Question

Question 6

Okawa Limited is a leading automotive repair centre in Victoria. The Okawa manager is responsible for raising the initial repair orders which are then sent to the administration area for invoicing.

The administration consists of a bookkeeper and a finance manager. The bookkeeper undertakes all invoicing and banking, along with follow-up of any outstanding accounts. A monthly report of amounts invoiced, banked and outstanding debtors is given to the finance manager.

The Okawa engages three full-time staff and up to 5 casuals at any time. Overtime is often worked on weekends by all staff. Inventory is stored in the Okawa warehouse which is accessible by all staff on an ‘as needs’ basis, based on a work order raised by the Okawa manager.

Your initial review of the business has highlighted the following risks:

1. Non-collectability of debts;
2. Overpayment of overtime to employees;
3. Inventory being stolen; and
4. Payments being made to suppliers prior to receipts of goods.

Required:

For each of the risk identified above in i-iv, determine a practical preventative internal control procedure that would assist in mitigating the risks identified above.                             (4*2= 8 marks)

Answer 1

iThe iaccounts ipayable iprocess ior ifunction iis iimmensely iimportant isince iit iinvolves inearly iall iof ia icompany's ipayments ioutside iof ipayroll. iThe iaccounts ipayable iprocess imight ibe icarried iout iby ian iaccounts ipayable idepartment iin ia ilarge icorporation, iby ia ismall istaff iin ia imedium-sized icompany, ior iby ia ibookkeeper ior iperhaps ithe iowner iin ia ismall ibusiness.

iThis imeans ithat ibefore ia ivendor's iinvoice iis ientered iinto ithe iaccounting irecords iand ischeduled ifor ipayment, ithe iinvoice imust ireflect

· what ithe icompany ihad iordered

· what ithe icompany ihas ireceived

· the iproper iunit icosts, icalculations, itotals, iterms, ietc.

iA ifew ireasons ifor iinternal icontrols iare ito:

· prevent ipaying ia ifraudulent iinvoice

· prevent ipaying ian iinaccurate iinvoice

· prevent ipaying ia ivendor iinvoice itwice

· be icertain ithat iall ivendor iinvoices iare iaccounted ifor

· Periodically icompanies ishould iseek iprofessional iassistance ito iimprove iits iinternal icontrols.

The iaccounts ipayable iprocess imust ialso ibe iefficient iand iaccurate iin iorder ifor ithe icompany's ifinancial istatements ito ibe iaccurate iand icomplete. iBecause iof idouble-entry iaccounting ian iomission iof ia ivendor iinvoice iwill iactually icause itwo iaccounts ito ireport iincorrect iamounts. iFor iexample, iif ia irepair iexpense iis inot irecorded iin ia itimely imanner:

· the iliability iwill ibe iomitted ifrom ithe ibalance isheet, iand

· the irepair iexpense iwill ibe iomitted ifrom ithe iincome istatement.

If ithe ivendor iinvoice ifor ia irepair iis irecorded itwice, ithere iwill ibe itwo iproblems ias iwell:

· the iliabilities iwill ibe ioverstated, iand

· repairs iexpense iwill ibe ioverstated.

In iother iwords, iwithout ithe iaccounts ipayable iprocess ibeing iup-to-date iand iwell irun, ithe icompany's imanagement iand iother iusers iof ithe ifinancial istatements iwill ibe ireceiving iinaccurate ifeedback ion ithe icompany's iperformance iand ifinancial iposition.

A ipoorly irun iaccounts ipayable iprocess ican ialso imean imissing ia idiscount ifor ipaying isome ibills iearly. iThis imay ilead ito isome ivendors idemanding icash ion idelivery. iIf ithat iwere ito ioccur iit icould ihave iextreme iconsequences ifor ia icash-strapped icompany.

Just ias idelays iin ipaying ibills ican icause iproblems, iso icould ipaying ibills itoo isoon. iIf ivendor iinvoices iare ipaid iearlier ithan inecessary, ithere imay inot ibe icash iavailable ito ipay isome iother ibills iby itheir idue idates.

Bad idebt iis ian iexpense ithat ia ibusiness iincurs ionce ithe irepayment iof icredit ipreviously iextended ito ia icustomer iis iestimated ito ibe iuncollectible. iBad idebt iis ia icontingency ithat imust ibe iaccounted ifor iby iall ibusinesses iwho iextend icredit ito icustomers, ias ithere iis ialways ia irisk ithat ipayment iwill inot ibe ireceived

· Bad idebt iexpense iis ian iunfortunate icost iof idoing ibusiness iwith icustomers ion icredit, ias ithere iis ialways ia idefault irisk iinherent ito iextending icredit.

