Internal Control and Accounting Systems - Example

Student’s Name Professor’s Name Course Date A to Z Vehicle Hire accounting system review 1. Terms of Reference 1.1 The major aim of this report is to review the current accounting system in A to Z vehicle hire attached, focusing on record keeping systems, principles of internal controls, methods of fraud prevention, and issues relating to professional ethics and sustainability. The report will also look into methods through which the whole system can be improved in ensuring that cases of fraud within the organization is reduced. 1.2 As part of the review, the report will consider all the systems that are used in the daily running of the organization. This will look at the weaknesses and strengths. Recommendations will be made into how the improvement of the system will be achieved in ensuring that the systems are efficient and able to stop frauds within the organization. 1.3 After the recommendations, analysis into how the costs and benefits that will be got out of the recommendation. It will consider whether they are viable for the organization to undertake those activities. 1.4 The preparation of the report has been undertaken in ensuring that the internal and external controls are undertaken in the right manner. The accounting system will be looked into to ensure that all factors are considered in the whole review. 2. Methodology To ensure that the correct review and analysis of the accounting systems was undertaken then the following will be undertaken; 2.1 Different sources with expansive details about accounting system were looked into. This include textbooks, professional reviews, and other online sources. 2.2 The whole accounting system about A to Z was reviewed with the strengths, weaknesses, opportunities and threats being taken into consideration to ensure that everything was brought on board. 2.3 Various fraud possibilities were undertaken into consideration with the possible correction measures being put in place so as to ensure that everything was on the right track. The risks were being evaluated and control measures being undertaken. 2.4 The review was undertaken with the ethical measures being in mind. The control measures were such that the AAT code of ethics and conduct were observed fully. 2.5 Issues that are related with environmental and social principles were being looked into to ensure that the accounting system under review was sustainable. 2.6 Agreements were reached on how to ensure that the accounting system within the organization was on the right track in ensuring that they attain the necessary expectations within the organization. 3. Executive summary 3.1 The report is about the review of A to Z internal accounting system and the recommendation on how improvement of the whole system will be undertaken. Measures that could ensure reduction of the fraud and cost within the institution. 3.2 The key finding are that if the internal accounting systems are well established and loopholes that lead to leakage of information within an organization, it will lead to complete stoppage of frauds and reduced risks towards having errors within the organization. 3.3 Implementation of the system should be undertaken in a way that all staff functions should be undertaken via this central accounting system. The system should have a backup of manual system that can be used in auditing the accounting system at large. 3.4 Additional software should be brought on board to ensure that all revenue generating activities within the organization are well accounted for. Integration of these new systems with other accounting system will ensure that all transactions are well controlled something that will ensure that no fraudulent activities will be undertaken. 4. Introduction 4.1 A to Z Vehicle Hire is a regional firm that is small dealing with van and car. There are a range of services that are being offered by the company ranging from, vehicles meant for family hire, and other options that have the personal drivers meant to be hired in the long run. Alan Milnes is one of the silent partners since the company was assembled when he had entered retirement. They formed partnership with Peter Stoker and Mo Khan who have remained active partners hence running most of the company activities. 4.2 In the region, the company has established three branches with a total number of twenty employed drivers, one cleaner, and nine mechanics. There is a small team of accounts in the head office which contain four members of staff and also there is one additional staff member at each of the two braches who oversees what the accounting activities at these offices. Though it was set up recently (February 2013), the company has expanded its activities which has made to have plans of opening up another branch which will be the fourth. The expansion has also forced it to have another additional staff member at the head office and an additional accounts technician to come in to help the others. 4.3 The partnership has been structured in a way that the two active partners have their branches with accounting technicians who report to the accounts manager who is located at the head office. This is undertaken to ensure that all activities undertaken will be well accounted. However, with the current structure it is easy for fraudulent activities to take place. 4.4 The company has five computers that are used by the accounts department. The system is decentralized to the respective users. The computers have been divided such that three are based at the head office, and the others have been allocated to the two branches respectively. The computers have not been provided with a security password. The accounting software used is Sage and is only loaded at head office. The system used in carrying out payroll activities is that one of cheque or cash. There are effects on the accounting systems due to organization’s structure since it would be used in dealing with issues such money reception and issues of money from the organization. Also, on top of that, invoicing is another issue that should be carried out in a timely manner. Usage of information within different departments should be free hence no restrictions that should occur in the flow of this information to ensure frequent update of records. 