The Accounts Receivable (Sales Ledger) of Cookridge Carpets - Essay Example

page A Review of the Accounts Receivable (Sales Ledger) of Cookridge Carpets AAT Words Kaplan... Methodology I carried out secondaryresearch to understand the concept of internal control and systems. I read some books pertaining to the internal control and accounting systems. In which, different types and dimensions of the internal control were highlighted and discussed. After comprehensively understanding them, I put into practice that understanding in the scenario defining the accounts receivables (Sales Ledger) in the Cookridge Carpets. Executive summary The sales ledger of Cookridge Carpets has numerous weaknesses. Stefan himself decides that the existing credit term policy is not appropriate and subsequently changes it with the policy requiring check the credit worthiness of the potential customers. Stefan not only records the sales order but also accounts for the payment from the customers. The segregation of duties may be employed as a way to introduce completeness and accuracy in the receivable accounts of the company by employing additional personnel in the accounts department responsible for recording and maintaining the payment portion. 1-Business Overview PIC 1.1 Cookridge Carpets Ltd is a large carpet, soft furnishings and bed Dealership Company located in Southampton. The company was established in the year of 2007, works as the main dealer for Memo@memory foam beds and mattresses. The company is owned by two brothers Peter and John Cookridge. 1.2 PIC 1.3 the Cookridge Carpets has three major stakeholders: Suppliers, customers, and staff. Memo Beds, in the year of 2010, offered the main dealership to the Company in the area of Southampton as the local dealer for the Memo Beds. The Company provides its services to the local residents of the Southampton and the local residents are the main customers of the Cookridge Carpets. The owners of the business have a considerable experience in direct sale of carpets and beds to the locals. However, recently they have gained accessed to the Internet and have made a significant sale via the Internet. As a result, the business has considerably increased. Currently, the company employs 20 members of staff including nine direct sales staff, two cleaners, three internet sales staff, one accessories salesperson, two car delivery drivers and three part-time staff in the small accounts department. 1.3 PIC 1.4 There are three staff members in the accounts office: Sonja Douglas, Stefan Kalinowski and Margaret Peterson. Sonja Douglas is Wages clerk. Stefan Kalinowski is Accounts Clerk and Margaret Peterson is also Accounts Clerk. Accounts payable or purchase ledger is maintained by Peter Cookridge and Margaret Peterson also works in this department. All suppliers cheques are signed either John or Peter. And, Accounts receivable or sales ledger is maintained by Stefan Kalinowski. Stefan’s main function is to maintain all the sales related transactions and maintain the receivables records as well. 2- Software (PIC 3.3., 3.4) 2.1 PIC 3.3 There is four computers in the office and is maintained by a standalone basis along with linked to the same printer. Microsoft Office Excel Spreadsheets are availed to record information and data pertaining to the inventory of carpets, beds and soft furnishings. When the company was established two new computers were purchased and currently running the Windows Vista operating system; they are also enabled with Microsoft Office 2007 along with a three use licence. In addition, when the computer system was first time introduced in the company, a password ‘Paula C’ was used and is still currently operational throughout the company. 2.2 PIC 3.3The company is using the most basic type of accounting techniques in the shape of Microsoft Office Excel Spreadsheets and may not serving the ultimate objectives of the company. Although the use of Microsoft Office Excel Spreadsheets can be cost effective, yet it cannot be 100 percent reliable as it is so easy that even a lay man can amend, delete or change data present in the Microsoft office Excel Spreadsheets. 3-Information Technology Policy 3.1 All computers must be loaded with only licensed software entitled by the company. No staff member is allowed to load any other software onto computers without prior approval from the management. Moreover, no unauthorized devices are allowed to be used for uploading, saving, or downloading work other than those bought and subsequently approved by the company. No unauthorized discs, memory sticks, external hard drives or other devices are totally allowed to be used. Only authorized members of staff are entitled to use the computers. 4-Internal systems of control (PIC 2.4, 3.2 and EAS 1.4) 4.1 The company has put in place numerous internal controls to support the accounting function. Each internal control is designed to serve the function of entertaining the objectives of the company along with ensuring completeness, accuracy and transparency in the accounting operations of the company. The company has put in place the following internal controls in the Accounts receivable or sales ledge function: Offering 60% extended credit terms is an internal control. Using credit rating agency for checking the credit worthiness of the potential customers is an internal control. Employing unlimited line of credit to the credit worthy customers is an internal control. Setting up credit accounts on the first day of the month is an internal control Receiving and processing the sales orders by the showroom staff is an internal control. Preparing invoices for the sales orders is an internal control Recording invoices for the sales orders in an internal control Using Microsoft Word for invoicing is an internal control. Employing monthly payment terms to all customers at 6 months interest free credit is an internal control Employing non-payment policy is an internal control. Employing the services of the debt collection agency is an internal control. 