hi. I'm stuck with a report whose Chic Paints Ltd. and I am finding difficulty to answer some questions such as the organisations accounting system requirements including hardware and software packages, review record keeping system to confirm whether they meet the organisations requirements and also methods of operating for cost effectiveness, reliability and speed. Can you help me out please.

Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Internal Control and Accounting Systems (AQ2013) For use in the AAT Accounting Qualification Chic Paints Ltd Assessment book Time allowed: Four months AAT Level 4 Diploma in Accounting Internal Control and Accounting Systems QCF qual ref SCQF qual ref QCF unit ref SCQF unit ref 600/6892/9 R324 04 F/504/3353 UD65 04 Notice to candidates 1) All candidates must adhere to the terms and conditions specified for this assessment. 2) Your report must be typed, completed and submitted for formal assessment within four months. Your assessment start date was recorded onto the assessment platform when you accepted the terms and conditions in order to access this assessment. 3) You will have four more opportunities to submit further supporting evidence at the discretion of your assessor. Please discuss this with your assessor. 4) Only your final submission should be made through the assessment platform. 5) Instances of misconduct will be investigated by AAT and appropriate action will be taken. 6) If you believe you have witnessed malpractice on the part of another candidate then you are encouraged to report this, in confidence, to an invigilator who will investigate and report to AAT. Copyright of AAT assessments and materials: AAT assessment material is copyright protected. You are not permitted to copy, distribute, download, modify, reuse, reproduce, repost, retransmit, disseminate, publish, broadcast, circulate, sell or otherwise use AAT assessment material. Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Guidance The unit being assessed by this report is Internal Controls and Accounting Systems. The report should be mapped to the learning outcomes and assessment criteria by paragraph number to ensure all criteria are covered. Assessment is by a formal business report, which can be reviewed by your assessor up to a maximum of five times. If not competent at that stage it will be necessary for you to complete a new report based upon a different case study. General guidance is available on both report writing and content on the AAT website. To write the report you will need to ensure you cover the six learning outcomes, and ALL the supporting assessment criteria. 2 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Assessment Tasks You are employed as an accounting technician with Chic Paints Ltd (CPL). The directors have asked you to review the accounting systems at CPL, and particularly the effectiveness of its internal controls. You have also been asked to review whether the culture of the organisation could be improved, in terms of working ethically as well as in terms of social, corporate and environmental sustainability. Finally, you are asked to make any recommendations for improvements, which you identify as being necessary. (The directors know there are many weaknesses - but are uncertain as to how these should be managed). The detailed task requirements are set out on pages 4 and 5. The directors have also suggested you review the following documents: http://www.aat.org.uk/sites/default/files/assets/AAT_Code_of_Professional_Ethics.pdf http://www.aat.org.uk/about-aat/aat-sustainability To help you with this the directors have asked the accounts staff to prepare some brief information about themselves, an overview of the accounting system and also a list of events that have occurred over the previous few months. This information can be found in the company diary. You are required to produce a business report addressed to Dave Whistler, Finance Director. The report should be approximately 4000-5000 words long but please note that the word count is not critical; what is important is the quality of the writing. For more information see the guidance page, or review the guidance on the AAT website. Task 1) Review and evaluate the accounting system. Task 2) Conduct an ethical evaluation of the accounting systems. Task 3) Conduct a sustainability evaluation of the accounting systems. Task 4) Identify weaknesses and make recommendations for improvement. 3 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Task 1) Review and evaluate the accounting system This review can be of the complete system or of one or more of the accounting functions, depending on your findings - but must specifically cover the following points: Record keeping systems - explain the purpose of financial reports, and the suitability of the organisation's current reports to meet organisational needs Internal systems of control - identify how internal control supports the accounting system and the types of internal control in place, and any controls that are missing Fraud - explain the causes of fraud, common types of fraud, methods that can be used to detect fraud and potential areas for fraud within the organisation Working methods/practices - review the working methods used including the use of appropriate computer software, and the operating methods in terms of reliability, speed and cost effectiveness Training - Identify how training is or can be used to support staff. The review should cover all aspects of the assessment criteria, as mapped above, when it can naturally be introduced into the report. If it cannot be covered in the report then it can be covered within a written explanation included in the appendix. Whilst a SWOT analysis may be a good starting place, this should not be placed in the body of the report. Task 2) Conduct an ethical evaluation of the accounting systems. Evaluate the accounting systems against ethical principles by reviewing working practices. Identify any actual or possible breaches of professional ethics. To help you with this see http://www.aat.org.uk/sites/default/files/assets/AAT_Code_of_Professional_Ethics.pdf 4 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Task 3) Conduct a sustainability evaluation of the accounting systems. Evaluate the accounting systems against sustainability principles by reviewing working practices. Identify any possible improvements that could be made to improve sustainability. 5 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Task 4) Identify weaknesses and make recommendations for improvement. Evaluate the system to identify significant weaknesses, which should be clearly explained along with their impact upon the organisation. For every weakness that has been identified there should be one or more recommendations made to attempt to improve the situation. The recommendations should concentrate on the effect that the changes would have both on the organisation and on individual members of staff. They may also highlight: o training needs; o aids to improve staff performance; o changes needed to organisational culture; o anything else which would improve the running of the accounting system. Prepare a Cost Benefit Analysis At least one of the recommendations made should be subject to a cost benefit analysis. Whilst not all benefits are quantifiable, all costs are. Students should make any necessary assumptions or estimates to allocate costs to such items as time, unknown salaries, or any other unknown expense involved in the recommended changes. All benefits should be identified, included those that cannot be allocated a financial figure. This can include such things as improved customer relationships, improved documentation systems or staff morale (though this could be allocated a financial figure as improving staff turnover cuts recruitment costs). Note on appendices Any charts and diagrams or supporting evidence should be included here and cross-referenced within the text. Any appendices included should be referred to in the main body of the report or, in the case of supporting statements to cover missing assessment criteria, be mapped and cross-referenced on the mapping document. 