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Cookridge Carpets- Aat Internal Control Accounting System Essay Sample

Cookridge Carpets- Aat Internal Control Accounting System Pages
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1) Terms of Reference

1.1
This project has been prepared to fulfill the criteria of Unit 10, managing systems and people in the accounting environment of Level 4 AAT.

1.2
The objectives of this report are:
To identify the current weaknesses in the payroll and cash handling systems within Cookridge Carpets ltd, and to help to prevent fraud from within the business To suggest an implementation of new systems that will help to reduce errors and fraudulent activity with in the financial accounting systems of the organisation, particularly payroll and improving the current systems relating to the storage of cheques and petty cash.

2) Methodology

2.1
In order to write this report, the company diary and job descriptions have been made available to review. By looking over the diary and seeing how the accounts department currently works it will be possible to identify strengths and weaknesses and determine recommendations off the back of these weaknesses. This will make the business more effective and improve the company’s internal controls.

3) Executive Summary

3.1
To summarise, after research and feedback from employees within Cookridge Carpets Ltd it has been discovered that there are several weaknesses in the current accounting systems relating to payroll and cash handling within Cookridge Carpets ltd.

3.2
The petty cash system is not secure and is susceptible to theft. The way in which the payroll information is stored means that it could be accessible to all and could be subject to identity theft. There are no backup systems in place meaning that should any data be lost, it would have to be re-input by a member of the accounting staff, resulting in work being duplicated and a loss of valuable staff time. Whilst a member of staff is re-inputting lost work, other important accounting work will be delayed and would have to be completed at the company’s cost. Staff wages could easily be stolen as most of the staff are paid in cash, these pay-packets are kept in the safe once processed until the office manager collects the wages and hands them out, again, no record system in place to record who has received their wages. Staff wages are calculated from the staff rota, meaning that those who hadn’t worked overtime could be overpaid, and those who had worked overtime could be underpaid, as these rotas are not always upto date before the payroll clark receives them. Only one member of staff has the knowledge to complete payroll procedures.

3.3
Recommendations have been made to ensure the safe and secure storage of information and backing up of information. Improvements have been suggested as to how to maintain a secure petty cash system. Staff training should be addressed immediately to ensure a smooth running of the accounts office and to address the situations where only one member of staff is trained to do the wages, this way should there be holidays or sickness, then the rest of the staff wont suffer from unpaid or short wages. A new system for handling wages each week needs to be put in to practice ensuring all staff receive their correct wages on time each week.

4) Background of the Company
4.1
Cookridge carpets Ltd is a large Company selling carpet, soft furnishings and beds, they are based in Southampton. The business has been established since 2007 and has been trading for the past three years. It was set up by two brothers, Peter & John Cookridge. Peter is a trained carpet fitter and has been in the carpet industry for 20 years. John was a mining engineer, but has recently been made redundant. Although it is a limited company the brothers have invested £180,000 of their own funds. The main stakeholder is Peter Cookridge who invested £100,000 into the business. The company has recently been asked to be the main dealer of Memo beds and at the moment they have no competitors in their area. The business has started selling beds over the Internet.

The company mission statement for the company is:
“To provide an excellent level of service to all customers, whether they are spending £5.00 or £5000.00 –and to provide carpets beds and soft furnishings that make a house a home”

4.2
Cookridge Carpets like any business has external stakeholders, who have interests in the businesses performance and figures. Examples are:
Customers, these rely on the good name of the business and the business performing well. Local community, there could be potential for expansion and create jobs. HMRC, as they will be paying tax and VAT

Suppliers, by placing orders they are keeping other businesses going. Cookridge carpets will also have internal stakeholders, examples are: Shareholders, these are the two brothers who started the business. Employees, who rely on their jobs and expect to be paid each week for their services.

4.3
The core values within Cookridge carpets are:
• Respect for all
• To treat the customer as you would expect to be treated
• Commitment
• Accountability
• Passion for continuous improvement
• Professionalism
4.4
The main bulk of the company’s profits come from the sale of carpets. As well as being paid an hourly rate the showroom staff are paid commission. The company has started to trade over the Internet, which has improved sales and has aided the company in being recognized not only within the UK but also globally.

For a structure of the staff within Cookridge carpets, please see Appendix 1

5 The Accounting System & Internal Controls

5.1
Cookridge Carpets Ltd is classified as a hierarchical structure as an organisation. It consists of different levels of seniority of people. There is a centralized accounting department (back office), which leads to a customer facing area – the shop floor. There is a big risk of Data protection being breached here, leaving a potential risk open to fraud as customers can make their way to the toilets and pass by the open door to the accounts office where customers personal details, including bank details could be on show for the public to see, and possible steal. The sales that are made on the shop floor, either by sales people or via the internet will be recorded by the accounting department team on their systems, along with many other events that are involved in the production of the accounts.

