Internal Auditing
Essay by Jessie_Zinc • May 10, 2015 • Essay • 4,089 Words (17 Pages) • 1,146 Views
ACF309 Advanced Auditing
Semester 1 Coursework
Section A
Requirements 1: Comment on PGG organizational structure in terms of potential weaknesses of internal controls due to lack of segregation of duties, as well as the risks of fraud which may derive from it.
Segregation of duties is one of the key concepts of internal controls. It is intended to separate jobs to different individual employees, preventing them from conducting frauds in case of escaping supervision from others. The structure of PGG Ltd. is not well designed since some of the important duties assigned to each employee are not segregated. This can cause some weaknesses in internal control.
In purchase cycle, the Sales Director Mr. Vanhoff is responsible for sending orders to suppliers, approving invoice received from suppliers and telling accounting department to record invoice into system for payables. In PGG, all these works are done by Vanhoff and this causes problems in control. Besides, Vanhoff also has the authority to approve the vendor invoice received, which is actually should be done by employee who initiate purchase requisition or an independent employees as the involving in approve invoice payment needs to know the number and price of the original orders. When the goods ordered arrived, PGG uses a same person, Mr. Bates to approve the receiving, check them according to invoice received and record into systems. In this situation, there can be an omission when Bates receives the deliveries and for further checks based on invoice and recording, Bates may omit some again as he does not find it at first. What’s more, there is a risk that Bates could also hide some deliveries or receive fewer deliveries on purpose and does not show the fewer amounts in the system as all those work are done by him.
For sales cycle, there are also several problems on segregation of duties. The sales representatives receive and record orders from customers while they also occasionally receive cheques and cash payments from customers. These two works should be done by different people. There is a risk that the representative may omit some orders and not turn the payment to the company. Besides, in inventory, the delivery preparing, output recording and inventory count are all done by warehouse manager, Mr. Bates. There is no mean to do the count if all these works are done by one person. The inventory count is aim to find differences between the real amount of goods in inventory and the amount in systems and the output record is functioned to double check the amount on order and the amount delivered. If Bates made a mistakes or he inventively record wrong number, this will not be found. After receiving all cheques or cash deposit, Ms. Silling is responsible for recording deposit received from customers based on invoice and will hand all deposit amount along with a summery to a staff that is charge of bank deposit. There is a possibility that Silling take some of the deposit away without recording and give the wrong summery. Finally, all these transactions and ledgers are preceded by an accounting outsourcing firm but sales ledger, general ledger and all transactions should be done by different independent employees in case there is some inconsistency.
The company also provide maintenance and reparation services. Some of the services require some spare parts from warehouse and these orders are send to Mr. Arnold. He will in charge of receiving spare parts, recording and supervising the spare parts. Like what has been mentioned in sales cycle for Mr. Bates, Mr. Arnold can not do these jobs all by his own. Mistakes in the amount and conditions of spare parts inventory can easily happened as no one checks Mr. Arnold’s works. Besides, all the repairing works are done by technicians and the payments that customers need to pay are decided by the time and cost. Invoice to customers are issued by technicians and payments collection also done by them. It is another problem on segregation of duties. Issuing invoice on payment and receiving payments need to be done by other departments separately. The payment amount and receiving amount should be the same. For PGG, there is a risk that these two amount may not matched and technicians may get benefits by issuing one invoice with high payment and one with low, giving higher one to the customers and giving the lower one back to the company and taking away some payments.
To conclude, the segregation of duties in PGG is not clear, causing problems in the control and risks. In purchase, sales and maintenance parts, many the important works should be done by separate departments or employees but in PGG, employees have multiple responsibilities. The company is facing huge risks of losing money or even fraud due to this.
Requirement 2: Prepare a review of internal controls based on the description of PGG business, operations and controls by identifying which major controls are either not in place or fail to meet the control objectives for the audit cycles under review. Summarize your results in one table
NO. | Internal control procedures | Control weaknesses | Risks | Potential Impacts |
01 | ……and with some less recognizable brands for which it has not signed any exclusivity agreement yet | No clear contracts signed with less recognizable brands. | No documents could be referred and the less recognizable brands can turn down the oral agreement easily. | The situation can be complex and even bad when disagreement happened and PGG may generate losses. |
02 | in smaller cities it relies on a network of local wholesalers to sell its products | Unstable and uninsured way to deliver products. | The sales made by network and local wholesalers are not safely guaranteed and the quality and delivery of products may decline. | The reputation of brands will be damage and the company may loss customers. |
No control to local wholesalers | The record of sales and inventory may be wrong due to lack of control. | The company may loss some inventory and even sales amount. | ||
03 | Sending orders to suppliers is under the responsibility of Mr. Vanhoff, sales director. | Vanhoff should not have the responsibility to send orders. There should be a three-way check on orders. | Confusion may rise due to lack of segregation of duties. Vanhoff can use the duties to benefit himself. | The work effectiveness and efficiency may be damage and company may loss profit. |
04 | Deliveries are sent directly to the company main warehouse. | Deliveries should be checked by employee that is not responsible for custody of inventories. | Mistakes in quantity and conditions of deliveries may occur when counting by main operator. | The quantity and condition of deliveries may not be correct. |
05 | Inventory records are kept updated in the information system for inventory levels. | The receiving, approving and recording inventory cannot all be done by Mr. Bates. | There is no double check on goods received and recording and may have misstatements. | The inventory recorded in system may not be consistent with physical inventory and the amount of inventory may not be fair. |
06 | suppliers invoices are received from the post office, the assistant of Mr. Santa transfers them to Mr. Vanhoff directly for approval | Mr. Vanhoff should not have right to approve invoice payment when he is responsible for approving and sending orders. | The payment amount on invoice may not be consistent. | Company paying more. |