6 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Chic Paints Ltd Company history and management The date is early September 2013. Your name is Alan Turner, and you are employed as an Accounting Technician with Chic Paints Limited (CPL). CPL was formerly part of Ashstead Plc, but was the subject of a management buyout (MBO) from its previous owners six years ago by five of its directors - Greg Pearce, Jane Yip, Ruth Jones, Ahmed Khan and Susan Mather. These five directors had formed the board of CPL when it was a fully owned subsidiary of Ashstead Plc. Six months ago Dave Whistler joined CPL as Finance Director, replacing Jane Yip who left the company at that time. The current board composition of CPL, their line management responsibilities, and their shareholdings in the company are: Greg Pearce Managing Director 25% shareholding Dave Whistler Finance Director 25% shareholding Ruth Jones Sales Director 20% shareholding Ahmed Khan Production Director 15% shareholding Susan Mather HRM Director 15% shareholding By 2005 Ashstead had decided that its future as a long standing manufacturer of everything from bricks to butter was no longer viable, and decided to change its business model away from being a conglomerate. This meant a change to specialising in niche product lines and over the next few years selling off or closing down those of its subsidiaries that were no longer considered to be a strategic fit. Ashstead put CPL up for sale in 2007. At the time of the MBO the CPL directors had managed the company for many years. They believed that their extensive contacts in the paint industry, together with their sales and production expertise and the excellent reputation of CPL, would enable them to raise the money to buy the company. Once they had done this and negotiated the terms of the MBO with Ashstead, their plan was to steadily exit the general household paints sector. Competition here was the most intense and, therefore, profit margins the lowest. They decided to replace this work with specialist paints - such as those used on boats, cars and industrial machinery. This sector of the market had the downside of requiring increased capital expenditure on specialist equipment and a highly skilled (and more costly) workforce. On the upside, however, it had less competition and enjoyed much higher gross margins than general paint products. Currently, six years on, the company has steadily reduced its turnover from 200 million to 120 million but has improved its gross profit margin from around 12% at the time of the MBO to around 30% today. Net assets over the same period have, however, increased from 20 million to over 25 million; and the workforce has been reduced from around 500 to around 350 employees. Last year both Ruth Jones and Ahmed Khan had indicated that they would like to sell their shareholdings in the company and retire. The other directors have been trying to find new investors who would both buy Ruth and 7 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Ahmed's shares and have the necessary skills to replace them as executive functional directors. In July, after extensive searching and discrete advertising, they finally found two possible replacements - Colin Addison and Zhang Wei. 8 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Mission statement CPL aims to manufacture paints and allied products that are expertly formulated to meet the highest international standards, using the best available technology for end user consumers. We employ a team of highly experienced, dedicated and customer-oriented employees to ensure process and product excellence. We will operate to the highest standards of business ethics in dealing with customers, suppliers, employees and the wider community. We will also operate our business in a sustainable manner; reducing our impact on the environment wherever possible, and using recyclable materials as a matter of course in all our products whenever feasible. Accounting and other information technology (IT) systems The financial accounting system was originally an integrated part of Ashstead's tailored IT systems and therefore had to be immediately replaced at the point of the MBO. For the sake of speed, keeping costs low and ease of installation it was decided to use Microsoft Excel spreadsheets rather than buy a more sophisticated integrated package. The actual account ledgers were bought as a tailored system for the company. This arrangement was only ever intended as an interim measure but even now, six years later, the company's accounting is still being carried out in this way, with their version of Microsoft Office having just been updated to the 2013 version. In total the company has 42 computers, eight of which are located in the Accounts Department. Every full-time member of staff in the company has their own dedicated personal computer (PC), but part-time employees are expected to use shared PCs. These computers mainly run on a stand-alone basis and share departmental printers. All Production departments and the Stores have their own PC and printer, which are intended to be used only by the Departmental Manager or their deputy. These also mainly operate as stand-alone units and are not connected to the office network but still had access to company email. All PCs were purchased as a batch some three years ago. They use the Windows 7 operating system and are also now loaded with Microsoft Office 2013 version. There is a 40-user licence for Microsoft Office 2013. As at September 2013 the principal systems are: The main financial accounting system which operates using Microsoft Office 2010 Excel spreadsheets to record all transactions accounting. This includes an inventory control system which is used to book in goods received into the warehouse and to issue out goods to the production areas. 9 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd At the end of each month the Accounts Department uses the spreadsheets to update the general, accounts receivable and accounts payable ledgers. These run on proprietary software, specifically written for CPL. The General Ledger enables a Trial Balance to be produced. It also provides financial reports, including audit trail, cash flow, income, budgetary information and other key financial indicators. A stand-alone full absorption costing system running on proprietary Cost Wise software, which was installed three years ago. A traditional standard costing and variance analysis system which is used to monitor and control the company's performance month by month. Standards are set at the start of each financial year and then remain unchanged for the remainder of that year. Monthly actual costs and revenues are then compared to the pre-set standards and a full range of variances are calculated. All adverse variances are then investigated by the Chief Accountant and the relevant budget holder. A Sage 50 payroll system, which was installed three years ago. A computer aided design/ computer aided management (CAD/CAM) system, which is used to control the manufacturing of CPL's products. Information technology (IT) policy The following is an extract from the company policy handbook issued by the new Finance Director upon joining the company three months ago, relating to the company's IT systems: All of CPL's computers must only be loaded with licensed software, owned by the company. No member of staff is allowed to load any software onto computers without prior written permission from their line manager. No unauthorised devices are to be used for saving, uploading or downloading work (no discs, memory sticks, external hard drives or other devices are permitted other than those purchased and approved by the company). Only authorised members of staff are to use CPL's computers. Each computer must be individually password protected. Only the employee and their line manager must know this password. Use of the internet by employees of CPL is only permitted where such use supports the goals and objectives of the business, as set out in its mission statement. Employees must ensure that they comply with current legislation, use the internet in an acceptable way and do not create unnecessary business risk to the company. 