5-Fraud (EAS 1.2, 1.4, PIC 2.1, 2.2, 3.1) Association of Certified Fraud Examiners defines occupational fraud and abuse as the use of one’s occupation for personal gain through the deliberate theft or misuse of the employing organization’s resources or assets (Singleton and Singleton 2010). And fraud may become significant either for giving the defrauded person a right to sue the fraudulent person for damages in a deceit action (Willston1909). Fraud encompasses a range of irregularities (Vona 2008). And it may occur when trickery is used to access or gain a dishonest or illegal advantage, which is often financial in nature, over another business or person. Fraud has become prevalent within virtually every aspect of business life (Pedneault 2009). The Fraud Act 2006 has categorized three new offences in the list of fraud: Fraud by failure to disclose information or data; fraud by false representation; fraud by abuse of power. 6- Reviewing the sales ledge processes of Cookridge Carpets (Weaknesses and recommendations) Weaknesses and their impacts Unauthorised change in credit account policy Stefan did not receive an authorisation from the management while changing the credit account policy. He himself realized that the 60% credit terms policy was not generating the expected results and subsequently, he realized that it was insufficient and changed the policy. Although using the credit reference agency for knowing the credit worthiness of potential customers is a better internal control to reduce the chances of bad debts, yet without approval from the management the chances of fraud and misuse of authority cannot be avoided. Stefan may give more credit to his friends, relatives and other colleagues. He may develop certain understanding with the credit reference agency and this understanding may only be serving his personal interests rather than the objectives of the Cookridge Carpets. And, at the same time, there is no check and balance over the mechanism for credit reference agency in the shape of neutral look. Under such circumstances, the chances of fraud and favourable credit may be extended to less trust worth customers and even to those who have poor payments history. Recommendation and its effect on the individual and organization Stefan should acquire authorization before changing the credit account policy. Before going to change the credit account policy, Stefan must get in touch with management of the company for the purpose of obtaining approval of change in the credit account policy. By employing the policy of prior authorization, Stefan would improve his goodwill in the eyes of management and the management would consider him a responsible employee of the company. However, in the beginning, the management may not agree with the change in the credit policy as may ask a valid justification from Stefan. For that, Stefan may need to prepare convincing points. For organization, the prior authorization would be a step towards entertaining the corporate objectives of the company and any unauthorized credit account policy step would not take place. In addition, the management would be knowing or having understanding about the changes being introduced or implemented in the credit account policy. And, the management would become in a position to eye on such credit account approvals which may have poor payment history and subsequently such requests and such clients would be discouraged and would not be entertained. Unlimited Credit Unlimited credit increases chances of fraud and unfavourable utilization of the credit policy. Once the credit reference agency clarifies the credit check and certain customers pass this credit check, Stefan gives them an unlimited line of credit. This means that it is a discretionary right of Stefan to extend an unlimited line of credit whoever passes the credit check on the credit reference agency. This gives an opportunity to Stefan to extend uncountable amount of credit to his friends, associates and other colleagues as well. In this way, the objectives of the company will not be entertained as they should and at the same time it seriously increases the chances of bad debts. Recommendation and its effect on the individual and organization An authorized and limited credit must be offered to the current and potential customers. Currently, Stefan must be suggested not to implement the policy of unlimited credit. The unlimited credit policy increases the chances of bad debt and non-recovery of credit from the customers. In addition to that, Stefan must be given a credit policy list showing different ranges and different credit rate facilities and they must be authorized by the management as well. Stefan would experience more work as the paper work will be increased. Before going to allow credit facility to the current and potential customers, Stefan will be required to get a prior approval from the management. Moreover, while sending a case for the approval, Stefan must send the credit history of the customer if he or she is the current customer. If the customer is new, he must obtain credit worthiness information from the agency and must attach with approval application. For company, limited credit line means decrease in the bad debts and the customers with poor payment history will not entertained and the customer having a favourable or appropriate credit payment history will come to light as well and their applications will be happily served by the management. Preparation and recording of invoices are not separated The control of segregation of duties is not being disregarded in the accounts department of the company. After receiving processed the sales orders from the showroom store staff, Stefan is required to carry out both preparation and recording of the invoices. The chances of mathematical error and deliberate misstatement of invoices cannot be ruled out. Both activities preparation and recording of sales invoices are maintained by a single employee. Under such circumstances, the possibility of mathematical errors such as