Assessment
The following case study has been prepared to assess your ability to meet specific performance criteria required
- Implement and Maintain Internal Control Procedures.
Specifically this case study will assess skills and outcomes associated with providing financial information.
To indicate that you have achieved the elements of competency listed in this unit you must evidence the following critical aspects:
Evidence of the ability to:
- interpret and comply with corporate governance requirements, organisational policies, financial delegations and accountabilities
- review corporate governance requirements and implement effective operating procedures
- monitor policy and relevant financial legislation.
In addition you should be able to demonstrate the following knowledge and skills:
Required skill
- high level communication skills to:
o determine and confirm internal control requirements by consulting with staff on internal control procedures and using questioning and active listening as required
o liaise with others, share information, listen and understand
o use language and concepts appropriate to cultural differences
- well-developed research and analysis skills for accessing and managing complex information
- well-developed literacy skills for interpreting and analysing complex documentation including relevant legislation and producing accessible guidelines and reports
- numeracy skills to accurately analyse, record and store data in accordance with organisational requirements
- IT skills for accessing and using appropriate software such as spreadsheets and databases and using internet information
- learning skills to maintain knowledge of changes to compliance legislation and requirements
- problem solving skills to identify any issues that have the potential to impact on the financial controls in the organisation and to develop options to resolve these issues when they arise
- organisational skills, including the ability to plan and sequence work
Required knowledge
- ethical considerations and confidentiality for management and handling of files and records
- financial legislation such as:
o taxable transactions
o reporting requirements
- methods of work practices and routines
- organisational guidelines and procedures
- principles of internal control and auditing
The Accounting firm
The firm of Bracken Ridge Accounting Services is a prominent accounting firm based in Bracken Ridge, Brisbane. The firm provides financial accounting, business planning and auditing services. You are a member of the management team and specialised in establishing internal control systems.
The Client
Mr Smart who is the Managing Director of North Point Ltd asked you to establish an internal control system for the his business. The business, North Point Ltd, manufactures and sells compact disks.
The Brief
1. Your first task is to evaluate the internal control system and prepare a report to be presented to the Board of Directors.
In your report:
- Evaluate the existing internal control system of the client's work, environment and prepare a flowchart,
- Determine the weaknesses and strengths of internal control system,
- Explain the consequences of the weaknesses of internal control system,
- Make recommendations how the weaknesses of internal control can be rectified,
- Prepare an amended flow chart of the basis of recommendations,
- Draft a letter of management to be forwarded to the management of North Point Ltd listing the weaknesses, consequences and state the changes that you would recommend for the system to improve internal control.
The business structure and operations
North Point Ltd manufactures and sells compact discs. The raw material used for the discs is purchased from Compact Disk Pty Ltd. The company has a computerised system but it is not net-worked and each department has its own stand-alone computer system. An order for the purchase material is raised by the stores department by completing two copies purchase requisition (PR). The top copy of PR is sent to purchasing department. When Goods Received Report (GRR) is received by the stores department, the PR is reconciled with the second copy and it is sent to the accounts department after updating the inventory records.
Purchasing Department approves the purchase requisition and prepares three copies of purchase order (PO). The top copy of PO is sent to the supplier, second copy to the Accounts Payable and third copy to Receiving Department.
Receiving Department reconciles the goods received with the PO and prepares two copies of GRR. The top copy is forwarded to stores department, second copy to the Accounts Payable.
Accounts Payable Department reconciles and checks for accuracy of the PR, PO, GRR and supplier's invoice and forwards them to the group accountant with a cheque requisition form attached for the payment to the suppliers after updating the accounts payable records to indicate that the accounts have been settled.
The Group Accountant authorises the payments. Most payments are made electronically, but some suppliers are paid by cheque. The cheques are mailed to the suppliers by the Group Accountant assistant.
As the raw material is needed, the Production Manager raises Material Requisition (MR) and forwards it to the Stores Department. MR is filed by the Store Department after updating the inventory records.
Sales Department approves and prepares four copies of Sales Order (SO) upon receiving a customer's order in writing or by phone call. The top of the SO is sent to the customer, the second copy to the store and the fourth copy to the Dispatch Department.
Credit Manager in Accounts Receivable Department checks the SO and approves for the credit and returns to the Sales Department where it is filed with Customer Order.
Stores Department issues the goods accompanied with the SO to the Dispatch upon receiving the SO and updates the inventories records.
The officer in Dispatch Department forwards the SO to the Accounts Receivable department by marking it to indicate that the goods have been dispatched.
Accounts Receivable Department prepares three copies invoice upon receiving the SO from Sales Department and Dispatch. The top copy is sent to the customer. The Accounts Receivable officer records the detail of invoice into the Sales Journal and posts the subsidiary ledger and forwards the Sales Journal with the second copy of invoice to the Group Accountant who posts the transactions into the control account. The third copy invoice is filed by the Accounts Receivable Department.
Two officers in the Mail Room are responsible to open the mail and forward the cheques received from the customers with a mail list to the Accounts Receivable Department which passes on the cheques to the Cashier for banking.
The Accounts Receivable officer prepares the Cash Receipts Journal and updates the subsidiary ledger and forwards the Cash Receipts Journal to the Accounts Department where the control accounts are updated.
Guidelines for the preparation of your assessment
1 Prepare flowchart
Prepare a flowchart using either flowcharting software or an excel spreadsheet for each subsystem.
If you chose to use excel, click on insert option on the ribbon and click on ‘shapes' on the toolbar and copy and paste the shapes you want to use in the flowchart. See the figure on page 73 of your text book for a sample flowchart.
2 List primary and specific objectives of internal control
List the primary and specific objectives of internal control for each cycle.
For example:
‘The primary objective of internal control within the purchases and accounts payable cycle is to ensure that the entity accepts liability only for the goods and services that it has purchased and that are necessary for its efficient operations.'
3 Evaluate the internal control system
Evaluate the internal control system and make recommendations in the following manner:
Weakness: The technicians can enter the computer system without supervision.
Consequences: Technicians may alter the system for misappropriation purposes.
Recommendation: Every activity must be authorised and a log book must be maintained for every activity by the technicians
Ensure that the weaknesses, consequences and recommendations are numbered.
4 Prepare amended flowcharts
Copy the flowchart that you have prepared after the evaluation to another sheet.
Amend the flowcharts on the basis of your recommendations.
5 Covering letter to management
Provide a suitable covering letter to management outlining the principles of internal control and auditing, and summarising the findings of the internal audit.