10 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd All IT systems must be fully backed up twice each day - once at lunch time and again at the close of business each day. 11 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Accounting personnel information Dave Whistler, BA (Hons), FCMA, Finance Director Six months ago Dave, aged 46, joined the company by buying Jane Yip's 25% equity stake in the business. Along with Greg Pearce, the Managing Director, Dave is the joint largest investor in the business. Like all the board, Dave has shared responsibility for the general strategy of the company as a whole; in addition his specific responsibility is to plan and manage the financial strategy of the business. This involves ensuring that CPL's large ongoing capital investment programme is professionally appraised, and is in line with corporate strategy; and that the company is funded by the optimal mix of debt and equity. He also has overall responsibility for taxation planning; for ensuring that CPL's credit rating is maximized; and that its working capital levels are kept to a minimum. He also has overall responsibility for all accounting, finance, legal and IT issues and personnel. In practice, however, he delegates many of these day-to-day responsibilities to the Chief Accountant In addition to his controlling activities, Dave personally produces the annual company report, including its statutory accounts; deals with all banking and finance issues; fulfills the role of company secretary and handles all legal issues. Hazel Richmond, AAT, ACCA, Chief Accountant Dave's deputy is Hazel Richmond, aged 38. Hazel is responsible for the day-to-day running of CPL's Accounts Department. She has been employed as Chief Accountant for the past four years and is both AAT and ACCA qualified. Hazel's work involves supervising the work of the accounts clerks who run the transaction accounting systems on the general ledger, accounts payable ledger, and accounts receivable ledger. She also supervises the work of the Costing Technician; the Payroll and Personnel Database Clerk, and is also your line manager Hazel personally produces the monthly management accounts and, with your help, carries out the resulting variance investigations. After producing the accounts she spends much of the following week reviewing the performance of the different parts of the business with the appropriate departmental managers. All adverse variances are investigated and a programme of remedial action is agreed upon. The management accounts are then reviewed and agreed by Dave Whistler before they are issued to the other board members and senior managers. Hazel also produces the annual budget, where her role is to co-ordinate the process, which is intended to be bottom-up, based on the information which the budget holding departmental managers input to the accounts department. Her other key responsibilities are to ensure that working capital levels (in particular paint inventories) are kept to the level set by the Finance Director, and that the company's trade credit rating with its suppliers is maximized. 12 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Hazel manages the company's day-by-day cash flow; approving all payments to suppliers, and making VAT (IVA), and payroll taxes (NIC and PAYE payments). Coming from a background of processing transaction accounts, Hazel is personally able to operate the general, accounts payable and accounts receivable Lledgers in a reasonably efficient way. She can also run the payroll. These skills provides a useful degree of sickness and holiday cover. The Accounts Department staff, who all report to Hazel, are: Imran Patel, Accounts Payable Clerk: Imran, aged 24, is responsible for entering all suppliers' invoices and credit notes into the accounts payable ledger; for issuing debit notes where necessary; for reconciling suppliers' statements to the accounts payable ledger; and for controlling creditor payments. He has been in this same job for the past two years when he joined the company. Imran has the level 2 AAT qualification which was obtained during his time with a previous employer, but has not done any further accounting study during his time at CPL. Before joining CPL, Imran was employed as a General Ledger Clerk with a large local company. Xu Hin, Accounts Receivable Clerk and Credit Controller: Xu's job is to operate the company's accounts receivable ledger, and to also act as Credit Controller. Xu, aged 30, is responsible for all data input into the Ledger, which involves raising sales invoices and credit notes, producing monthly statements and reconciling debtor payments. As the ledger is only updated monthly, however, she has to use the spreadsheets for credit control purposes. She is also responsible for carrying out the company's credit control procedures. This involves making online credit checks on all new credit customers and recommending a credit limit to the Finance Director and to the relevant Sales Manager. Dave Whistler has delegated authority to Xu to set up credit limits of up to 25,000 per customer, with any increase above that figure being referred to him for a decision. Xu also chases up debtors who are late in paying by a combination of telephone calls, emails and letters. Xu has been in this job for the past two years since joining CPL from a furniture manufacturer, where she was Assistant Credit Controller. She has neither accounting nor credit control qualifications, but has expressed an interest in acquiring some form of formal qualification in either area. Nothing has, however, yet been done to start the process off, and Xu herself is uncertain as to which qualification would be best to study for. Dan Hickman, General Ledger Clerk: Dan, aged 26, is the General Ledger Clerk. This means he is responsible for all data which is required to be directly input into the general ledger, and for producing the end of month, end of quarter and year-end trial balances. He is also responsible for recommending the monthly provisions figures, for prepayments, accruals and inventory provisions to Hazel Richmond. The general ledger runs on bespoke CPL software. Dan also maintains the company's cash book and its petty cash imprest system. 