5. External regulations affecting the organization: In running any business, there are several important laws that should be adhered to ensure smooth running of its activities. Therefor A to Z Vehicle Hire must observe this regulations. The accounting department should ensure that in dispensing its duties it should keep its responsibilities according to these laws and ensuring that they are up to date. Changes within the laws should be communicated to the concerned department for implementation and adjustments where necessary. Undertaking this is an assurance that the organization does not face legal challenges in its operations. Some of the regulations and responsibilities that should be observed are as follows; 5.1 The Data Protection Act 1998 The act spells out on how organizations should maintain data that is related to customer information and the employee’s information. This is to ensure that personal information that is sensitive in nature is not leaked to the public. For the case of A to Z Vehicle Hire, it is important that they maintain the data within its custody save to avoid penalties and fines that are unnecessary. Observing the act is important as it will cause safety of the data hence ensuring that everything within the organization is safe. The act observes that personal details within the organizations should be kept accurate, secure and to the period that the data is necessary. In the organization, most of the data that is kept is that one of employee’s payroll and that of the customers that they serve all through. The customer’s information and that of employees should always be kept confidential and be handle by the appropriate authorized individuals. 5.2 The Companies Act 2006 The company act is a law that spells out the requirements that should be attained for a company to exist legally within a given jurisdiction. One of the requirements of the company act is that at every date, the company’s financial statements should be available both to the public and the required authorities for auditing. Specific rules on the preparation of this documents has been laid down and it is necessary for the organization to observe them. 5.3 Accounting Standards This are standards that have been laid down by various accounting regulatory bodies like the financial reporting council (FRC). They provide the rules that guide those in accounting department to observe when preparing different financial statements and documents. Companies must prepare there documents according to the laid down framework and report them according to UK standards or international financial reporting standard. The framework has specifications on how different events and transactions should be prepared. For the organization’s documents and statements to be accepted, it is necessary that they comply with the said standards. 5.4 Consumer Credit Act 1974 This are a set of laws that stipulate on how the customer and the company should relate. They regulate on the credit card purchase and also they rules in regard to customer protection and also the company upon entering an agreement. This ensures that rules are act regulates credit card purchases and gives the customer and the company protection when they enter into a hire agreement. If A to Z Vehicle Hire is to have privileges of protection by the act, then it is necessary that it complies with the requirements of the act. 5.5 Supply of Goods and Services Act 1982 The sole purpose of this act is to ensure that the organization is able to fulfill its services as required by the laid standards. It ensure that all the necessary essentials are fulfilled in order to ensure proper standard of workmanship. In order to move forward and ensure that customer services provided are valuable it is proper for A to Z Vehicle hire to comply with this act. 5.6 Late Payment Law – Late Payment of Commercial Debts (interest) Act 1998. The act discusses about the how payments terms should be undertaken within the organization. A to Z Vehicle Hire should ensure that they fulfill their payment agreements as stipulated so that they can will have the necessary reputation in carrying out its activities. Failing to honor the agreements is unethical and it will be a weakness towards the organization hence it will harm the reputation of the company and also it may have strict measures against it being given credit terms in the future. 5.7 Health and Safety Legislation This act stipulates on measures that should be undertaken within organizations to ensure employees’ safety. A to Z Vehicle hire will have to comply with the regulations laid down by the act. It should provide first aid equipment’s and also ensuring that the employees are working in a safe working environment. All these undertakings will ensure that their employees are well protected. Not only will compliance to the act cause the organization to avoid unnecessary legal battles, it will also increase the morale of employees to work hard. 5.8 Taxation Law e.g VAT/ INCOME TAX/ NIC (PAYE) / CORPORATION TAX This an act that observes on ways that the organization should follow to ensure they are tax compliance. In any country tax is an important source of revenue and the governments are usually strict in following issues related to tax. For A to Z Vehicle Hire, it is important to observe rules related to different types of tax. For example it should regularly consider the changes that occur in the changes of VAT rates to ensure compliance. If it is for the VAT that is passed to the customers it should be undertaken in such a way that they would understand why a given amount is being added to the normal organization prices for the services. The accounts clerk should be aware of the effects and be able to account for every tax that has been collected. All the tax that are related to the payment of employees should be well calculated and be submitted to the relevant authorities. Also, if changes to the Personal Allowance/Tax Bands the payroll system would have to be updated to ensure that the income tax calculation is correct. Taxes will affect the amount of payment that will be distributed to the different employees hence care should be undertaken. 5.9 Association of Car Rental Industry Systems and Standards (ACRISS) This is an act that seeks to regulate the rental business. ACRISS works to ensure the provision of accurate information when booking car rental through electronic booking systems. A to Z Vehicle and Hire will need to ensure to comply with this in order to progress to booking their rentals through the internet. This will ensure that it has complied with the required regulations to undertake this business. 