Non-collectability of Debts Internal Control Procedures
Discuss about the Information Technology Resources Provide Competitive.
The internal control procedures practically required by the company Mallacoota Marina Limited in the given identified risks are :
This is a major risk in every business that where the sales are done on credit basis, as the collection from debtors is a strenuous task for every company. In case there are any bad debts, it results in revenue loss to the company (Laux, 2014). For ensuring collection from debtors on a timely basis, following internal controls may be implemented by the company:
- The company should maintain proper reporting devices for keeping a check on the collectibles such as cash registers, cash receipts, check registers, etc so that every receipt from the debtors may get recorded (Leo, 2011). The presence of proper register will help the company in tracing various items and will provide a basis for comparison, as well as rectification.
- The company should maintain proper debtor’s registers to keep a record of the sales done to them, the amount received from them and the outstanding balances at the end of the period. The invoice registers or the invoice books should be tallied with the entries done in the debtor’s registers so that no entry for the invoices is missed out. Once the register is properly maintained and verified, it will lead to a better scope of reconciliation and will thereby make the accounting process more reasonable in nature.
- The employee’s jobs must be segregated so that those employees which do not have cash handling responsibilities should be allotted the work of collection from debtors and recording the same in the account books maintained (Laux, 2014).
- The amount collected directly in bank accounts should be recorded separately and afterward, should be compared with the entries done in debtors account book separately.
- Proper software should be assigned within the company so that the debtors can be classified age-wise and timely reminders are issued to the collection team so that there is timely and accurate collection from such debtors (Lapsley, 2012).
As there is no coordination between the Slipway and administration departments and whatever the slipway department raises the bills to be invoiced, the administration department without any questions makes invoices of the same (Leo, 2011). So there always remains a possible chance of under booking of revenue and below we explain the internal control procedures that can be adapted to minimize the risk :
- Every work order or services done by the slipway department should be cross-checked by the slipway manager first and then only the same should be sent to the administration department for billing. This process is essential in the fact that such a process will help in verification and thereby will led to providing the correct entry at the correct point of time.
- There must be a standardized process for every work. For example, for every type of repair and maintenance, a standardized worksheet should be maintained and justified by the slipway employees who are responsible for the work to be done (Marsh, 2009).
- To stop under-invoicing by the employees, their duties should be changed frequently and they should be allocated the work from the slipway manager without any interaction with the client itself.
- It should be cross-checked by the administration head that the staff preparing the bills does not give any discounts to the client at its own discretion. The discounts should be provided as per the orders of the top level executives only (Lapsley, 2012).
- The employees may make a deal with the debtors or customers so as to under book the bill raise to them so the employees work order raised should be compared by the head of the department and randomly it may cross-check with the customers so that the worksheets are double checked and under billing may be checked. (Matthew, 2015)
The company has hired both full time and casual labors for the completion of work and overtime is often done on weekends. For keeping a check on overpayments being done to the employees for overtime, following internal control checks may be adopted :
- The company should maintain proper attendance registers in which the time of arrival time of departure, number of hours worked overtime, number of leaves taken, etc should be mentioned. Moreover, at the time of arrival and departure, the employee should sign that register under the supervision of a deputed supervisor (Hoffelder, 2012).
- The rate per hour of overtime done should be predetermined in advance so that at the time of payment of overtime salary or wages, the wrong amount is not paid to the employees. The pre determination is essential in the case because the entire computation can be done at the beginning. The presence of rates at the beginning leads to a smooth flow of the work and does not hamper the flow of the accountant.
- Every overtime to be booked should be only allocated when there are enough work orders available with the company and there is sufficient evidence that the same could not be completed within the normal working hours. The slipway manager should allocate the overtime only when the work is beyond completion within the normal working hours.
- In case the normal wages are less than the overtime payments, it is advisable to hire casual labor rather than employing or allocating overtime in a weekend which will not only save overtime payments but also allow the company to complete the work timely (Melville, 2013).
- The slipway manager should try to divide entire repair work with the available employees and take regular follow up from them of the completion and pendency of the work. There should be strict guidelines for the completion of every work order and there should also be a deduction from the employee salary in case of delay in work and incentives if the work is completed before time (Hoffelder, 2012).
Inventory being stolen–The inventory mainly consists of paints and electronic boating equipment. The inventory is stored in the slipway warehouse. Once the slipway manager issues a work order, the employees take out the inventory items on its basis. The main problem here is that the inventory is accessible to every staff member when the work order arrives. The internal control procedures may be as follows:
- Firstly the access to the inventory stores should be given to only a few authorized personnel. There should be secured locks with passwords or combinations so that only the authorized person can enter the warehouse (Merchant, 2012).
- Every inventory should be managed through computers only where there should be a storekeeper who should maintain every inventory in digital mode only. This will help in stopping the leakage of the inventories.
- Every expensive equipment should be issued only with the approval of the slipway manager where he shall justify the usage of the part and it should be immediately allocated to the work order also.
- Inventory should be categorized according to their value, size, usage and their dimensions. These should be covered by an insurance cover. Every breakage or return should be recorded in the account books (Merchant, 2012).
- The company should make sure that there should be inventory audit at every specified period of time.
- The duties of the employees should be segregated and the employees responsible for issuing of stock must be different from those receiving them in the warehouse.
The internal control procedure that may be adopted by the company may be:
- The bookkeeper of administration department is responsible for raising invoices and making supplier payments and his work is not cross-checked by anyone. His work should be cross-checked by the administrative manager and in case of his absence, payments should be delayed until his presence in the company.