13 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd He joined CPL six years ago as Accounts Payable clerk, and carried out this role very satisfactorily until moving to his present position four years ago. Dan took level 2 AAT certificate qualification before joining CPL and has always expressed an interest in taking further qualifications since then. Before his employment with CPL, Dan had worked as an Accounts Payable clerk with the local council. Dan is currently studying for his level 3 AAT qualification, and is then keen to complete his studies and achieve full AAT membership. John Thatcher, Costing Technician: John Thatcher, aged 43, costs all CPL's paint range using a tailored process costing system. As well as costing the product range, John is responsible for recommending minimum selling prices, that have to be achieved based on the cost of products, to the company's sales force. He has been in this job since joining the company four years ago from his previous employer, a petrochemical company, where he had worked since leaving school. John's final position there was as Assistant Costing Technician. He is not particularly interested in receiving anything other than essential work-based training, and has no accounting qualifications. He does, however, have a degree in Economics from Reading University. John has on several occasions expressed his reluctance to undertake any form of personal development or training. He is viewed by his colleagues as something of a contradiction. On the one hand he is often viewed as an individual with severe mood changes - friendly and bright one day and hardly approachable the next. On the other hand he is generally considered to be very competent at his job and is also reliable. Susie James, Payroll Clerk: Susie, aged 27, is responsible for running the monthly payroll (for salaried staff) and weekly payroll (for hourly paid staff) and for issuing the various forms required by HMRC (the UK tax authority). Susie was recruited to do this job three years ago, when the new integrated payroll system was introduced. She has a level 3 AAT qualification, and is currently studying for level 4. Once she completes her AAT qualifications, Susie is keen on starting to study for a Chartered Institute of Management Accountants (CIMA) qualification. The final member of the accounts team is you, Alan Turner, Accounting Systems Technician. You are aged 20, and are employed mainly on reviewing accounting systems and procedures. This means you are often deployed on special project work that the Finance Director or Chief Accountant asks you to undertake. This usually involves reviewing parts of the accounting system and also occasionally checking that the company's policies in respect of ethical behaviour and sustainability, as set out in its Mission Statement, are being adhered to. You have worked for CPL for the past year and are hoping to complete your level 4 AAT qualification this summer. 14 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd You have some limited experience of working on accounts receivable, accounts payable and the general ledger, but no hands-on experience in operating these at CPL. Your knowledge of standard costing, variance analysis, working capital management and operating a payroll system are purely theoretical since you have no practical experience in these areas. 15 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Business and accounting practices and policies The following is a summary of the business and accounting practices and policies operated by CPL. Internal controls are stated where applicable. Purchases and supplier payments Brett Sinclair (Purchasing Manager) and Rita Hume (Deputy Purchasing Manager), the company buyers, are responsible for identifying and liaising with suppliers, and negotiating all contracts and prices with them. Brett and Rita have been employed in their existing positions for the past six and five years respectively. There was a change in purchasing policy around two years ago. Up until then, the buyers had followed a policy of buying materials as required from the cheapest source available on the day of purchase. This had involved the buyers dealing with around 100 suppliers, and encouraging them to compete against each other.This meant that materials could be bought at the lowest possible price available for that individual transaction. However, in late 2011, the policy was changed to one of \"partnership sourcing\". This means that the buyers now deal with a much smaller number of thoroughly vetted and approved suppliers on medium-term contracts. CPL now operates with only around 30 regular suppliers, who are on two or three year contracts with prices set each year via annual price negotiations. The advantage of this policy to CPL is that it can get to know and understand 30 suppliers far better than it could 100. It also gets the advantages that come with medium-term stability in product quality and prices. Once a new supplier has been identified, they are checked for perceived quality and reliability by either Brett or Rita, and for financial stability by Imran Patel, the Accounts Payable Clerk. Almost all purchases are negotiated to be on 30-60 days open credit (credit without security) terms. Once the buyers place a purchase order they enter the details on the computerised inventory system. The subsequent goods received note (GRN) is then received in the warehouse by the goods inwards warehouse staff, who check against the computer that the correct quantities have been received. They also physically check the condition of the goods in so far as their packaging permits. The warehouse staff will then record on the system the actual quantities received and note any discrepencies. A copy of the goods received note is then sent to Brett Sinclair or Rita Hume, who will also later receive the supplier's invoice. One of Brett or Rita is then responsible for confirming that the correct quantities have been been received as ordered and invoiced, and that the invoiced prices are correct. Once agreed, the buyers then pass the approved invoices to Imran Patel who enters them into the accounts payable ledger and at the same time makes the appropriate general ledger postings. Each month Imran uses the accounts payable system to produce an aged creditors listing which identifies those suppliers who are now due for payment according to their agreed terms. Hazel Richmond, the Chief Accountant, then reviews the company's cash position at the time and approves the actual creditor payments to be made. CPL's stated policy is to pay all suppliers to terms, however, there are several times during the year when the company's cash flow does not permit this, and payment is delayed until later. Suppliers are usually then told that 'the cheque is in the post'. Once the final list of approved payments has been agreed, Dan Hickman, who is in charge of the cashbook, produces the bank automated clearing system (BACS) transfer authority and cheques, which are then signed by any two of the authorised signatories. These consist of the five directors and the Chief Accountant. In practice, the cheques are always signed by the Chief Accountant first and then usually by the Finance Director, unless he is away on business which is quite often the case. In such circumstances any of the other directors who happen to be available are asked to countersign. 16 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd 17 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Banking procedures During the past three years the company has introduced a policy of trying to pay many key suppliers by BACs. However, there is still a substantial minority who are still paid by cheque. In fact, CPL likes the flexibility of paying at least some of the less vital suppliers by cheque because it is easier to make excuses for delayed cheque payments, than it is with BACS payments. For those suppliers who are paid by BACS, the payment authority is approved by the Chief Accountant and then countersigned by one of the other directors. In the absence of the Finance Director, Hazel Richmond frequently has difficulty in persuading one of the other directors to countersign all the individual cheques because of the time involved. They are all, however, usually happy to put the one countersignature on the BACS payment authority form. All company cheques, for any purpose, including supplier payments, are required to have two signatures from amongst the authorised signatories (the directors and the Chief Accountant). Sales and customer receipts The company operates with a small but highly professional and well paid sales force of four sales managers under the direction of Ruth Jones, the Sales Director. They are responsible for identifying potential new markets and customers, and for all regular dealings with existing customers. The customer base is made up of both UK and