5.2
This information will be presented in the income statement, this establishes the profits and losses that the company will make at any given period of time during the accounting period. The team will have responsibilities for producing the statement of financial position, showing the assets and liabilities within the business and how much they equate to. All this information is extracted from a trial balance. The team have responsibilities for producing a statement of cash flow which looks at the inflow and outflow of cash within Cookridge Carpets, and determines how liquid the business is. The interested parties can obtain information on the business via the companies Income statement, provides information to the company’s directors and investors whether the company has made or lost money during the period being reported. Forecast/cashflow is a key aspect of financial management of a business, planning its future cash requirements to avoid a crisis of liquidity. Statement of Financial position shows the companies assets, liabilities and equity at a particular point in time. It is sometimes described as a snapshot of a company’s financial condition.

5.3
All staff are accountable to Peter and John Cookridge.

The business employs 20 staff:
Nine direct sales staff
Three Internet sales staff
Two cleaners
Two car delivery drivers
One accessories salesperson
Three part-time staff in the accounts office.

The showroom is open 7 days a week.

5.4
In the Accounts Department there are three members of staff, a wages clerk, an accounts receivable clerk and an accounts payable clerk. The wages clerk deals with the payroll for each member of staff. All the staff apart from the accounts department are paid weekly in cash, pay packets are available from the showroom manager, Jim Andrews from 10.00am on a Friday morning. The rest of the staff are paid monthly by cheque on the last day of each month. The wages clerk (Sonja Douglas) is given the Rota on a Wednesday to calculate the wages she then prepares a cheque to be signed by one of the brothers so that she can withdraw the correct amount of cash from the bank. The Account receivable clerk (Stefan Kalinowski) is responsible for preparing sales invoices, manage credit accounts, ensuring all payments are made within 90 days, and prepare monthly management information. He must deal with customers when preparing credit control, so it’s important that they have good customer service skills. The Accounts clerk (Margaret Peterson) responsibilities include, checking GRN and purchase invoices, liaison with suppliers, managing accounts payables, ensuring payments are made accurately and on time and to prepare monthly management information alongside Stefan.

5.5
The accounting systems within the organisation must abide by the IFRS and IAS standards and any external regulations such as health and safety Act. For example: if the Data protection act policies changed the staff will have to be taught the new process. This would be the ultimate responsibility of Peter & John Cookridge. It is vital that all IFRS standards are kept up to date and ensure that if changes are made externally by the international accounting standards board then the policies within the business are changed
to reflect this.

6) Evaluation of the Accounting Systems

6.1
The accounting system, which a company has in place, is the backbone of the accounting function. The system needs to enable the following tasks to be completed in a timely manner.

• Calculate payroll and track salaries and related taxes.
• Produce sales invoices and record sales.
• Record expenses and purchases
• Control Inventory
• Record cash and bank balances.
• Monitor the company’s creditors
• Produce reports such as Income statements, cash flows and bank reconciliations.

The system and structure that a company chooses to implement will depend on the nature and size of the business. Cookridge Carpets Ltd currently runs their accounting system using Microsoft office applications. Many of the tasks performed are repetitive, time consuming and rely on accuracy of data. By reviewing each section within the accounting system, it will be possible to identify weaknesses and suggest improvements to make Cookridge Carpets Ltd.’s accounting function more cost effective and more efficient.

6.2
If we look at the Petty cash: In Jan 2010, Lynn (an new sales team member) was asked to get a large jar of coffee, when she checked in the petty cash tin there was no money in it, so Jim took £10.00 out the till, but made no reference that he had done this. When Margaret was asked where the money was, she checked the tin as she had placed £100.00 in it the week before. There were only petty cash slips to show that £40.00 had been spent in the 2 last two weeks. As anyone has access to this tin, it is going to be easy to steal cash from it, so a system needs to be put into practice where other members of staff will have to ask one of the accounts team for some cash out of the tin. The change and receipt for goods obtained must be presented to the accounts department so they can keep good records in the tin. An imprest system should be put into practice with the petty cash tin. As no records keeping system is in place, no one knows where the money is going, this needs addressing.

6.3
The payroll has several weaknesses:
Sonja Douglas prepares all payroll information and payments to staff. She is the only person on the organisation that is trained to operate sage payroll. To estimate future wage packets on one weeks Rota is unacceptable practice. There is no mention of PAYE or National Insurance contributions being made each week/month. Sonja has to go to the bank with a signed cheque to withdraw enough cash to be able to complete the wages for the staff that are paid weekly, this is a dangerous situation to be putting Sonja into every week, as there is the potential that she could be followed from the bank and have the cash stolen from her.

