1.Terms of Reference
1.1This report has been complied to review the Association of Accounting Technician Internal Control and Accounting Systems Unit.
1.2The report will review the payroll area and provide recommendations for Cookridge Carpets Limited.
1.3The unit mapping document of Principles of Internal Control (knowledge) PIC is presented in Appendix A.
1.4The unit mapping document of Evaluating Accounting Systems (skills) EAS is presented in Appendix B.
2.1In order to complete this report I initially reviewed the Internal Control and Accounting Systems (ICAS) assessment book for Cookridge Carpets Limited.
2.2I completed the ICAS Report Plan to obtain further guidance from the tutor. Using the additional guidance I reviewed several websites and written material.
2.3Further research was undertaken by using the internet and a number of books.
2.4I used Companies House to obtain further information about statutory regulations and liability of limited companies.
2.5Wikipedia was used to gain further data on financial statements and their purpose.
2.6Her Majesty’s Revenue and Customs (HMRC) and Sage websites was used to collate information on Payroll software and accounting packages.
2.7For details around IT Networking I researched the IBM and Dell websites.
2.8I used the books to get information on financial statements.
2.9I analysed the case study for potential fraud and reviewed the IBM website as suggested by the case study.
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2.10The bibliography is layout in Appendix C.
3.1There are a number of areas for improvement that need to be addressed by Cookridge Carpets Limited.
3.2The accounts office is easily accessible to everyone, whether it is other staff or general public. It is recommended that the keypad lock is used to secure the office. The benefit of this will ensure that information is not obtained by unauthorised people.
3.3Staff working within the accounts department do not have the necessary qualifications or appropriate training. Investment in staff training is recommended to minimise and eliminate errors from occurring. Although, a cost is attached to training this outweighs the potential risks with reporting accounts with errors.
3.4Staff are only responsible for their areas of work this poses risks and functions will not be undertaken. Recommendation is that staff “buddy up” for each other on periods of absence. Costs attached relate to training, but the business activity would be conducted as usual as result of fully trained staff.
3.5There are no training manuals or documentation. It is recommended that training manuals are in place. The benefit of this is that staff have a reference point when they are unsure of what they need to do.
3.6There are no contingency or disaster recovery plans in place. It is recommended that plans are documented and in place to ensure business continuity. The company will benefit from this as they will be able to continue in an emergency and all staff will know what their responsibilities are during this period.
3.7There are no risk management policies. Recommendation is that risk management plans and register be kept. The benefit is the business will be prepared in the unlikely event the risk occurs and will be able to manage the risk cost effectively.
3.8The computers are stand alone machines. These should be running on a network. There are initial and ongoing costs however, benefit to the business will be staff will be able to share and access documents they need to all use.
3.9Passwords are the same for all the staff and machines. All staff should have individual passwords which are changed periodically. This will reduce risks of potential unauthorised access to the system and the company can monitor who has accessed what documents whilst adhering to the regulations within the Data Protection Act 1998.
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3.10Payroll runs are not conducted in a restricted area. It is recommended that payroll business is done in a restricted area to protect employee information to comply with the Data Protection Act 1998.
3.11Blank Cheques being made and left in unlocked drawers. No blank cheques should be written. The benefit of not having blank cheques is it eliminates the potential of theft and loss to the business.
3.12Although, the company has an Information Technology Policy in place it is not enforced. The policy should be enforced and penalties introduced if staff do not follow it. This will lessen the risk of unauthorised access to the system and the documents.
3.13There is no record of money being spent from Petty Cash. The log should be kept up to date and the receipts produced which are checked to monitor petty cash spend. This reduces money being taken from the business through theft.
3.14Supervisor issued pay packet to wife of a member of staff. Pay packets should only be issued to members of staff. Benefit of this is the company is complying with Data Protection Act 1998 and employment legislation.
3.15Ex member of staff authorised the purchase of carpet tape and signed the company cheque. No members of staff other than the owners should be able to sign the cheques and authorise purchases. The benefit of only the owners authorising payments and purchases is they can monitor what payments are being made and they have an audit trail.
3.16A member of the Sales team accessing the computer with Sage Payroll. No unauthorised access to computers in the accounts office should be allowed. The benefit is data is protected and viruses from the internet minimised.
3.17Cash from safe given to a Salesperson who had been off work ill. Only the Wages Clerk should be authorised to issue wages. This minimises theft and incorrect pay being issued.
3.18Back ups of the system not updated regularly. Introduce automatic back ups and have the server off site. There will be costs to run the server off site but benefit is that all business trading activity will be recorded.
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3.19No records of sales commissions. Recommend that the sales staff have a sheet to record their sales and it is signed off by the supervisor on a weekly basis. This will help eliminate incorrect pay being made.