international clients. CPL does not sell to the general public, but to companies involved in the manufacture or repair of boats, cars and industrial equipment. When a new customer is found, the company's policy is generally to trade with them on a cash with order basis for a one month trial period and then to offer open credit up to an internally set limit. Xu Hin, the Accounts Receivable Clerk/Credit Controller, is responsible for performing the online credit check of these new customers with Experien, a credit scoring organisation, and for taking up trade credit and bank references. Following discussions with the relevant sales manager, Xu then either sets an initial credit limit of up to a maximum of 25,000 or recommends a higher limit to Dave Whistler, which will apply after the one month trial period. The relevant sales manager will recommend any subsequent increases to this limit. All increases to existing limits are approved by the Finance Director or, in his absence, by the Managing Director. The company does not normally insure its trade credit risks. CPL has around 80 regular customers, and this repeat business accounts for around 80% of the company's turnover. The remaining 20% of turnover comes from one-off orders which the company secures. Company policy is to steadily increase the proportion of its repeat business since this is the most profitable part of its turnover. The 80% of turnover from this source accounts for 90% of the company's gross profit margin. Xu Hin uses the goods dispatched listings as the trigger to produce sales invoices, which are sent out to customers on a weekly basis. Statements are issued on the last trading day of each month. Most of the regular repeat business customers pay by BACS, with the remainder of debtors paying by cheque. All cheque payments received in the post are directed to Xu who banks them on a daily basis. She is also responsible for raising any credit notes and for all the postings to the accounts receivable ledger. Where goods are returned for a valid reason, Xu raises a credit note request. All credit notes have to be approved by the relevant sales manager, and those over 2,500 by the Sales Director. 18 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Each month Xu produces an aged debtors listing and all outstanding debtors more than one month overdue are reviewed with the relevant sales manager. All outstanding debtors more than two months overdue are reviewed both by the relevant sales manager and by the Sales Director. Xu chases up late payments by a combination of telephone calls, e-mails and letters Dan Hickman, the General Ledger Clerk, produces a weekly bank reconciliation statement, which reconciles the cashbook and paying-in book to the bank statement. The bank reconciliation statement is then checked by the Chief Accountant who initials it to indicate that she accepts it as being correct. Payroll procedures The company operates two separate payrolls running with Sage 50 software. Every Wednesday Susie James, the Payroll Clerk, runs the first of these to pay the shop floor production workers paid by the hour. Around a quarter of these hourly-paid employees are still paid in cash, with the remainder having payments made directly into their bank accounts via BACS. Dan Hickman, in charge of the cashbook, is notified by Susie of the amount of cash needed the next day and he withdraws this from the bank on a Wednesday afternoon. The cash is then locked in the accounts office safe overnight. Susie then makes up the pay packets on a Thursday morning. Every Thursday afternoon, those paid in cash queue up to collect their pay packets from Susie's office. They are meant to do this in person, but some employees ask a colleague to collect them on their behalf. Although this is against CPL's stated policy of only allowing personal collection of one's own pay packets, Susie ignores this practice. This is because it is easier for her to do so. For example it is quicker for her if one person collects and signs for four pay packets than it is to deal with four individuals. Employees paid via BACS have their pay credited weekly to their accounts on the same Thursday. The second payroll is run four days before the last working day of each month. This is used to pay the monthly-paid members of staff who are the directors, management, supervisory, sales and office staff. All monthly paid employees are paid via BACS. Susie is required to notify HMRC whenever a payment is made using the new RTI (Real Time Information) system. Once the two payrolls for the month have been finalised, Dan Hickman draws up cheques to HMRC in respect of income tax and NIC payments. These cheques are signed by two of the authorised signatories, as per the bank mandate. As well as Susie James, The Human Resources Management (HRM) Department also has access to Sage 50. They use it to maintain employees' records such as job position history, previous employment history, education and academic qualifications, references, skills and competencies and training records. The Sage 50 package is not integrated with the main accounting system to enable payroll costs to be automatically transferred. Susie has to post the information using journal entries. 19 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd The stated company procedure is for Susie to make regular twice daily back-up copies of the payroll data, and store these on-site in a fireproof safe. One possible advantage of Susie's computer not being linked into the main accounting system is that it avoids any disruption caused by problems with other hardware or software. It also reduces the risk of unauthorised staff members accessing the payroll. 20 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Diary of events for last six months March 2013 Rymore Boats, one of the company's trade customers, went into administration this month. This was a bad blow as the customer was a large national company and traded on uninsured open credit terms. Xu Hin was particularly disturbed about the news. Experien had only recommended a 15,000 credit limit, but Xu had set it at the maximum she was permitted of 25,000 - two thirds higher than the amount recommended. What was making a bad situation much worse was the fact that Rymore Boats were considerably overdue with their payments and their outstanding debt had risen to over 40,000. Dave Whistler was very annoyed about the situation. Xu, however, pointed out that although she had ignored the Experien recommendation, the current internal controls allowed her to do this. She also added that she had been asking for a long time for the credit control procedures that she was required to follow in chasing up late payers to be made much clearer. She pointed out, for example, that she had no real guidelines as to when to place a customer on 'stop' - it was simply left to her discretion. Hazel Richmond also raised the issue of insuring against the risk of offering open trade credit. Finally, Xu added that she really felt that it was asking too much of her to be both Accounts Receivables Clerk and Credit Controller. She pointed out that she often just did not have time to chase up outstanding debtors, as she was busy with ledger work, and asked the company to consider giving her an assistant. The Finance Director made a commitment to review CPL's trade credit procedures. Stan Ogden, one of the hourly-paid shop floor workers complained that he had not been paid last week. It turned out that he had been off sick on payday and a workmate of his, Onslow Brown, had collected both his own pay packet and Stan's. Susie James had been quite happy with this arrangement as she was always very busy on a Thursday afternoon, and Onslow had signed for both pay packets. Upon further investigation, it was found that Stan had in fact borrowed money from Onslow, but had not paid it back. Onslow, had therefore