07 | Mr. Bates, warehouse manager, who will verify whether goods have been properly received or not, and then provide a formal written approval | Mr. Bates should not do the verify job since he is the one who write approval for reception to suppliers. | There is a self-review threat. Mr. Bates cannot check his work. | There may be inconsistency with the order and goods received. |
08 | Orders from customers are received by sales representatives in Liverpool and in other cities | Lack of controls to sales representatives. | Those representatives may behave irresponsible. | The company may lose customers and information on invoice may be inaccurate. |
09 | ……afterwards a summary is sent to Mr. Bates, who prepares a plan for client deliveries | The inventory manager should not get access to those documents. | There could be a self-review threat that Bates would record wrong number. | The physical inventory may not be consistent will what recorded in system. |
10 | The warehouse manager records outputs in the inventory system. | The inventory manager cannot do the delivery plan and keep records at the same time. | The manager may manipulate the number in record. | The number in systems may be wrongly entered. |
11 | The warehouse manager is required to conduct a full inventory count of all items in the warehouse. | The inventory manager who is responsible for daily custody should not do the counting work. | There is a self-review threat. The double check has no meaning and there is litter chance for the manager to find mistakes. | The check will not work and there may be mistakes existing in the system. Those mistakes may influence further sales cycle and financial position. |
12 | Each delivery voucher is sent in three copies to the invoicing department. | The date of invoice should be set after it is confirmed by customers. | There may be future changes on goods agreed and the invoice date can be wrong. | Not only date but also information like quantity on invoice issued may be wrong. |
13 | an accounting outsourcing firm which proceeds to the recording of transactions and issue the sales ledger, clients’ accounts, and the general ledger at the end of each month. | The company cannot fully rely on outsourcing firms doing ledger without supervision and control. | Since no control and supervision and the outsourcing firm doesn’t know the activities in PGG well, the account done could be misstated | Misstatements may shown in financial statements and it is easy for the outsourcing firm to manipulate account. |
The jobs of recording transactions, sales ledger and general ledger should be done independently instated of by the same outsourcing firm. | The outsourcing firm can easily manipulate account as all the related accounts are done by them. | The balance figure in those accounts may not be fair as long as other figures like sales and receivables. | ||
14 | ……allow some clients to pay in two or three installments (although those agreements are only discussed orally). Some clients can enjoy a three month delay of payment | No contracts with customers on the payment due date. Only oral agreements are not enough. | There is a risk that customers won’t pay on due and no written agreements could be found to be referred. More delay on payments may come. | Liquidity problems will increase and doubtful debt or even bad debt will increase. |
15 | ……a deposit of 10% to 20% is collected by the personnel of the transportation company in charge of the delivery or by the sales representative. | Lack of supervisions and controls on those transportation company and sales representatives. | Manipulations or mistakes on payments may happen and the amount handed may not be same as the amount should. | The company can lose profits and sales. |
16 | The invoicing department proceeds to the reconciliation of each client accounts | The issuing invoice and reconciling account should be done by independent employees or departments. | Mistakes may happen and the reconciliation may not work well. | Misstatements in accounts still exist and the will affect future activities as well as the financial position. |
17 | When spare parts are received, Mr. Arnold records them manually into a notebook which is used to check the quantities indicated on each invoice received by the suppliers. | Manually record is not enough and solid as every one can get access to it and the information on it may lose. | The accuracy and completeness of information about spare part inventory may be damaged. | The amount of inventory may be wrong and can influence future repair service as some spare part may lose. |
18 | There is no permanent inventory for spare parts, which also includes some components from second-hand household devices being recycled | Lack of specific locations to store specific goods. | New spare parts can be mixed with old devices and both of the goods’ amounts can be recorded wrongly. The condition of spare parts cannot be ensured. | The spare parts and ole devices may be mixed and then decreases the quality of repairing. The new parts may in bad condition and depreciate quickly. |
19 | Transfers the request form to the personnel in charge who will proceed to the client request depending on schedule and availability of the technicians. | Works for repairing should be arranged by maintenance manager instate of by technicians. | The efficiency is lack and may since no clear schedules, situations like technicians leave an unfinished task may happen. | The quality of repairing service can be decreased and the company can lose customers. |
20 | The technicians receive the spare parts for reparation that they need without any document or records or voucher being recorded then | Adequate documentations are needed when technicians receive spare parts. | The amount recorded and the physical amount may not be consistent and technicians may take more spare parts to benefit them. | The record of spare parts is not accurate and company may lose money when technicians |
21 | ……the technicians issue a reparation invoice using pre-numbered sequential vouchers. | Prices and invoices should not be issued by technicians as their jobs are only repairing. | The price issued may be wrong as the working hours and spare parts used can only be verified by technicians | More cost to clients and increase wage of technicians that damage customer relationship of the company and increase cost. |
22 | The payment is collected from clients by the technicians themselves. | Lack of segregation of duties as technicians shouldn’t get access to payments. | Parts of payments collected my lost and the repairing work of technicians may be delayed. | Loss payments and shows inconsistency with amount on invoice, which is in systems. Work efficiency is damaged. |
23 | The work of the technicians is supervised by Mr. Evans, the head of Reparation & Maintenance services department, who keeps record of the number of repair services completed by each technician. | Keeping records and providing supervision for jobs done should be taken by independent employees. | Fraud risk and self-review risk. It is easy for Mr. Evans to manipulate account as he is responsible for supervision, recording and sending orders. He may not find mistakes he made. | The amount in system may be inconsistent with physical inventory. |
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