Question

Super Garden Equipment Ltd makes a large range of garden ornaments and gardening tools and accessories. It has 126 employees. Turnover last year was a little over £15m.

The company operates an accounts payable system to make payments to suppliers and other non-payroll payments. The total value of payments made last year was £4.56m. The company is VAT registered and is able to recover VAT on most payments that it makes and then has to charge VAT on most sales. The payments process is managed by the Accounts Payable Supervisor, who has two Finance Assistants working with her.

The system has for many years worked on the basis of processing paper invoices. A paper order is raised by the budget-holder and sent to the supplier specifying the goods and/or services required. When these are received, they are checked and the invoice is signed by the member of staff who checked the goods and/or services to confirm that the items were received and in good condition. The invoice is then checked by the budget-holder and payment authorised by signing the invoice as authorised for payment. The invoice is then taken to the Finance Office and placed in an in-tray. One of the Finance Assistants then checks the certifications and inputs the invoice to the computerised accounts payable system. As part of this process, the recoverable VAT is identified. The VAT rules are complex and the Finance Assistants have learned a great deal since starting their current roles. They often have to discuss invoices to work out whether the VAT is recoverable.

At 3.00pm each day the two Finance Assistants swap invoices and check each other’s workfor the day. If there are no problems with an invoice, the on-screen “PAY” button is pressed.If there are any problems, the Finance Assistants discuss them and seek to resolve them. A list of payments confirmed for payment each day is then automatically e-mailed to the Accounts Payable Supervisor. She has 48 hours to carry out a sample check and query any payments that she is unhappy about. Payments not queried and stopped are paid by bank transfer after the 48 hour period has ended. Payments over £10,000 are also automatically e-mailed to the Finance Manager, who is also expected to carry out a sample review and can also stop any payments that he is not happy with.

On average, about 800 invoices are processed each week. About 80% are double checked and the Accounts Payable Supervisor checks 20 each day. The Finance Manager checks all payments over £25,000 and about half of those between £10,000 and £25,000. These levels of checking reduce during holidays and periods of illness.

The Finance Assistants and the Accounts Payable Supervisor have full system access so that the latter can input invoices in the absence of one of the Finance Assistants. She occasionally provides cover for her staff during holidays and periods of illness.

Required

1. Identify six significant control weaknesses in Super Garden Equipment Ltd’s accounts payable system.

2. For each of the significant control weaknesses that you have identified in your answer to 1), identify and explain the value of an appropriate improvement in internal control.

Answer 1

The internal control issues in the AP systmen are the following ;

1. Ther purchase order is generated as hard copy, it is not entered into Accounting system and receiving and AP or treasury department.

2. The receiving department does not check if the goods /services received as per PO and the quantities are as per PO.

3. AP department processes the invoice approved by budget holder , there is no matching against the PO if the quantity , rate are as per PO.

4. The AP entries and recoverable VAT entries are cross checked by the Finance Assistants themselves, no independent review is done for the entries.

5. The payment is done as per the payment term of invoice, it is not cross checked against the the PO paymnet terms agreed.

6. The payments are authorized by the Accounts Payable supervisor. There is no segregation of duties.

The following improvements can be done for each of the internal control weaknesses describes above ;

1. Instead of making a paper PO, the PO can be generated in the accounting system and can be integrated with receiving , AP and Treasury functions so that the PO can be accessible to each person involved in the process. This will be a huge improvement as everyone will validate the transactions against one source of truth , that is the PO.

2. The Receiving department can check the goods /service against the PO in sytem to ensure that the goods /service quantity and quality are as per the PO. This is a very important check point to ensure that the ordered materials are recieved in correct quality and quantity.

3. The AP department need to match the PO, the Invoice and the receiving report to ensure that there is no deviation in quantity , rate and price among the three sets of documents. This is the vital step in AP control that eliminates any chance of error in detecting variance against PO and actual receipts.

4. The AP entries with recoverable VAT entries should be checked and approved by AP Supervisor aor any other responsible Manager to detect any error at the entry level and approve any variance against PO , before the payment process starts. This is very important step to avoid errorneous entries and wrong payments going out from that.

5. It is very important to follow the paymnet term as agreed in PO and not what is mentioned in Invoice. This is very important as cash outflow can get distorted if the payment term as per Budget owners PO is not followed.

6. The duties of AP processing and payment processing must be segregated to avoid conflict of interest. This is a very important control to avoid possible frauds. After the AP processing is over, the Treasury department should take over and schedule the paymnets as per availability of fund and the sequence of AP aging. Payment processing must not be triggered by AP team members.