taken matters into his own hands and used the opportunity of Stan being off sick to get his money back by taking it from Stan's wage packet which he had collected from Susie. Stan was furious that the company had allowed Onslow to get his money back in this way. However, Susie James pointed out that her records showed that Onslow had regularly collected Stan's pay packets over the years and that Stan had never raised this as a problem until now. 31 March was the the company's quarter year-end. Every quarter the company's Managing and Finance Directors have to present the management accounts to the bank, as a condition of their bank loan agreement. Dave Whistler has set out that creditors are not all to be paid in the months which are quarter ends. Instead, they are then paid in the first two weeks of the following month. As the company now only operates with a relatively small number of suppliers, it is usually possible for Imran Patel, the Accounts Payable Ledger Clerk, to fend off supplier requests for payment, and, if necessary, advise them that their payments will be two weeks late. The reason for doing this is to 'window dress' or falsify the management accounts to make them look better by reducing the company's overdraft at the quarter-end. 21 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Diary of events for last six months continued Many suppliers accept that this tends to be standard, if perhaps unethical, business practice, and have no real problem with it. There was, however, a particular problem this month with Packington Pigments, a supplier of paint colourings to CPL. Their account was already four weeks late in being paid, and they themselves had breached their overdraft limit with their bank by over 30,000. CPL owed them 50,000, and Packington had assured their bank that they would reduce their overdraft to within its agreed limit by 31 March once the payment from CPL had been made. They were, therefore, devastated to be told by Imran that they would not now be paid until mid-April. April 2013 CPL's main supplier of the containers that the final product was sold in (paint pots) approached the company to try and sell it their new 'ultra green' biodegradable paint pots. Unlike conventional paint pots, which were currently used by CPL and its competitors, these containers would degrade 95% biologically after they had been finished with. The supplier had been developing this product for the past few years and was now keen to launch it onto the market. So far they had no customers for it. Brett Sinclair, the Purchasing Manager, and Ahmed Khan, the Production Director, both went to a presentation by the supplier, and were suitably impressed by the new paint pots' technical performance. The drawback was that they cost around 20% more than conventional paint pots. Later that week when they had returned to CPL, Ahmed and Brett discussed the issue with Ruth Jones, the Sales Director. Ruth felt that a biodegradable paint pot would be a good selling point. However, she felt that any increase in price, in the current difficult economic times, would be resisted by CPL's customers. They therefore decided to defer a decision until/if any of their competitors switched to the new paint pots. Due to spring gales, there was a major problem mid-month caused by a powercut, due to fallen electricity cables, which took two full days to clear. Although the company does have a standby generator this was only sufficient to power the whole of the production site room and offices for up to six hours. The internal controls regarding the Accounts Department backing up systems are set out in CPL's IT policy. The powercut occurred in the late afternoon. Neither Dan Hickman nor John Thatcher had backed up their work since leaving work the previous day. This meant that all that their work on the day of the powercut on both the general ledger and the costing system was lost. There was an apparent breach of security concerning the general ledger this month. This is the central hub of financial information at CPL, containing all the company's transactions that can be enquired into in different ways so as to provide a complete picture of the company's financial activities. A problem occurred this month, however, when unusual entries were found in it that could not be traced to either Hazel Richmond, Susie James or Dan Hickman, the only three members of staff who are authorised to work on it. Dan found these entries and then checked with Hazel as to whether she had made them. Once Hazel had confirmed that she had not, she then asked for your help in investigating how these entries had occurred. After 22 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd some investigation you found that Imran Patel had accidentally accessed the general ledger, when updating the accounts payable ledger from his spreadsheets. Diary of events for last six months continued Upon further investigation you discover that the general ledger software has security settings to ensure that information is only available to those users that have the right clearance, but the list of authorised access users has not been set up. As at September 2013, even though they did not know it, all Accounts Department staff had full general ledger access. The company received a request this month to sponsor Ashton Wanderers, the local football club, and the directors agreed to this, and agreed to pay for a full team kit. May 2013 Following the Stan Ogden case, the board of directors discussed at their regular monthly meeting whether to end the practice of some shop floor employees still being paid in cash. This discussion was by all accounts quite lively and centred on whether to stop the practice entirely or to change the lax procedure for employees collecting their pay packets. The board then went on to consider how they could persuade employees to voluntarily accept this change, and exactly what the company's legal position was in respect of enforcing the change for any employee who still resisted it. Susan Mather, the HRM Director, was against any form of compulsion as she felt it would aggravate industrial relations, whereas Dave Whistler felt the time had come to stop the practice entirely. Eventually it was decided to look into improving the internal controls of the existing system, with a decision on stopping cash payments altogether being deferred for three months. Brett Sinclair, the Purchasing Manager, asked you to have a look at the purchase requests that had been sent through to him, by email, from the Special Orders Production Department earlier in the month. This department manufactured top of the range paints mainly for expensive cars and boats. These were made against a specific order, rather than for holding in general inventory. They also used very expensive ingredients. Although Brett had actioned these requests by raising the necessary purchase orders, he was concerned that they included a number of items that he would not have expected to be ordered in such abnormally large quantities. You spoke to Alf Wright, the departmental manager, about this and he confirmed that he could not understand why such large quantities were on the purchase requisition email either, as he had not ordered them. After investigating the matter further you found out that it was Alf's normal practice to add items to an email attachment each day as needed, and to leave the email open as a draft until he finished it, and sent it off at the end of the week. Someone had obviously added extra items in and Alf had not checked the final list before emailing it to the Purchasing Department. 