additions, totals, multiplications may occur either deliberately or unknowingly as well. Even if Stefan want to deliberately misstate the mathematical calculations in the sales invoices, such fraud may go undetected as there is no mechanism ensuring the subsequent check and verification of the mathematical accuracy in the sales invoices? In addition to that, there is no mention of delivery note which is raised when items are dispatched towards customers. In the absence of delivery note, the chances of inaccurate dispatch of items increase and in addition to that the completeness procedure will not be performed as well. The showroom store staff may send more goods or less than the one purchased. If more goods have been dispatched, the chances of fraud from the showroom store staff may occur; and if lesser goods have been sent towards the customer, the customer may become unhappy and this could seriously discredit operational working of the company. Recommendations and its effect on the individual and organization The sales invoices must be separately or prepared and recorded as well. One employee must obtain the sales orders prepare the sales invoices as well and other employee must record them. In addition to that, the sale invoices must have be signed by the authorized personnel in the accounts department. The signature on the sales invoice would suggest that the signatory has taken the responsibility of its accuracy and completeness. This will bring more accountability and responsibility in the accounts department as the members of accounts department will now fully aware of the severe consequences of the any unauthorized steps. The effects on the individual would be different. The person preparing the sales invoices may require training about preparing the sales invoice. The company will experience numerous effects of such changes. For example, the company may require new hiring in the accounts department and the new accounts personnel may require training and development. Also, this will increase the cost as the new employs would be paid along with the cost of providing training to them as well. The absence of segregation of duty and delivery note Both raising sales invoices and recording payments are maintained by Stefan and the risk of fraud becomes more severe when the non-payment issues are also managed by Stefan. Almost all steps of sales transaction cycle are being recorded by Stefan. Stefan receives the sales order, prepares and records the sales invoice and subsequently, the payment and non-payment issues from the credit customers are also overhauled and managed by Stefan. Under such circumstances, the chances of error, embezzlement and fraud in the sales transaction cycles are more as only Stefan has been authorized to manage all the receivable steps of the company. In addition to that, there is no mechanism to compare statistics in sales order, sales invoice and delivery note. Any embezzlement would not be easy to detect and the frequency of fraud in the sales would go undetected as well Recommendation and its effect on the individual and organization The delivery note must be raised as well. Currently, there is no policy requiring the provision of delivery note. The main purpose of delivery note is to ensure that the items sent to the customers must be those are asked by the customer in the sales order. And, the same items must be reflected by the sales invoice as well. The presence and maintaining three essential documents are highly necessary as they facilitate the process of cross checking in order to eliminate mathematical errors and deliberate chances of fraud and embezzlement. The individual and the company will experience distinct effects. The individual may be any person from the management. He or she would be authorized to develop delivery note and may be asked to calculate their mathematical accuracy and completeness as well. In addition to that, while dispatching the items from the showroom, the showroom staff must dispatch only those items which are maintained in the sales invoice and prepare the delivery note as well. For the company, this would decrease the chances of fraud and embezzlements. The showroom staff may be asked in the absence of certain items in the showroom at the time of any surprise internal or external audit. Costly debt collection agency agreement The debt collection agency charges ? 80 per debt collection case including 30 percent of any amount collected. This increases the cost of debt recovery and subsequently it influences the business as well. Currently, using debt collection agency is not inexpensive as also suggested by the management of the company. Moreover, the chances of the debt recovery may not optimistic as the non-payment policy is being maintained by the same person who is responsible for the accounts receivable entries. Again, in the absence of impartial and neutral check over the recovery of non-payment or the communication with the debt collection agency, the possibility of fraud in the shape of embellishment, the inaccurate disclosure of debt information and actual amount recovery, and the abuse of power along with false representation of information are those aspects that may not present the actual information and impartial practices in the company. Recommendation and its effect on the individual and organization The company must search for other debt collection agencies. For that, the management must carry out a market research. Before going to select any new debt collection agency, a comparative analysis must be carried out between or among the debt collection agencies. In the comparison, it must be ensured that only affordable debt collection agencies must be analysed. Subsequently, a new debt collection agency agreement must be made. This will bring numerous implications for the company. First, its current charges received by the existing debt collection agency will be decreased and this decrease can be utilized to fund the needed areas in the accounts department. In addition to that, the management