MISSION STATEMENT
To offer variety good, quality products that will suit your wants and needs at every hour of the day. You our valued customers are our first priority and we attend to your every need at your time and cost.
AIM 1
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To investigate the various internal control methods used in Morgan Grocery Shop.
OBJECTIVES 2
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To describe the various internal controls used by Morgan Grocery Shop over areas such as inventory, cash, accounts receivable and accounts payable.
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To discourage occurrence of errors or irregularities in the Morgan Grocery Shop.
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To assess the effectiveness of the internal controls used by Morgan Grocery Shop.
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To make recommendations to improve the internal control system used by Morgan Grocery Shop.
METHOD OF DATA COLLECTION A qualitative research was done on Morgan Grocery Shop. Both primary and 3
secondary sources were implemented in assessing the internal controls of the company. The primary sources were interviews with the Sole Proprietor and the manager. Questionnaires were also used for other employees in the organization. The secondary sources were textbooks and brief researched notes. The sources were substantial and reliable to a great extent as the data was current and was obtained from personnel within the business. The owner and manager would have in depth knowledge of the daily activities and the control strategies implemented in the company. The employees were also relevant as their involvement in the day-to-day operations in various aspects of the company brought forth detailed information and clarification on certain business processes. The research instruments, questionnaires and the interview schedules were used. These instruments were relevant to the study as the questions were geared towards directly focusing on the areas intended for the research to investigate, analyze, assess and evaluate the internal controls implemented in the business. These instruments also allow for understandability and validation of the accounting information presented by the business. Observation was also useful as it allowed the researcher to assess the reliability of the data presented by the workers and highlight other controls that may not have been mentioned by them.
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LIMITATIONS •
The duration of the interview was insufficient as the only time available was during working hours when persons were very busy.
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Some of the data required for the report was not obtained as the information was confidential to the business; hence the study was not as detailed as it could have been.
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PRESENTATION OF FINDINGS INTERNAL CONTROL OVER STOCK
The inventories used in the business daily operations are: perishable food items, liquor, juices, snacks, cigarettes, phone cards, bleach, all meat kind, etc. These are materials that are generally purchased on a weekly basis depending on the supply and demand level of the goods. In order to prevent or minimize theft or tampering of stock from occurring, management may implement internal control measures. In the business staff is rotated in order for workers to understand what the other positions are like and necessarily to reduce fraud caused by being too comfortable in the position. Only the manager and owner are allowed to access certain high level security areas. For example, the “locked cabinets” where the bulk of the stock items are stored. Stock requisition and purchases movements are authorized and approved by the owner and manager thus reducing pilfering. The owner orders stock based on the supply available on generally on a weekly basis approves all orders requisitioned and authorizes the payments made for the stock requisitioned. The manager records all the stock documentations necessary and organizes all the documents such as purchase requisitions and invoices related to stock. The manager also records the stock purchased, physically verifies the quantity and document the stock quantities. These activities performed by the manager pertaining to stock are overseen by the owner who verifies the inventory records based on the source 6
documents and the entries recorded by the manager. In order to prevent stocks from being ordered for personal use under the business name, the owner makes direct contact with the suppliers. The source documents are filed, and then the copies are processed and kept in the owner’s office. The records of the stock is stored on a computerised system which is entered by the manager and overseen by the owner. The computerised system is secured by a password which is only accessible to the owner and the manager. A backup copy of these files is stored off location. In addition to this, the business property is securely fenced to prevent unauthorized access.
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INTERNAL CONTROL OVER CASH All transactions involve authorization and approval, custody of both fixed and current assets and recording of the transaction. In order to ensure that all transactions are recorded, they are authorised and approved by the owner only. Only the manager is authorized to handle cash receipts before properly accounted for in the books. All business cheques used in the business are pre-numbered and the sequence in which they are used, is recorded at the bank so if there are discrepancies, they can be identified or verified and reported to the business. Source documents are kept safely in the locked cabinets or drawers which only the owner and the manager has access to. It is the duty of the manager to lock away the cheques each night and only the manager and the owner have access to the safe. Only the owner is authorized to sign cheques. Cash in hand is reconciled with copies of the receipts collected from customers by the manager and also with records entered in the cash books. The owner performs all reconciliation on a weekly basis with the records provided by the manager. During the week, while the company operates cash is locked away safely in locked cash box and is only accessible by the manager and the owner. It is sent to the bank and a bank reconciliation statement is prepared and done monthly by the owner. The manager to employee ratio is 1:9.