3.20Bank reconciliations not maintained. Recommend regular bank reconciliations are completed. The company will benefit as they will be aware of what actual payments have been made and have a track on how much they still owe.
3.21No proper debtor collection process in place. Introduce process on ensuring debtors pay on time. Benefit is that this will generate a positive cash flow for the company.
3.22Staff rota not updated. Rota should be updated daily by the supervisor and sent electronically to the Wages Clerk. Benefit staff paid for actual days worked and eliminating incorrect payments being made.
3.23No record to check staff actually worked the days on the rota. Introduce electronic or paper signing in system which is signed by the supervisor on a daily basis to vouch attendance. Benefit staff paid for actual days worked and eliminating incorrect payments being made.
3.24Customer paid for goods using her husband’s bank card. Sales staff to conduct proper checks when bank cards are used. Benefit is that fraud will be reduced resulting in company having payments for goods sold.
4.1Cookridge Carpets Ltd was established in 2007 by two brothers, Peter and John Cookridge and has been trading for three years. The company has been financed through a combination of John’s redundancy money (£80,000), inheritance and a loan (£100,000) which Peter secured against his home.
4.2The company initially started out directly selling carpets. As business grew they expanded into selling beds and soft furnishings. They are the main dealership in the area that specialise in foam beds and mattresses. They have also now started to sell their products over the internet, this again has increased business.
4.3The company employs a total of 21 staff. An organisation chart is shown in Appendix D. The Accounts department is made up of three part-time staff (Wages Clerk, Accounts Receivable Clerk and Accounts Payable Clerk).
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The company recently employed a Senior Accounts Clerk, who works full-time supervising the running of the Accounts department. An organisation chart for the Accounts department is shown in Appendix E.
4.4The Wages Clerk has been with the company for four months and is contracted to work 15 hours over two full days usually Wednesdays and Thursdays. She is qualified to AAT NVQ Level 2 in Payroll which was awarded in 2004. She has not undertaken any further training since acquiring this qualification.
4.5The Accounts Receivable Clerk has been with the company for one year and is contracted to work 37.5 hours over five days per week. He actually covers his hours over a four day week. He has no formal accountancy qualification but was trained on the job in his previous post and has some in house training with Cookridge Carpets Ltd.
4.6The Accounts Payable Clerk has been with the company for eighteen months and is contracted to work 20 hours over five days per week. However, she tends to work over two and a half days (all day on Tuesdays and Wednesdays, half day on Thursday morning).
She has no formal accountancy qualification but has several years experience in operating accounts systems but has not worked in this area for over two years.
4.7Accounts department is open weekdays from 9am to 5.30pm. The department is based on the first floor of the showroom and is accessible via a staff and members of the public shared stairwell. Although, there is a keypad lock on the door however, this is never used and the office layout is open plan with no private working areas.
4.8Their key supplier is Memo Beds, who originally asked the company to become the main dealership for Southampton. Cookridge Carpets also have further external relationships with the bank, Debt collection Agency, Credit Reference Agency, customers and staff.
4.9As a Limited company, Cookridge Carpets need to abide by certain regulations and statutory legislation when they provide financial reports. They should be complying with the Generally Accepted Accounting Practice (UK GAAP).
This body sets out the regulations on how company accounts should be prepared within the UK. UK GAAP not only includes the national accounting standards but also UK Company law.
4.10Accounting standards are made from a number of sources. The primary source is The Accounting Standards Board (ABS) which is part of the Financial Reporting Council (an independent regulator solely funded by a levy on listed companies. The ABS issues the standards namely the Financial Reporting Standards (FRS).
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4.11In addition to the accounting standards, UK GAAP includes UK Company law. The primary legislation is The Companies Act 2006. This Act includes elements of The Companies Act of 1985 and 1989, and incorporates further additional key objectives.
4.12This Act states that any company whether trading or not must register their company with the Registrar of Companies. They must also file annual financial statements and accounts with Companies House, a regulatory body that lists all companies trading or not. Companies House also examine and store company information and make this information available to the public.
4.13Although, the Companies Act 2006 is the current act, it states that annual accounts of companies established prior to 6 April 2008 can continue to prepare the accounts and reports in accordance to the Companies Act 1985. Since Cookridge Carpets was established in 2007, the Company would then continue to prepare accounts and reports in the same manner.
4.14Being a limited company Cookridge Carpets must keep accounting records and file accounts for each accounting period with Companies House. The director is responsible for submission and would be penalised should these returns be delivered late.
4.15As Cookridge Carpets fall into the category of small company they will need to submit an annual return to Companies House. In this case an abbreviated Balance Sheet with Notes.
