Percy Ltd (Percy)

Percy provides education to students studying for their professional accountancy exams. Percys clients are employers that send their employees as well as individuals studying independently of an employer. Percy runs classes in its 15 education centres across the UK. You are currently reviewing the internal controls documentation at the planning stage of the audit.

Each education centre has its own capital expenditure budget and centre managers are able to spend up to this amount on capital items without further authorisation. No checks are made centrally to determine whether annual capital expenditure budgets have been exceeded. There is no central suppliers list, as individual centre managers are free to decide on the most appropriate supplier to meet their needs.

New clients must undergo a full credit check prior to being accepted. On the basis of this, a credit limit is proposed by sales staff and approved by the sales director and these credit limits remain static in the sales system

Every month, the financial controller undertakes the bank reconciliation. As the financial controller is a senior member of the finance team, a review of the bank reconciliation is not deemed necessary.

When a new employee starts working for Percy, the human resources manager (HR manager) completes a new joiner form with all of the relevant information for each new employee. Once the details have been confirmed, a copy is sent to the payroll department who sets the new employee up on the payroll system. To ensure this can be done promptly, all members of the payroll department are able to add new employees and amend employees data when required. All staff access the system using the same login and password the payroll director updates the password every month. No checks are made of the changes to standing data.

Each month, the payroll team generate a list of payments per employee which links into the bank system to produce a list of automatic bank transfer payments. The finance director reviews the total to be paid on the list of automatic payments and compares this to the total payroll amount to be paid for the month per the payroll records. If any issues arise, then the automatic bank transfer can be manually changed by the finance director.

Required:

In respect of Percy:

a) Identify and explain five deficiencies in internal controls

b) Recommend a control to address each of the deficiencies identified in part a)

c) Describe a test of control that could be performed to identify whether each of the controls identified in part b) are operating effectively.

You should present you answer using three columns headed Control deficiency, control recommendation and test of control respectively