should directly handle the issues with the debt collection agency rather than allowing any member from the accounts department. As the matter is of critical nature and of strategic significance, the management must find some time to appropriately mange the affairs of the debt collection agency. Free access to the accounts department The accounts department access is not difficult even for unauthorized personnel as well. The accounts department is on the first floor of the building and its door routinely remains propped open and any one use and access to the area of the accounts department. The access of unauthorized personnel to the accounts department may alter or manipulate the accounts maintained by the accounts staff. Also, the possibility of stealing customer information and their private information may also be accessed. If the accounts are altered without authorization by the non-accounts staff, this may create more problems for the company as the inaccurate or altered accounts data would only create problems in maintaining the routine business operations. In addition to that, the four computers do not have different passwords but the one known to every accounts staff members. This means, the receivables clerk also knows the way to access to the computer of the payables clerk and he or she wants to modify any accounting information, they can easily do so as they are fully aware of the password which is the same for the four computers. Recommendation and its effect on the individual and organization Only authorized access must be allowed to the accounts department and the personnel working in the department should use different passwords for their computers as well. The washroom facility must be relocated so that the accounts department must not be accessed by any other person other than the accounts members. By relocating the washroom facility, the company may incur some replacement cost. In addition, the staff members must not allow any external person inside the accounts department even if someone really needs to enter him or she must have authorization from the responsible management seat. The individuals must observe more rules and regulations with the effects of these changes as they do not entertain the unauthorized access to accounts department. Under such circumstances, some individuals in the company may indirectly happy with these new regulatory changes in the organization and may resist changing. And in order to hear their concerns, they may be given some counselling or training sessions so that they fully understand the purpose and objectives of these new changes in the organization. Other recommendations Authorization must be introduced throughout the company. Every transaction in the accounts department must receive authorization from the person other than the one recording the transaction. The major advantage of this activity would be implementation of sense of responsibility across the departments. Physical security measures must be implemented as well. For example, installation of Close Circuit Cameras, security guards, and safe placement and restricted access to the accounts documents must be ensured. The CCTVs must be installed in the showroom, the accounts department and at the main entrances as well. And, the monitoring and maintenance of CCTVs must also be given to security personnel. He or she must be independent of any accounts personnel. This would reduce the chances of collusion and reduction of the chances of fraud. In addition to that, cash must be stored in the lockers and their keys must be given to a responsible person preferably the management should keep the keys with them. And, lockers must be provided to the accounts department as well. The accounts department will put their important documents and ledgers inside the lockers or they can put their important CDs or software information document inside the lockers. The current personnel working in the accounts department seem less qualified for the jobs being performed by them. The under-qualified personnel would bring more cost and lesser efficiency in the business operations. In order to avoid such costs, the management must try replace them with the appropriately qualified personnel and having a relevant and adequate experience in their related fields. Before going to hire new personnel, references from the ex-employers must be sought so that the chances of inappropriate hiring must be diminished as well. Cost benefit analysis The company must appoint new personnel in the accounts department. He or she must be responsible for maintain and recording the debt collection from the credit customers. Costs Salary (?6 per hour) ?1344 per month Training and development ? 500 This amount of salary may be given to the new employee. And, he or she would consume 8 hours in the accounts department and serve his or her new job responsibilities. He may also be trained and this may also require some expense in the training and development as well. Benefits Numerous benefits can be enjoyed by this activity. First, fraud in the shape of false representation, failure to disclose information and abuse of power would discouraged. Second, the corporate objectives of the company such as protection to assets, prevention and detection of fraud and error will also be availed. This would increase in the controls as the segregation of duties has been put in place. The sales orders are recorded by one person and the non-payment issues are being handled by another person. This would ensure the accuracy and completeness of the transactions. Appendices Pedneault, S2009, Fraud 101: Techniques and Strategies for Understanding Fraud, 3rd edn, John Wiley & Sons: New Jersey Singleton, TW, & Singleton, AJ 2010, Fraud Auditing and Forensic Accounting, 4th edn, John Wiley & Sons: New Jersey Vona, LW 2008, Fraud Risk Assessment: Building a Fraud Audit Program, John Wiley & Sons: New Jersey Willinston, S 1909, The Law Governing Sales of Goods at Common Law and Under the Uniform Sales Act, JB Lyon: New York Read More