- Every invoice of the supplier should be recorded and should be allocated a due date for its payment. At the time of the payment of the invoice, a receiving must be obtained so as to ensure that the supplier does not ask for its payment again (Needles & Powers, 2013).
- The payment must be made only through online mode or account payee cheques which itself keeps a check and acts as an evidence of payment (Ross et.al, 2014).
- The supplier ledger statements should be obtained frequently and the same should be tallied by the accounts person, in this case, which is the bookkeeper.
- Every payment made to the supplier should be done on a bill to bill basis, it should not be done on account or lump sum basis. Every payment must be made on the due date or before due date through electronic mode only so that no creditor can deny the payment.
The general control weaknesses found by the auditor in the company operations are as follows:
- An IT department is a significant department of the company which should be headed by IT director who should be a specialist in IT field and should possess at least 10-15 years of experience in the same line. But in the given case, the IT department is under the control of Finance Director who has the minimum knowledge of IT operations. This is a major control weakness (Carroll, 2014).
- The company uses FMS as its system to record its management and other functions. The person responsible for making modifications in the FMS was a system analyst. This is a major irregularity because any significant modification in the software of the company should be done by a team of IT experts. In this case, only one person was responsible for carrying out the modifications (Basta et.al, 2013).
The company did not have any backup of the software which could have brought a disruption in the day to day operations of the company. The system analyst left the job after an argument with the IT manager and no replacement was made before his departure. This made a collapse in the operations as there was no specific directions or any documentation done by the analyst for the FMS operations (Basta et.al, 2013). He had explained the functioning to the employees verbally only. The notion documentation of an important function of the company is a big weakness in itself (Tucker, 2017).
- Another weakness was that the access available to the Analyst was not closed even after his dismissal. As a result, he made an unauthorized access to the FMS without the prior permission of the company. This shows that the company does not have any safety checks for its important sections also. This is a very big weakness in itself as there are no measures determined for the safety of the documents and important data of the company.
- Another general weakness of the company is that the main software FMS is unattended by any responsible person at any given point in time. This is clearly evident from the fact that the auditor entered the IT department without any permission, reviewed all the documentation and even made changes in the FMS program which she was not authorized to do. All this could happen because the programmer had not even logged out of the FMS program before leaving the department room (Carroll, 2014).
- i) The company should hire an experienced IT director who shall be responsible for all the IT operations of the company and modifications therein. There should be a clear hierarchy in the IT department which is responsible for carrying out any IT related work. Every work of a person should be checked by another person, in this way every work shall be twice checked and chances of error shall be reduced (Tucker, 2017).
- ii) In case the company carries out any modifications in the main software of the company, it should be properly documented, recorded through print,audio and video mode and a team of IT experts should be responsible to carry out the modification so that even in the absence of any IT member, the work is not destructed and smooth working in the company is ensured. In the above case, the process of modification was carried out irregularly which created disruption in the company.
The company should purchase an original software so that a duplicate backup of the FMS data should be made simultaneously. This will ensure that if the original data is misplaced or gets corrupt, there will be a backup of data available in hand with the company. This will ensure smooth functioning of the company and no stoppage of work (Barney & Ray, 2015).
- iv) There should be an HR Manager who should keep the database of entry and exit of every employee. The privileges, pay scales, access and other benefits allotted to him. At the time of exit of any employee, it should be properly recorded in the database and all the access and privileges allowed to him should be revoked with immediate effect (Tucker, 2017). The employee should not have any access to any asset of the company after his termination from the company.
- v) The department in which the FMS software database if set up should have properly designated security officials so that each and every person entering the room has to get permissions to enter (Barney & Ray, 2015). Further, there should be someone deputed at the server system of the FMS software so that no one can access the system without permissions. Also, no one else should the system to make modifications in the software data other than the IT department authorized employees
- vi) The company auditor should be given separate login for access of company operations and his log in details should be revoked once the audit is completed. The auditor should be permitted to view all the functions but no editing should be allowed to him which may create a confusion in the company (Parrino et. al, 2012) Any modification suggested by the auditor should be processed by the IT team only after complete discussion on the changes suggested.
Hence it is advised to the company to follow above effects before and during any modification in the FMS, it is the lifeline of the company and in case there is any stoppage in the system, it may seriously affect the company. The company should ensure strong compliance with the internal controls of the company (Vaitilingam, 2014)
References
Barney, J. and Ray, G. (2015). How information technology resources can provide a competitive advantage in customer service. Planning for Information Systems [online]. 3(2), p. 444-460. DOI: 10.4236/me.2015.63038
Basta, A., Basta, N. and Brown, M. (2013) Computer security and penetration testing, Cengage Learning.
Carroll, J.M 2014, Computer security, Butterworth-Heinemann.
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
https://doi.org/10.1080/00014788.2014.897867
Lapsley, I. (2012). Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management [online]. 9(3), pp. 291-292. https://doi.org/10.1111/1468-0408.00081
Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting. Accounting and Business Research. [online]. 44(4), 380-382. Available from:
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.
Matthew, S. E. (2015). Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review [online]. 90(2), p. 495-527. Available from: https://doi.org/10.2308/accr-50871 [Accessed 14 May 2018]
Melville, A. (2013) International Financial Reporting – A Practical Guide. 4th edition. Pearson, Education Limited, UK
Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific Accounting Review. [online]. 24(3), 1-34. Available from
Needles, B.E & Powers, M. (2013) Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014) Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Tucker, A. (2017) 5 technology trends set to impact accounting most. [online]. Available from: https://www.accountantsdaily.com.au/columns/10008-5-technology-trends-set-to-impact-accounting-most [Accessed 14 May 2018]
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.
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