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INTERNAL CONTROL OVER ACCOUNTS RECEIVABLE Morgan Grocery Shop offers goods on a credit based system. Most customers are regarded as debtors; hence their personal information is collected such as their address, contact number, occupation; to ensure creditworthiness and ability to repay their debt. This is stored on the computer in a customer database which is backed up monthly and is done by electronic mail. Customers receive a receipt of their transaction which includes the amount that they have paid for their goods and the outstanding balance owing. A copy of this receipt is kept and monitored by the manager who is responsible for securing it away in the locked cabinets, thus reducing fraudulent interference within the business. These records are recorded in the accounts receivable book by the manager. When debtors pay their balance, the receipt book is updated showing the date of payment and the amount paid. The accounts receivable book is also updated with the amount paid for by the respective debtor. The accounts receivables are an asset which is susceptible to fraud and so is closely monitored by the manager and supervised by the owner. The accounts receivables are recorded by the manager in an accounts receivable book which is locked away by the manager in file cabinets each day. The only authorised persons are allowed to view these documents are the manager and the owner. The manager responsible for the accounts receivables ledger is independent of the owner who manages the general ledger with the debtors control accounts. The 9
accounts receivables are monitored by the manager. These records are transferred to the owner who is responsible for preparing the proper accounting statements and ensures that the debtors’ ledger control account is consistent with the accounts receivable figures.
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INTERNAL CONTROL OVER ACCOUNTS PAYABLE The business accounts payable system is mainly monitored by the owner. The owner is the only person that controls the crediting of supplies and goods used in the business. Only authorized personnel allowed to see these documents are the manager and the owner. Copies of these documents include receipts and invoices which are stored in a locked cabinet. The owner implement the following internal control methods to reduce fraudulent actions, these methods are: separation of duties, rotation of employees, documentation and proper authorization. The accounts payable accounting records is done independently keeping the general ledger with the creditors control account. Copies of these receipts and invoices from the suppliers are also sent to the manager. Some creditors are paid by cash and some by cheque. The manager makes payment which is authorized by the owner.
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ANALYSIS OF FINDINGS
The effectiveness of the internal controls of Morgan Grocery Shop is shown below with 1 being most effective and 5 being the least effective: The Effectiveness of Internal Controls at Mini Laundry Mat Limited Internal Controls
1
Establishment of Clear Responsibilities
2
3
4
5
Segregation of Duties
Physical Controls
Proper Authorization and Approval
Proper Documentation and Records
Competent Personnel
Supervision and Management
Internal Check
1-Most Effective 5 – Least Effective Figure 1
The table above shows all the internal controls used by Morgan Grocery Shop are effective to a small extent. It went on to show that establishing clear responsibilities is the most effective internal control. Physical controls, proper authorization and approval, proper documentation and records are lacking to an extent. Segregation of duties and supervision and management are not as effective. It also shows that 12
internal check is the least effective internal control.
PIE CHART SHOWING THE LEVEL OF SUPERVISION
Figure 2 The chart above shows the ratio of supervisor to employees is 1:9.
Bar Chart Showing The Importance of Internal Control As Perceived by Employees
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Figure 3 The chart shows the importance of internal controls as perceived by the employees in the organization. It shows that internal checking is seen as the least important while the establishment of clear responsibilities is the most important. Physical controls are also viewed as important to a large extent as well as competent personnel, supervision and management and proper documentation and records.
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Figure 4 The chart above shows that cash is the main focus of the organization pertaining to internal control and accounts payable is the least important focus of all the other areas while cash and accounts receivable are considered to be the areas with the most focus.
