash more effectively and will also reduce the chance of losing including reducing

overdraft fees.

7.4.3 CPL will appear to be more professional and better service provider, as there will

better communication links between staff.

7.4.4 An improvement in the quality of a service provided to clients/customers including

internal and external stakeholders.

7.4.5 A more effective preparation of reporting system such as;

Balance sheet

Income statement

Cash flow statement

Payroll reports

Petty cash expenditure

7.4.6 The current bad debts procedure would be improved; it means that the system will

ensure that extra credits have been stopped once realising that the current overdue

debts customers are not paying previous debts. This will stop faulty buyers from

taking extra advantage of the current floppy control system. It is measured that this

would approximately save £5,000 a year.

7.4.7 The system will produce payroll more accurately and more up to date data rules and

regulations. This will also increase competency timing of the staff. It is made sure

that the new system will do the payroll job more quickly and correctly, this will

therefore speed up the system which will save time and reduce the wages bill by up

to £8,000.

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7.4.8 Another benefit is that there will be fewer dangers for a system to break-down with

more suitable backup system. This means that even the computers fails the

organisation will be out of risk of losing an important data.

7.4.9 Electronic payments to suppliers will have fewer errors which will save time and

money up to £2,000.

7.4.10 Further benefit would be the improvement of preventing fraud in the accounting

system of the organisation as well as improving cost control. Reports will allow the

director and senior manager to review where the business has paid more than

expected and be able to clearly see whether any figure is missing. As far as the

current system in concerned it is almost impossible to find whether CPL has suffered

from any fraudulent activities. This improvement could save CPL a fortune of

£20,000.

7.4.11 The last benefit that CPL will be able to do is to comply with some of the ethical

regulations with more secure storage.

7.4.12 Average image of estimated benefit analysis is as below;

- Prevention of bad debts £5,000- Time Waste £8,000- Electronic Payments £2,000- Fraud £20,000

Total Benefit £35,000

Documents

Internal Control and Accounting Project (1)