6. A to Z Vehicle Hire – Key External Stakeholders External stakeholders are those individuals that are associated with the company but do not work directly with the company. However, their presence to some extent affect the decisions that are taken by the organization directly. Some of the external stakeholders in A to Z Vehicle Hire include; 6.1 Communities Each and every organizations operate in a given environment that contain a community. However, the community will always affect its customers. It is always certain that those who are members in which the business is situated will always expect that the business will operate in a manner that is ethical and that is responsible in ensuring that the environment is conducive for all. It is always the expectation of communities to be involved in some of the business operations. Acknowledgement of the community is always something that will affect the business positively. There can be different ways of acknowledgement of the community, however, charitable donations are always the common practiced by many organizations. It is important for A to Z Vehicle Hire to ensure that good relationship is maintained between the local communities and the staff. 6.2 Suppliers Suppliers are important stakeholders of any organization. For A to Z Vehicle Hire the suppliers are important in availing all the parts that are required to undertake repairs and maintenance of the vehicles. Also, to some extent they can supply vehicles that can be used in the business. It is important for the organization to ensure that suppliers are satisfied in all factors so that their business will not disappoint in anyway. They will always be concerned with the period that will be taken to ensure that payments are made on time for the goods and services that they give the organization. Always, they will try to look into financial statements that will enable them determine the credit position of A to Z Vehicle Hire. It is mandatory that this organization should ensure that it has a positive credit history in every undertaking of the organization activities. 6.3 Bank Manager To any institution/business, its bank is a very important stakeholder. It can always provide emergency credit to the institution when need arises. The operations of the business can be stopped if there is no enough capital that is provided by the bank at any particular time. The bank also can provide professional knowledge about the different types of investments that the business will undertake. Therefore, A to Z Vehicle Hire should have a bank that is reliable and ready to assist when need arises. In this case A to Z Vehicle Hire has had a cash flow shortage that has made the customer’s deposits not be returned on time hence affecting the business in a way. Therefore the partners should choose a very efficient bank manager that will oversee different activities of the organization without any failure. The activities of the Bank Manager regarding financial reports include the following: Statement of Profit and Loss – this will enable the bank determine the performance of the business of the organization therefore determine profitability of the organization. Statement of Financial Position – This statement determine the position of the organization financially. It will always show the assets, liabilities and capital with in the company`s financial year. Cash Flow – The statement will always show the amount of cash in and out of the organization. It will determine whether the cash balance within the organization will lead to profit or if the organization is overspending. To the bank manager if the above statements are not accurately kept, then it will be difficult for them to obtain credit from the bank in the future. 7. A to Z Vehicle Hire – Key Internal Stakeholders Internal stakeholders of an organization are those individuals that work directly with the organization. They are the ones that have key interests within the organization. 7.1 The Partners Partners are core owners of A to Z Vehicle Hire. They are the ones that will always determine the success of the organization. In fact they are the ones who determine what actions and decisions that will be undertaken within the organization. It is best that trust and understanding between the partners should be the best. Partners will always be guided by the financial information from the accounts department in taking decisions within the organization to ensure success. 7.2 Employees Employees are very important individuals within the organization. Always the management should ensure that employees are satisfied on their job. When the employees are motivated, then it will be easy for them to work hard towards providing services that are quality. 8. The Accounts Department The accounting department in an organization is key that should be keenly be monitored. It is the department that provides financial information to the stakeholders. It will always provide financial information that is necessary in ensuring critical decisions have been undertaken within the organization. 8.1 Records found within the accounting department of an organization Statement of Cash flows- which show all the cash that get into and out of the organization at any particular time. The statement enables the suppliers to determine the period the organization is likely to take to pay out their debts and other obligations. Statement of Profit and Loss- this statement shows the income, expenses, losses, and profits that the organization that has incurred within a given period. Under this statement, there are legal obligations that are required to be met according to the companies’ act. It is from this statement that we are able to calculate Corporation Tax due to HMRC, and also it is from this statement that external stakeholders are able to determine the performance level of the organization. Statement of Financial Position- it is also a legal obligation according to the company act to produce this statement. The statement show both the total assets and liabilities that the organization has. The stakeholders use this statement to determine the likely returns on their investment. So it provides a pointer to the returns on investment. The above statements will enable the business partners of A to Z Vehicle Hire to make decisions that will run its activities in a cost effective manner. 