6.4
All computer systems that hold the employee information, payroll information and the majority of financial information are not password protected. The computers that are password protected, the password is known through the company, in case Sonja is unexpectedly off. Some blank cheques are pre-signed in case the brothers are off, as these are the only people that can sign cheques.

7) Strengths & Weaknesses in the Accounting System

Weaknesses
7.1The accounting system’s arrangement for cash handling and record keeping of cash payments seems non-existent. The petty cash system is not set up properly allowing opportunities for theft. Cash is held in the safe along with wage packets, there is no record of any kind in place to show who has collected their wage packet. There is an open invitation to theft.

Sonja is the only person who is currently able to complete the payroll, as no one else in the accounts office has had any training, although Stefan is willing to undertake training so he can take some of the pressure off Sonja. This could improve the moral in the office as Sonja wouldn’t feel the pressure to complete the payroll if she is to go on holiday. No process is in place to cover her absence whether expected or unexpected. Sonja stores all payroll information on her computer. This data is unsecure and all staff have access to her computer. There is personal data about other members of staff held on her computer, which if accessed by any third party could be seen to breach the Data Protection Act. See Appendix 2. The DPA stipulates that all data held about individuals must be stored safely and securely.

Sonja completes the pay packets for all staff, there is no practice put in place to have then checked, verified or counter signed. It is presumed that once they are complete, that they are correct, they are then placed into the safe until Friday morning when they are handed out to staff. As there are no checks in place as to who receive their wages, this is a high-risk option as they could be given to family members or other workers by mistake.

All computers are on a standalone basis, these could be upgraded so that they all link up together.

Fraud:
7.2Covers a wide variety of offences but in general terms, fraud is seen to be the use of deception with the intent of obtaining an advantage, avoiding an obligation or causing loss to someone else or an organisation. Fraud is a criminal activity. There is a possibility for fraud to take place within Cookridge Carpets, as some of the controls within the accounting function are very weak. It is not a problem at the moment in the company as there are only 3 staff in the accounting department, but this may not be the same in the future if more staff are employed and more people have access to the accounts package. One example of fraud going undetected is the lack of confirmed information when processing the payroll. Any member of staff could very easily get paid too much, or maybe even twice as Sonja is the only qualified member of staff to complete the wages. If fraud was to occur within the business it could cost time and money to investigate and put right, if there are sufficient controls in place and some internal auditing happening on a monthly basis, this could prevent the business becoming victims. Fraud can often go undetected for long periods, and this is a high risk factor to the company.

Strengths

7.3
All users know how to use Microsoft Excel, but to different levels, therefore a staff training day would be an advantage to all. There are packages online that are free and they can learn at their own pace, and would be able to help each other. The accounts office has a keypad on the door, this should be used and passcode changed on a regular basis. Only the 2 brothers are key holders for the offices, so at least they know that no one will be wandering round the offices when they shouldn’t be. All drawers are lockable, and there is a safe in the office. The petty cash tin is lockable

All computers can be password protected.

8)Recommendations for improving the cash handling, payroll and Accounting systems

8.1
There are 4 suggested options for improving the current cash handling and recording of payroll systems, listed below:

1
Secure the offices and cash, lock away secure items such as petty cash tins and cheque books. All doors are to be secure, especially the accounting department. The senior account manager who is the only full time member of staff in the accounts office will have sole responsibility for the keys, petty cash & cheque books and will ensure there safety.

2
Migrate all the information onto the sage accounting systems as well as keeping hard copies. This means the information will be securely stored and protected, preventing possible fraud or error. Inventory records are kept on excel spreadsheets, these could be controlled better with the purchase of Sage Accounts 50.

3
Put checks into place to ensure work is being carried out effectively and correctly, specifically payroll. All pay packets should be checked by another competent member of staff in the accounting department. When completed they should be locked away in the safe as suggested earlier. Record keeping systems, all records are kept in Microsoft office documents,

4
A clocking in system could be used, a cost and benefits package is shown in appendix 4, this would enable the correct wages are calculated each week.

Although the majority of the changes recommended can be easily implemented, they will save the company both time and money in the long run by reducing the risk of fraud, and minimizing the duplication of work. This will help to improve staff morale, in turn increasing productivity.

Any training would have a cost effect on the company, being the wages paid to the staff for the time to train them, however, as the accounts department are salaried, this will not have an effect on the companies overall outgoings. There will be minimal training required for the sales team, which would mean money saved on overtime.

However options 2 & 4 could have a significant effect on the company’s outgoings.