23 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Hazel Richmond then asked you to carry out an investigation into the purchases of the special orders Production Department. She was concerned that they were ordering on average ten per cent more ingredients than they had in the past although the department's turnover was actually down by five per cent. You, therefore, went to the department on Friday to carry out an unannounced inventory audit. When you got there, you discovered that Alf Wright, the departmental manager, was off work on half a day's annual leave, and you were met by his deputy, Eve Plank. Eve explained that Alf often took Friday afternoon off, as he was a classic car enthusiast, and regularly took one of his three old Jaguar cars to classic car shows over the weekend. In fact she said he was actually re-spraying one of them all this weekend. 24 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Diary of events for last six months continued You carried out a spot check of the inventory against the computer records and found that the physical stock was well below that shown in the accounting records. You then checked the wastage reports in the department, and found that the amount of ingredients being thrown away each week had risen steadily over the past year. June 2013 No product costing was done for five days due to the absence (because of sickness) of John Thatcher, the Costing Technician. Normally John is able to plan his work well enough ahead to cover his going away on holiday for example. However, this unexpected sick leave obviously prevented him from doing this. Unfortunately no other member of staff had the detailed knowledge of the company's products to be able to stand in for John. Hazel Richmond provided the sales force with some rough cost estimates to guide price quotes, but it was far from ideal. On day six, John was still not fit to return and his doctor signed him off sick for a further two weeks. A temporary agency employee, who was familiar with the costing system, was then brought in to provide cover until John returned. The fact that no one else was trained to use the system cost CPL over 3,000 in agency fees. Imran Patel got involved in a dispute with one of the company's suppliers this month concerning the actual number of containers of paint pigment that had been delivered last week to the CPL Stores. The supplier's invoice was for the amounts ordered on the purchase orders, but the Stores Manager had already complained to Rita Hume, the Deputy Purchasing Manager, that he had not received the full quantities ordered. However, when Rita checked the goods received notes (GRNs) they also agreed to the quantities ordered. You were asked to investigate, and went to the Stores to discuss this apparent difference between what the Stores Manager insisted had been delivered and what the paperwork actually showed. You were somewhat surprised when you arrived at the Stores during the lunch break to find two warehouse staff members playing computer games on the Stores computer. This was intended to be used for recording GRNs and stock issues. They explained that the game was their own software and not the company's and that as they had the manager's permission both to load this onto the computer and to play it in their lunch break, they could not see that there was a problem You subsequently found out that the GRNs were in fact signed off by whichever of the stores members of staff happened to be in when goods were delivered. The stores staff had not been told that they were meant to check the quantities shown on the GRN against those actually delivered. They simply thought they were signing as a receipt for a delivery, rather than realising they needed to check the actual quantities that had been delivered. When you asked the Stores Manager to go through last week's GRN records with you he produced a memory stick and plugged it into the company Stores computer. He cheerfully explained that he always stored any material that might be in dispute on his own personal memory stick for security purposes. He thought that this would be safer than just having the information backed up on the Stores computer every night. You pointed out that both this and allowing his staff to use the company computer for their own personal use was against CPL's IT policy. The manager, however, did not know that the company even had an IT policy - let alone what is exact contents were. Apparently he had never been given a copy of it. 25 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Diary of events for last six months continued CPL's financial year ends in June. As usual, this meant that this month produced a heavy workload for the Accounts Department. As well as being very busy the department suffered several serious difficulties in trying to meet the year-end closure routines. These arose due to the time it takes to manually transfer information from the Excel spreadsheets to the tailored ledgers. The two parts of the system were not really compatible, and staff always had to transfer data by journal entries rather than this being done automatically. Xu Hin also had other problems, caused by the usual problem of trying to operate the Accounts Receivable Ledger and at the same time trying to act as credit controller. Dave Whistler, the Finance Director, had told Xu to give priority to reducing outstanding year-end debtors by as much as possible. This meant that she spent most of her time during May and June chasing up debtors for payment, and as a result, falling behind in her Accounts Receivable Ledger work. By the third week of the month, Xu had only completed the postings for less than a third of the transaction entries affecting the accounts receivable ledger. She was now working an extra 15 hours a week of paid overtime to try and catch up with her work. The only other member of staff trained to operate the accounts receivable ledger is Hazel Richmond, the Chief Accountant. Hazel had more than enough work of her own to get through, but had to postpone this to help Xu out as much as possible. It had also been a couple of years since Hazel had worked on the Accounts Receivable Ledger and this lack of recent experience slowed her down. Dan Hickman was obviously another member of staff who struggled this month. Usually, in a normal month, that is not the full or half year-end, Dan was always very busy during the last week of the month, but had relatively little to do on the general ledger during the other three weeks or so. In these slack periods he concentrated on trying to get well ahead with his work on the general ledger and the cash book. This is so that he can then concentrate on producing the end of period trial balance. In June, however, both the accounts receivable and the accounts payable ledgers had to be closed off much later than scheduled, which in turn meant that Dan was unable to complete the trial balance until over ten days after the deadline. This meant that Dave Whistler was unable to complete the statutory accounts, as planned, before he was due to attend the usual quarterly meeting with the bank. The Finance Director was not at all happy about the situation and resolved to look into updating the company's accounting software. July 2013 As a result of the losing money when Ryemore Boats went into administration, Dave Whistler had been thinking about how to tighten up the company's credit control procedures. The situation with outstanding debtors was continuing to get steadily worse, because as the effects of the recession deepened, CPL's large trade customers were more keen than ever to hang onto their money for as long as possible. 