8.2 Due to the fact there is an accounts department in the head office and having part-time accounts clerk in the branches then it is possible that some fraudulent activities may be undertaken within the organization. Also another weakness is that there are no security codes provided in the computers used by the accounts department. This makes it easy for those with evil minds to commit there fraudulent activities without being recognized and being responsible. 8.3 The major purpose of the accounts department in A to Z Vehicle Hire is to ensure that all activities relating to accounting and other financial activities like accounts receivable, accounts payable, revenue tracking, financial statements and reporting and finally, financial controls. However, there are some of the weaknesses that have been identified in the whole internal accounting control system of A to Z Vehicle Hire and also there is insufficient management activities of the accounting activities and cash flow forecasting there is need of reform and improvement of the whole system. 8.4 The Accounts Department – Key Internal Stakeholders To ensure that procedure and policies that should be obtained within the organization are achieved, it is important that internal stakeholders are involved since they are involved in implementation of the changes. The following are the internal stakeholders and there functions; Accounts Manager- he is the one who is responsible of managing the accounts team. He ensure that all the policies and procedures are followed according to the requirements. In the A to Z Vehicle Hire the accounts manager gained his AAT qualification 10 years ago. Head Accounts Clerk- he is responsible of ensuring that matters that deal with deposits are returned and taken on time without delay. They ensure that all documents related to the customers’ credit accounts are recorded in a proper manner. In A to Z Vehicle Hire the head accounts clerk gained his AAT qualification in Level 2 and Level 3. Wages and Accounts Clerk- he is responsible of ensuring that all issues relating to salaries and wages are the right order and the documentation is done in a proper manner. Also, he may undertake the duties of supporting the accounts manager. At A to Z Vehicle hire the clerk is required to work for five half days per week and he has a wide experience in payroll but has no formal accounts training. Accounts Clerk 1- he is responsible of banking and ensuring that all accounting services are complete and correct and also he supports the head accounts clerk with customer credit accounts. At A to Z Vehicle Hire the clerk is required to work for five half days per week at head office. He completed a computerized accounts course two years ago however he has not put into use. Other important stakeholders include; accounts clerk2, general office assistant, accounting technician, drivers, mechanics, and cleaners. All these play an important role in ensuring that the operations of the organization are moving towards the right direction. 9. SWOT analysis of the Accounting System The report analyses A to Z Vehicle Hire accounting system. It looks into the weaknesses and give recommendations on how improvements will be made. Documentation and recording of various financial activities was considered to indicate both the weaknesses and strengths within the accounting system of A to Z Vehicle Hire. On top of these, stakeholders were investigated as to whether the system serves them according to the required manner and also, meeting the organization needs. Different aspects of the system were considered as follows; 9.1 Working Methods and Practices The system is decentralized to the respective users. The computers have been divided such that three are based at the head office, and the others have been allocated to the two branches respectively. The computers have not been provided with a security password. The accounting software used is Sage and is only loaded at head office. The system used in carrying out payroll activities is that one of cheque or cash. Payment to the suppliers is made through the internet. In addition to these, the computers in the organization have a password that can be accessed by any staff at any time without any restriction. Even the offices have no regulations of who should enter where and at what particular time. Some of the weaknesses in the working conditions are as follows; Most of the staff within the organization are employed in part time basis making it difficult to stand in for the other in case of absence Some workers have not be thoroughly been trained leading to commitment of unnecessary errors. There is no central accounting system for the organization making it difficult when it comes to reconciliation of the accounts Currently, most of the work is completed manually something that makes things to be completed slowly The system in place does not meet all the required functions within the organization as there is manual calculation of the payroll currently Communication within the organization is not complete something leading to inconsistencies and errors 9.2 Record Keeping Systems In the record keeping system there are some of the weaknesses that have been identified. The following are some of the weaknesses; There is no person in charge in cases of absenteeism meaning that most of the work during absent time is incomplete. The payroll is manually prepared something that may lead to errors. Some of the staff are not professionally trained something that may result into errors or omission of some data if not understood. Records of the petty cash are not properly kept or kept in a safe place Some deposits are manually done something that may result to poor records due to poor banking habits Invoices are not properly checked before making payments and they are usually paid out of customers deposits something that may make tracking of payments difficult Manual recording of accounts may lead to commitment of errors that are unnecessary. Cheque books are not properly stores something that may lead to fraudulent transactions being done using them. There is no back up system or worker in case of failure or absenteeism respectively There is a legal requirement that has not been fulfilled by A to Z Vehicle Hire of keeping relevant documentation that will lead to verification of financial transactions for a specified amount of time e.g VAT invoices. This affects the accounting function as they need to ensure that they have policies and procedures in place to do with the retention and disposal of this documentation. This makes a sum of the weakness within this organization. 