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EVALUATION The internal controls at Morgan Grocery Shop are overall effective to a small extent. The level of competence of the workers is poor and does not help to ensure that the internal controls of the company are maintained and as a result this may ultimately affect the profitability of the firm. The segregation of duties in the organization is extremely poor in various areas; there is moderate control when it comes to the security of the stocks in the organization; however this is not very effective or efficient as there have been reports of attempted break-ins despite the lock placed on the cabinet. An efficient security system should be present as proper measures should be in place to safeguard assets. There is an efficient way of ensuring that all transactions are recorded and the cash is safeguarded against theft which is in keeping with the controls, however the segregation of duties are lacking in this area. The sole trader is responsible for handling the receipts, cash register as well as entering in the respective books; thus increases the possibilities of errors and inaccuracy of financial statements in the organization. This manager has the opportunity to defraud the company to a large extent as he or she is responsible for a wide range of activities. It is also unsafe to have cash on the premises for such a long period of time as this increases the opportunity for theft and other fraudulent activities in the business as cash should be put away in a shorter period of time. In addition to this, the same employee may be allowed to make entries in both the purchases/sales ledger and the general ledger. This invites fraud, inaccuracy of data 16
presented in the income statement and or balance sheet and also breaks down the ability to detect errors readily as this will cause irregularities; e.g. a person is able to record the same figures that would ultimately cause the balances in the Balance Sheet totals to agree. The manager is responsible for operating the cash register, entering transactions in the books, preparing receipts, controlling the accounts receivable, collects and verifies the stock. This is a major violation of the segregation of duties in the organization as the manager is able to completely defraud the business. The manager is also responsible for too many duties such as controlling the accounts payable, authorization, approval, and stock requisition. This is not efficient as the manager may not always be present to play all these roles or act out these responsibilities. Employees are fully aware of their duties and responsibilities in the establishment; however some employees fail to fulfil or carry out their respective duties thus leaving most of the workload on the manager. There is not an effective switch over system from electronic to manual in the case that the electricity goes. This may result in incorrect information being inputted in the system, errors such as miscalculation of figures, delay of relevant information thus leading to inaccurate information presented in the income statement and or balance sheet. Limitations of having a computerized or an electronic internal system, will lead to big problems if a power outage should occur and so there might be no evidence that the transactions had taken place and hence it would not be properly documented and recorded and would ultimately lead to an error in the financial statements. The organization has a direct backup system for its files which employees are 17
able to use and so increases the availability of obtaining the information at their convenience. The employee to supervisor ratio is quite distant. As a result, workers may not be monitored as is necessary and may get the opportunity to collude and will be able to defraud the company. The Grocery Shop does not have regular internal checks as a result, no verification occurs of the work done by the employees in the business, which does not allow for discrepancies to be discovered. The financial statements’ reliability and validity are strongly affected by the assessment made on the internal controls. The stock figures (opening and closing) in the balance sheet may be incorrect as the current internal control does not properly safeguard the stock in the business. The cash, accounts receivables and accounts payable figures may also be unreliable. The accounts receivable figure in particular may be unreliable to a great extent as the segregation of duties is highly lacking in this area. The turnover figure in the final accounts could also be affected due to the poor separation of duties.
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RECOMMENDATIONS
The weaknesses highlighted in Morgan Grocery Shop can be addressed to improve the financial state of the organization. In order to improve the reliability and consistency of the financial statements of the business, the relevant internal control system for each asset studied should be chosen for the most secure and effective means of security for the business. It is also highly recommended that there should be internal checks implemented on a regular basis to verify the work done by employees in the organization, also the internal systems should be modified for effective security measures. It is also very important that the tasks allocated to the manager should be divided so that he or she does not have full control over every aspect of the business. Cash and inventory count should be done on a regular basis by another employee hired for that purpose. It is also advised that cash should be removed from the premises in a shorter period such as each day. Employees should be officially provided with job responsibilities. The accounts receivable could be managed electronically, to minimize errors and shorten completion time; also files can be backed up regularly. The password to the computer should also be regularly changed. Additionally, the owner should ensure that the manager gets more leisure days for all the being done. It is better if another employee who is independent of the general ledger records be responsible for doing so.
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CONCLUSION After conducting a thorough investigation on the internal control systems used in Morgan Grocery Shop, the researcher concluded that there are good methods of internal control in place for each prominent asset but these methods need modifications in order to be more effective in securing these assets, reducing fraud and inaccurate financial data that can jeopardize a business financial standing and performance. In assessing this business it is clear that specific duties and responsibilities must be trusted upon other employees, for having a big workload on one main employee will lead to stress, insufficient data and inaccurate information being inputted whether in a computerized or manual accounting system. There are different control methods for inventory, cash, and accounts receivable and payable; such methods are: segregation of duties, adequate documentation, independent internal verification, proper authorization, competent personnel with clear responsibilities, physical safeguard of assets and rotation of employees. Each method can be broken down to work as effective as possible for each asset and should be carefully analyzed before being implemented. After implementing the most effective and efficient control system, the owner and manager should regularly evaluate and assess the control systems to ensure maximum and optimum effective security of all assets, hence reducing the risk of fraud, theft, inaccurate or unreliable information. This will help in keeping proper financial records for the business.
Bibliography 20
“CAPE Accounting textbook” by Harold Randall
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