Question

1. The Kernow Company, a client of your firm, has come to you with the following problem. It has three clerical employees who must perform these functions:

            i)         Maintain general ledger

            ii)        Maintain purchase (creditors) ledger

            Iii)       Maintain sales (debtors) ledger

            iv)       Prepare cheques for signature (including checking supporting documentation)

            v)         Maintain expenses journal (recording expenses paid)

            vi)       Issue sales credit notes

            vii)      Reconcile bank statement

            viii)     Handle and bank cash receipts.

            The directors wish to achieve the highest degree of internal control.

            Required:

            a)         How would you distribute the above functions among the three employees?

            b)         Suggest a possible satisfactory combination of the functions listed above.

            Assume that there is no problem with the competence of any of the employees and that the three employees perform no other accounting function except for those above.

2. a) Compare and contrast the internal controls in a typical small company with those in a typical large company.

            b) Explain the impact on the auditor of a typical small company and how the auditor may overcome any resulting difficulties.

Answer 1

a.) Companies hire employees to fill many different role within an accounting department and the duties of the employee depend on the size of the firm and industry.

A satisfactory combination to distribute the function among the three employees are

Employee 1

1.Maintain general ledger

2.Issue sales credit note

3.Reconcile bank statement

Employee 2

1.Maintain expense journal

2.Handle bank and cash receipts

3.Prepare cheque for signature (Checking supporting document)

Employee 3

1.Maintain purchase (credit) ledger

2.Maintain sales (debtors) ledger

b.) The above answer shows a possible satisfactory combination of functions among the three employees.An example of an unsaticfactory combination

1) Handling Bank and Cash receipts and sales ( debtors ) Ledger

2)Handling Bank and Cash receipts and issuing sales credit notes

3)Maintainig expenses ledger and purchases (creditors) ledger

.4)Handling Bank and Cash receipts and bank reconciliation

5)Maintainig expenses ledger and bank reconciliation

6)General ledger and cash and bank receipts

7)Sales (debtor )ledger and issuing sales credit notes

C.) In a small company just as in a large comapny it is managements job to maintain a system of internal control that the financial statements will be reliable.There are 4 factors necessary for establishing effective internal control

1. Seggregation of duties

It can be reffered to as assignment of duties to different employees.Proper seggregation of duties helps to ensure the responsibility and accountability among employees.In large firms seggregation of duties is easy because of the large employees whereas in a small company an employee is required to perform one or more of these duties.

2.Policies and Procedure

All business should have written policies and procedures and all the processes should be documented.In a large company there would be a lot of policies and procedure and it would be properly documented whereas in a small company as business operations are uncomplicated these common processes may not always be properly documented.Thorough and standardized documentation also allows full discrepancies and errors to be more easily identified.

3.Oversight and review

Best way to reduce risk of fraud is management oversight and review.Management must be commited to implementing and following their own internal controls.In a large company oversight and review procedures well defined at proper intervals of time whereas the internal control of a small company is likely to be loosely defined since the cost of the control functions shall be steep for a small company

4.User and access right

Prevention of any unauthorized access to key data bases and systems is of primary importance.Employees should be given limited access to information with only rights to perform function necessary to their work assignments.Small companies will have broader access to information than large companies.

D) Internal and exteranl audit each serve their on purpose but both are conducted inorder to evaluate internal control policies and procedures and to make sure your finances are in order and properly filed.They may require to undergo due to industry regulations some may need to produce a positive audit opinion to secure a business loan ,Suspected fraud concern about employee theft or operating about inefficiency are also valid reasons to engage an audit.

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