9.3 Training There are some weaknesses that have been brought out regarding staff training. They are as follows; Some of the staff are not adequately trained on the accounting systems and usage. This makes them to lack in-depth knowledge regarding accounting functions to avoid unnecessary errors Lack of responsibility upon completion of various functions leads to lack of training of the staff Staff has not been taught on how to remain ethically responsible leading to breaking some of the responsibilities Staff has not been made aware of how to practice sustainable practices within the organization 10. Ethical Evaluation of the Accounting System Under this practice, an Ethical Evaluation is produced to analyze against the ethical principles and possible breaches of these principles by A to Z Vehicle Hire. The following are the points noted; Possible preaches of ethical principles was considered Some of the misleading accounts were prepared so as to secure finance for new fleet acquisition something that can be said to be unethical, deceitful, and fraudulent to some extent. They disclosed the plans of other companies something that is unethical in regard to competition There is misuse of the internet on the social media in regard to the company services and customers is not a professional way of carrying out activities. The fact that the company will be having a fourth user on its sage software though it has been licensed for three users. 11. Sustainability Review of the Accounting System Social, economic and environmental sustainability review has been conducted to ensure that decisions taken are those meant to improve economic development, society improvement and protection of the environment. Though A to Z Vehicle Hire has mentioned some environment sustainability measures in its mission, it has not put up policies that will enable its implementation The paper recycle is not an environment sustainability practice rather a cost saving within the business No support is being offered to the local community 12. Internal System of Control Though the internal control measure have been undertaken with A to Z Vehicle Hire, there has not been keen measure undertaken to ensure that the internal control system within the organization is undertaken. Some of the weaknesses seen in the internal system control include the following; No enough security regarding those who can access the systems and the passwords are available to all employees No controls on how to use cash and petty cash within the organization Cheques are not properly kept No controls regarding the new customers and suppliers that are going to associate with the organization There are no controls regards debt recovery within the organization There are no controls regarding the usage of credit cards within the organization It is crucial that an organization considers situations where fraud may occur and prepare for it by producing internal controls which help to reduce the risks of errors and fraud. The internal controls should include: Segregation of duties – ensuring activities are shared e.g handling cash. Authorization of cheques and cash – providing a check on expenditure. Physical security – Valuables e.g cash is stored securely. Supervision – ensuring the internal controls are implemented. Monitoring – regularly reviewing the internal controls to ensure they are effective. 13. Analysis of Fraud There are activities that have been undertaken within the organization that have no prove to have taken place. Some of this activities include; The handling of payment of cash as salaries may have led to theft Several errors in the payroll due to lack of authorization and countercheck Cheques not stored properly Lack of proper documentation of most of the transactions Some of the measure that should be taken to detect fraud with the organization include; Supervision and observation of activities. Investigating any suspicious activity or unexplained situation. Educating staff about fraud and encouraging an anti-fraud culture. Having a process in place for employees to report anything suspicious 14. Recommendation According to the review that has been undertake in the A to Z Vehicle Hire, the following are the recommendations that should be undertaken to ensure improvement of the internal accounting system. Centralization of the system so as to make reconciliation of the accounts easier. Training of staff to have up to date information on how to use accounting systems. Ensure there is system back up to be used in case of failure Purchase of system manuals that will be used in the process of training of staff on the usage of the accounting system Staff should be trained on how to undertake secondary roles so that they can cover up during absentee periods Staff should be informed on the working days and hours so as to avoid unnecessary absenteeism Using centralized system in payments so as to avoid cases of fraudulent transactions. Ensure that petty cash system is developed and also rules on the usage of petty cash should be laid down. All banking transactions should be properly done to avoid cases of undocumented transactions Storage of the cheque book in a safe place and with only authorized person Come with corporate social responsibility measures and methods on how implementation will take place. Work Cited "Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements". Public Company Accounting Oversight Board "Commission Guidance Regarding Management's Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934". SEC Interpretive Guidance. Securities and Exchange Commission. June 20, 2007. Committee of Sponsoring Organizations of the Treadway Commission: Internal Control – Integrated Framework (1992) Matti Mattila: The ECAR Model, 2007. Management Antifraud Programs and Controls”. American Institute of Certified Public Accountants "Management override of internal controls”. American Institute of Certified Public Accountants. 2005 "Managing the Business Risk of Fraud: A Practical Guide". American Institute of Certified Public Accountants. Rezaee, Zabihollah. Financial Statement Fraud: Prevention and Detection. New York: Wiley; 2002. Sawyer's Guide for Internal Auditors. The Institute of Internal Auditors Research Foundation. 2012. p. 36. Organization of Supreme Audit Institutions (INTOSAI) Read More