CAT MA1 Course Notes Contents Page
The main types of transactions undertaken by a business and the key personnel involved in initiating, processing and completing transactions.
The main transactions undertaken by a business and the key personnel are as follows:
Purchase of raw materials: this will usually be initiated by someone in the warehouse or factory who can see that more materials will soon be needed. Often this person raises a purchase requisition which goes the buyers’ department. Buyers will then order from the most suitable supplier. Goods will be received in the warehouse and these must be checked back to the order to ensure that the correct goods are being received. Invoices from suppliers will be received and processed by the accounting department.
Sales: in a retail organisation sales will be initiated by customers either in a shop or through the internet. Payment will usually take place immediately. In businesses selling to other businesses, the sales representatives (sales men and sales women) will be responsible for encouraging customers to place orders. Once received, orders should result in goods being despatched from the warehouse and invoices being created and sent to the customers by the accounting department. The accounting department will also record what each customer owes. Once payment is made, this will be recorded by the accounting department. If payment seems slow then the credit control department might contact the customer in the hope of speeding up payment.
Paying employees: large organisations will have a wages and salaries department which is responsible for calculating amounts owing, and dealing with employees who leave and with new joiners. The amounts to be paid will usually be passed to the accounting department which will look after the cash transfers to employees.
Paying other expenses: often, these will be recurring items such as rent, electricity, telephone and insurance. Sometimes they will be once-off like paying for an advertisement in a newspaper or for the repair of a piece of equipment. The invoices will be processed by the accounting department who will make sure that the expenses look reasonable compared to previous amounts or who will ensure that the services have been properly ordered and received.
Purchase of non-current assets: The purchase of these assets will often begin with an employee raising a purchase requisition, for example for a new printer, which is then authorised by a manager or by the company accountant. When the invoice is received, someone needs to ensure that the asset has been received and that it is working properly.
The need for effective control over transactions
In large organisations, which typically can have thousands of transactions, it is very easy for
- errors to be made
- unauthorised transactions to take place
- fraud to be carried out
Good control of all transactions is therefore necessary. ‘Internal control’ is the name given to the system used to control transactions. All transactions should be:
- authorised
- completely recorded
- accurately recorded
An important part of internal control is known as the segregation of duties. This means that transactions are broken down into different stages with a different person being responsible for each stage. So in a purchase transaction, one person should order the goods, another receive and check them, and a third person should pay for them. Because several people are involved in the transaction it will be more difficult for unauthorised transactions to slip through; also each person, to some extent, checks up on what the previous one has done. For a fraudulent transaction to be processed would probably require collusion (co-operation) between all the parties, and this can be dangerous for the fraudster to organise.
Other types of controls include: signatures to authorise amounts, control totals to ensure all transactions have been processed and the use of sequential documents to check if any go astray.
Example 1
A company pays its employees a basic wage and often extra amounts for overtime worked. Payments are made and other information is collected on the basis of time-sheets that are completed weekly by each employee.
Describe controls that the company could use to ensure that:
- All overtime has been properly worked
- A time sheet is obtained from each employee
- The total hours on each time sheet have been correctly added up.
What’s the answer for this??
Download the complete notes (the link is at the top of the page) and you will find answers to all of the examples at the end of the notes.
I think option 3
What do you mean? There are no options to choose from!
You are asked to describe controls for all three.