26 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd The credit control procedure for after the point of sale is based on Xu Hin producing an aged debtors listing at the end of each month. Both the Accounts Receivable Clerk, and the Sales Director review this, to try and ensure payments are received on time. As soon as a payment is 10 days overdue, Xu is meant to telephone the customer and chase up the outstanding debt. 27 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd Diary of events for last six months continued Dave Whistler has revised the credit control policy this month to try and deal with the problem of overdue debtor payments. Under the new policy, if payment is not received within a further 10 days of her telephone call, Xu is then meant to formally chase the customer for payment. This involves her writing to the customer asking for payment and for the account to be brought into order. All outstanding debtors more than two months overdue are then reviewed by both the Sales and Finance Directors. In reality this policy is still not working well. As Xu is still the only employee working on both the accounts receivable ledger and credit control, she simply does not always have the time to follow the policy properly. Furthermore, the sales managers and Ruth Jones, the Sales Director, are usually only in the office for one or two days a week. Given everything else they have to do, they only have a small amount of time to deal with the problem of outstanding debtors. They usually prefer to spend their office-based time preparing sales quotes or ringing round potential customers. According to the final stage of Dave Whistler's new credit control policy, if payment is still not received after three months then the debtor's details are supposed to be passed onto a debt collection agency that work on behalf of CPL. This stage of the policy is, however, likely to be obstructed by the sales force. The Sales Director is required to approve all referred cases and in the current difficult trading circumstances he is likely to be reluctant to risk alienating large customers by pressing them too hard for payment. August 2013 As the worldwide financial recession continued for its seventh year, cash flows remained very tight across all the market sectors in which that CPL operated. The company was already looking to improve its credit control policies and controls for customers. Dave Whistler now decided that, as well as trying to receive money from debtors more quickly, he needed to further extend the time CPL was taking to pay its suppliers. He wrote to all major suppliers saying that from October 2013 the company would be changing the time it took to pay them; from 30 - 60 days as at present to a standard two months from the end of month of the date of invoice. Effectively, this would give CPL an average of 75 days' credit. Alternatively if the supplier would give CPL a 2% early settlement discount, their account would be paid one month from the end of month of invoice. Brett Sinclair, the Purchasing Manager, had not been even consulted about this and was furious. Dave Whistler knew, however, that under the 'partnership sourcing' arrangement, few - if any suppliers - would want to lose a major customer, such as CPL. As it turned out, he was correct. After several weeks of bitter protests, all suppliers except for three finally gave in and accepted the new imposed terms of trade. It did, however, sour relationships between them and the company. Brett suspected that they would eventually get their revenge by raising prices once the recession finally ended. Quite often during August, there are problems caused by staff holidays. Although some aspects of the accounts department's work can be left for a couple of weeks, others - relating to the transaction accounting - always cause difficulties when they are not done on a day-to-day basis. For example, no invoices were raised during the second 28 Live assessment: Internal Control and Accounting Systems ISYS 1: Assessment book - Chic Paints Ltd and third weeks of the month because Xu Hin was on holiday. Nor was any credit control work done during this period. Diary of events for last six months continued Although CPL had only recently decided to sponsor Ashton Wanderers, their local football club, they now decided to drop their sponsorship. This was because the club had performed badly this season and were expected to be relegated to a lower division. Finally, there was a major blow to the business when both Colin Addison and Zhang Wei, for different and unrelated reasons, pulled out of buying into the company. 29 Live assessment material Appendix I: Mapping document Mapping of report to outcomes and criteria Title Principles of Internal Control (Knowledge) Level 4 Learning outcomes - learners will: Assessment criteria - learners can: 1.1 1.2 1 Understand the role of accounting within the organisation. 1.3 1.4 1.5 2.1 2.2 2 Understand the importance and use of internal controls 2.3 2.4 2.5 Describe the purpose, structure and organisation of the accounting function and its relationship with other functions within the organisation. Explain the various business purposes for which the following financial information is required: statement of profit or loss statement of cash flow statement of financial position. Give an overview of the organisation's business and its critical external relationships with stakeholders. Explain how the accounting systems are affected by the organisational structure, systems, procedures, and business transactions. Explain the effect on users of changes to accounting systems caused by: external regulations organisational policies and procedures. Identify the external regulations that affect accounting practices. Describe the causes of, and common types of, fraud and the impact of this on the organisation. Explain the methods that can be used to detect fraud within an accounting system. Explain the types of controls that can be put in place to ensure compliance with statutory or organisational requirements. Explain how an internal control system can support the accounting function. Page / Section / Paragraph number 30 Live assessment material Appendix I: Mapping document Mapping of report to outcomes and criteria Title Evaluating Accounting Systems (Skills) Level 4 Learning outcomes - learners will: Assessment criteria - learners can: 3.1 3.2 3 Evaluate the accounting system and identify areas for improvement. 3.3 3.4 3.5 4 5 Conduct an ethical evaluation of the accounting system 4.1 Conduct a sustainability evaluation of the accounting system 5.1 4.2 5.2 6.1 6 Make recommendations to improve the accounting system. 6.2 6.3 6.4 Identify an organisation's accounting system including hardware and software packages Review record keeping systems to confirm whether they meet organisational requirements Identify weaknesses in and the potential for improvements to, the accounting system and consider their impact on the operation of the organisation. Identify potential areas of fraud arising from lack of control within the accounting system and evaluate the risk. Review methods of operating for cost effectiveness, reliability and speed. Evaluate the accounting system against ethical principles Identify actual or possible breaches of professional ethics Evaluate the accounting system against sustainable principles Identify where improvements could be made to improve sustainability Make recommendations for changes to the accounting system, including ethical and sustainability considerations with a clear rationale and an explanation of any assumptions made. Identify the effects that any changes would have on the users of the system. Enable individuals to understand how to use the accounting system by use of training, manuals, and written information or help menus. Identify the implications of recommended changes in terms of time, financial costs, benefits, and operating procedures. Page / Section / Paragraph number 31 Internal Control and Accounting Systems (ISYS) Assessment book AAT Level 4 Diploma in Accounting (AQ2013) Contact us Call us on 0845 863 0800 (UK) +44 (0)20 7397 3000 (outside UK) Lines are open 09:00 to 17:00 Monday to Friday (UK time) Email us at aat@aat.org.uk Visit us at aat.org.uk Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY United Kingdom Registered charity no. 1050724