Accounting Systems
1 The purchases system
Do not confuse an objective, a control and an audit test. ‘Purchases are valid’ is an objective; ‘purchase orders are authorised by an appropriate manager’ is a control; inspecting a sample of orders for evidence of that authorisation is a test of control.
An effective system of internal control for purchases will aim to ensure the following ('control objectives'):
Goods are ordered only as and when needed
They are ordered at competitive prices, in the required quantities and are of the required quality
They are ordered from authorised suppliers
The goods are received as expected (correct time, type, quantity and condition)
They are recorded in inventory
Invoices are checked to goods received notes and orders
Invoices are entered properly into the trade payables account
Payments are made properly to suppliers.
It should be possible to trace from order through to cash account entry and from cash account entries back to orders and goods requisition notes.
2 The sales system
Control objectives:
Orders are accepted from creditworthy customers only
The ordered goods are promptly dispatched
The goods are received by customers
All deliveries are invoiced promptly and accurately
Invoices are entered properly into the trade receivables account
Payment is received when due
Receipts from customers are accurately recorded
Credit control procedures target long-outstanding receivables
It should be possible to trace from order through to cash account entry and from cash account entries back to orders and dispatch notes.
3 The payroll system
Control objectives:
Employees are hired only as necessary
Employees are paid correct rates
Hours worked are accurately recorded
Overtime is authorised
Net pay and deductions are accurately calculated
Payments are made correctly to employees, the government and others, on a timely basis
Employees leaving are promptly removed from the wages system
4 The inventory system
Clearly there is an overlap here with the purchases and sales systems. As well as ensuring that, for example, damaged goods are not received into inventory, controls should ensure that:
Goods cannot be misappropriated (i.e. stolen)
Goods cannot be damaged (i.e. conditions of storage are suitable)
Obsolete or slow-moving items can be identified (because they will need to be written down)
Goods are only despatched with approval
Inventory records are complete and accurate
A correct ‘cut-off’ is established at the year end (this is covered later in Chapter 20).
For a manufacturer, the inventory system would also include the process of converting raw materials into finished goods. In this case there would need to be controls over the transfer of raw materials from stores to the factory and there would be overlap with the payroll system (as labour cost would be included in the cost of production).
5 The cash system
Again, there is an overlap here with the sales and purchases systems. Looking at these from the perspective of the cash system, there must be controls to ensure that:
All cash received is recorded accurately
Cash is held securely (so cannot be stolen)
Cash is banked promptly and intact
Only authorised payments can be made
All payments are accurately recorded
6 Non-current assets
This system overlaps with the cash system – payments for acquisitions and receipts of disposal proceeds. There are also parallels, if not overlaps, with other systems:
As for purchases, acquisitions must be authorised (most likely by the board) and completely and accurately recorded
As for inventory, assets must be safeguarded and accurate records (the non-current asset register) maintained
As for sales, disposals must be approved and completely and accurately recorded.
Control objectives that are specific to non-current assets include ensuring that:
Only capital expenditure is recognised as an asset
All assets (except land) are depreciated at appropriate rates over their useful lives
Assets are adequately maintained and insured
Documents of title are safely kept (e.g. title deeds to a property held by the bank)
Accounting systems
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