· To icomply iwith ithe imatching iprinciple, ibad idebt iexpense imust ibe iestimated iusing ithe iallowance imethod iin ithe isame iperiod iin iwhich ithe isale ioccurs.

· There iare itwo imain iways ito iestimate ian iallowance ifor ibad idebts: ithe ipercentage isales imethod iand ithe iaccounts ireceivable iaging imethod.

· Bad idebts ican ibe iwritten-off ion iboth ibusiness iand iindividual itax ireturns.

There iare itwo imethods iavailable ito irecognize ibad idebt iexpense. iUsing ithe idirect iwrite-off imethod, iaccounts iare iwritten ioff ias ithey iare idirectly iidentified ias ibeing iuncollectible. iThis imethod iis iused iin ithe iUnited iStates ifor iincome itax ipurposes. iHowever, iwhile ithe idirect iwrite-off imethod irecords ithe iprecise ifigure ifor iaccounts ithat ihave ibeen idetermined ito ibe iuncollectible, iit ifails ito iadhere ito ithe imatching iprinciple iused iin iaccrual iaccounting iand igenerally iaccepted iaccounting iprinciples i(GAAP).

Reclaiming iOverpayments iof iSalaries iand iWages

iTypes iof iOverpayments

There iare iseveral ireasons iwhy ian iemployee iwould ibe ioverpaid, ifor iexample:

· Employee iServices inot iinformed iby ithe iDepartment ithat ian iemployee ihas

· ceased iand ithe iemployee icontinues ito ibe ipaid.

· Employee ion ithe iweekly ipayroll idoes inot iturn iin ifor iwork iand ihas ibeen ipaid iin

· advance i(particularly iover ithe iChristmas iperiod).

· Overpayment ito ian iemployee iwho ihas iexhausted ihis/her isick ipay iat ihalf ior ifull

· pay.

·

Overpayment iof iOvertime

An ioverpayment iof iovertime iis ideducted ifrom igross ipay iover ian iagreed itimeframe.

iAs iovertime ipayments iare imade iby iloader ifile ifrom ithe idepartment, idetails iof ithe ideductions iare ikept iat ilocal ilevel iand ian iemail iis isent ieach ipay iperiod ito ithe iweekly ipayroll iadministrator iin iPayroll iServices ioutlining ithe iamount ito ibe ideducted.

Overpayment iof iBasic iPay

An ioverpayment iof ibasic ipay iis ideducted ifrom igross ipay iover ian iagreed itimeframe. iThe iDepartment iwill idiscuss iand iagree iwith ithe iemployee iand inotify iEmployee iServices iof ithe idetails.

Stolen iinventory

iBecause iinventory icontrols iare iso iimportant ito ithese icompanies, ithey ihave ideveloped iseveral imethods ifor itracking iand iaccounting ifor ithe iflow iof iinventory, ifrom iproduction ito ifinal isale. iAn iimportant iadjustment irequired ifrom imerchandising icompanies iis iaccounting ifor iinventory ishrinkage, iwhich iis ithe idifference ibetween ithe iphysical iinventory icount iand ithe iamount iof iinventory irecorded iin ithe ibooks. iLearning ihow ito iaccount ifor istolen iinventory iwill iallow iyou ito ibalance iyour iinventory iaccount iwith ithe iphysical icount.

Payments ibeing imade ito isuppliers iprior ito ireceipts iof igoods.

Generally, igoods iand iservices iprovided ito ithe iInstitute iare ipaid ifor iafter ireceipt. i iOn ioccasion, iit imay ibe inecessary ior idesirable ito iprovide ia iknown iand ireputable isupplier iwith ian iadvance ipayment i(prepayment) ito ipay ifor igoods ior iservices ibefore idelivery. i iThis iPolicy idescribes ithe igeneral iprovisions iregarding iadvance ipayments iincluding ithe irequirement ifor iPurchase iOrder inotation, ithe isubmission iof iinvoice, iaccounting ireconciliation, ireceiving iand idocumentation, iand irequired iapprovals

Advance ipayment/prepayment: i iFull ior ipartial ipayment ifor igoods iand iservices ibefore ithey iare ireceived iby ithe iInstitute iin igood iorder ior irendered isatisfactorily.