4.16A Balance Sheet is a financial statement that provides a snapshot of the business’ assets and liabilities at particular time. It shows how a business is funded and how the funds are being used.
4.17The Balance Sheet can also assist managers in analysing and improving the management of the business as well as assist potential investors in their decision making with regards to lending money to the company.
4.18Notes to the accounts are supplementary financial information providing further details on the figures contained in the financial reports. These are important to investors who maybe interested in providing funds.
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4.19There are a number of other regulations and legislation that Cookridge Carpets need to comply with which are listed below and is not exclusive;
•The Furniture and Furnishings (Fire) (Safety) Regulations 1988 •Health and Safety and Work Act 1974
•Trade Descriptions Act 1968 and 1972
•Competition Act 1998
•Consumer Credit Act 1974
•Consumer Protection Act 1987 and the General Product Safety Regulations 1994 •Data Protection Act 1998
•Consumer Protection (Distance Selling) Regulations 2000
•Electronic Commerce (EC Directive) Regulations 2002
4.20The company must keep up to date with changes in regulations and implement these as soon as possible.
4.21To generate the annual accounts it is imperative to have IT systems that are robust and able to deliver the required output.
4.22The Accounts department has four stand alone computers with each being connected to the same printer. Two of the computers were purchased when the company was established and are running on Windows Vista operating system with Microsoft Office 2007 (with a three user licence) loaded on them. A new computer was purchased, which was loaded with Sage Payroll software.
4.23All staff use the same password to access their computers. The passwords have not been changed.
4.24The Sage Payroll software is used to calculate and produce wages for all staff. The inventory (stock) information is kept on MS Excel and all invoices are prepared using a form in MS Word.
5.Review of the Payroll System
5.1Cookridge Carpets Ltd uses the Sage Payroll software to undertake their payroll duties. However, only the Wages Clerk is able to operate this software and has not had any further training or qualifications since 2004.
5.2It also appears that the Wages Clerk conducts some calculations manually, this is not necessary with Sage Payroll as the system is capable in calculating these as long as the information regarding pay rates, overtime rates and commissions have been input on to the system correctly for each individual staff member.
5.3The Payroll duties are conducted within the open plan office this needs to be reviewed to protect the employee information.
5.4Payslips are printed on the shared printer, this is not appropriate as other staff and members of the public can access the office.
5.5Unauthorised access to the Payroll computer by other staff members allows for access to employee records, potential fraud and viruses to be downloaded from the internet.
5.6Not all staff are paid through their bank accounts and pay packets left in office safe which all the accounts staff have access to.
5.7There is poor segregation of duty as only the Wages Clerk prepares the payroll run and produces the pay packets.
5.8There is potential for fraud within the accounts department. Fraud generally is illegal and irregular acts conducted by people to intentionally deceit. Fraud is regulated through the Fraud Act 2006.
The act defines fraud in three categories:
1.fraud by false representation;
2.fraud by failing to disclose information; and
3.fraud by abuse of position
6.1Access to the accounts department should be minimal and the keypad should be used.
6.2It is essential that the Wages Clerk receives further up to date training to process payroll information.
6.3It is important that the Accounts Receivable and Accounts Payable Clerks undertake formal training in order to complete their duties.
6.4It is recommended that staff should “buddy up” to ensure business continuity during periods of absence or consider making arrangements for a business accountant to provide emergency cover.
6.5A risk register should be implemented to record the risks and issues in order to manage potential risks and issues.
6.6Business continuity and disaster recovery plans should be in place to help manage and restore order during and after an incident. This should outline the roles and responsibilities of all staff when an incident occurs.
6.7Automatic back ups should be conducted weekly. Back up copies of the payroll data should be kept in a lockable fireproof cabinet.
6.8Computers should run on a network to ensure file sharing is possible.
6.9Information Technology procedures should be enforced.
6.10System access passwords should be generated automatically by the system and changed periodically.
6.11The payroll tasks should be run on one computer located in a restricted area with a separate printer.
6.12Segregation of duties should be applied to the payroll tasks, one person should input the employee records and another should do the payroll run with one of the owners authorising the payments.
6.13Only the owners of the company should be authorising transactions.
6.14Staff attendance should be recorded using a signing process and supervised.
6.15Payment of wages should be through BACS for all staff.
The websites used to research information for this report were:
The books that were used to research information around financial statements were:
Collis, Jill and Hussey, Roger. Business Accounting. Hampshire and New York: Palgrave Macmillan, 2007
Appendix D: Cookridge Carpets Limited Organisation Chart
Appendix E: Cookridge Carpets Limited Accounts Department Organisation Chart
Appendix F: Fraud Matrix
Appendix G: Cost Benefit Analysis