9 Cost Benefit Analysis

From the above recommendations, this is the breakdown of cost for the two options that would have the highest cost and possibly the best outcome.

Option 2: The clocking in system would mean a one off payment of £140.00, then the cost of maintaining the machine each year, and the cost to purchase the clocking in cards per employee. To make the information supplied to Sonja more reliable a suggestion could be a clocking in machine. Some information is available from the Internet on site:

www.clockingsystems.co.uk. This machine listed is on sale at £140.00 and includes, 250 free clock cards; free 25-slot rack, free ribbon and free delivery. Listed below are some of the machines benefits.

• Simply Plug in and start clocking straight from the box.
• Up to 4 clocking’s per day per employee.
• Fully automatic in and out clocking.
• Automatic hour change for Summer & Winter.
• Auto re-set of time, date & memory after power cut.
• Large, clear LCD time and date display.
• Tough ABS construction for robust use.
• Anti-tamper, lockable case.
• Built-in battery backup for time, date and memory auto-reset after power failure.
• Selectable print formats: Date and time, day and time (12 or 24 hour format).
• Standard 60 min or 1/100 (decimal) and 1/10 hour time printing.
• Wall or table top mounting.

• 1 year warranty.

Option 4: Sage 50 Accounts plus: See Appendix 2 for website Its main features and benefit are:
• It’s suitable for small to medium sized businesses.
• It generates invoices, quotes, orders or proformas for customers.
• Manage inventory levels
• VAT management
• Flexible reporting, i.e. statement of Comprehensive income and statement of financial position.
• Debt reports
• Bank reconciliations
• Cash register – helps account for takings, tracking discrepancies and managing till floats
• Can be linked to the companies website, so sales made over the internet are recorded in the correct ledgers
• Reports can be linked to excel
• Helps to keep a company updated on legislation changes such as VAT
• Is compatible with Microsoft vista.

Only 2 licenses will be needed to install on a network housing all for computers.

This way all tasks performed by the accounts staff can be consolidated onto one system. After an initial injection of money, sage 50 accounts plus would save the staff time as most tasks will be automated.

The training for this is £145.00 per stage; you can work at home or in the office, with step-by-step guides. There are 3 stages each at £145.00 per stage. Each stage includes a 180-day version of sage 50 accounts, plus practice data to get some real hands on experience. Introducing Sage 50 accounts plus into the company will cost £1,120.00 + £250.00 for network license. (This initial outlay includes a £270.00 training voucher to aid the accounts staff in learning to use the system)This system will prove beneficial to the accounting department, as it will reduce the time taken to do the work, work wont be duplicated, as all members of staff will be trained to use it, there will be no problems with holidays or sickness, and worrying about wages being paid. This will increase staff morale.

After assessing the benefits it is clear that by improving the efficiency and control over the systems that time and money would be saved, meaning it could be spent on other

10) Conclusion:

10.1
This report has been reviewed Cookridge Carpet Ltd current accounting systems and internal controls, it has identified weaknesses and has recommended solutions.

Implementing these solutions will help to make Cookridge Carpets Ltd a more efficient workplace and will help to combat the risk of fraud. The next stage in the process of improving the company’s accounting system and internal controls is to consider the recommendation made and implement where considered necessary.

11) Appendices

Appendix 2: Internet Research:

i) Clocking in system: www.clockingsystems.co.uk

ii) Excel Training: www.free-training-tutorial.com

iii) Sage 50 Accounts Plus: www.sage.co.uk

iv) Data protection Act: www.ico.gov.uk/for_organisations/data_protection.aspx

Appendix 3: Swot analysis:

Strengths:

• Small accounting team – Cookridge carpets Ltd has a small accounting function made up of 3 people, this makes it easy to control. • Staff training – staff are happy to expand their knowledge and are open to suggestions on how to do this. • Stakeholders: The company has a good reputation with stakeholders and is he leading memory foam provider in Southampton.

Weakness:

• System Integration: The sage accounting system is not used to its full potential. • Poor communication: there is a lack of communication between the sales floor team and the accounts department. • Security: There is hardly any security relating to the secure storage of petty cash, wages and cheque books. • Knowledge – Not understanding the full potential of software and systems hinder the efficiency of the accounting function. Courses and reading up on the software can improve knowledge.

Opportunities:

• Business sector: The company is expanding with many future opportunities for success. • Staff training: staff are open to learning and development • Dealership: the company has recently become the main dealer of memory foam beds and therefore could expand and increase sales by advertising more on the internet

Threats:

• Communication: there is a lack of communication between sales and accounts departments, this has meant that some transactions have not been accounted for. • Fraud: Open opportunities for theft or fraud in the business as no security in place in accounts office.

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