The traditional classification of operation for internal control purposes was:
a) Cash and cheques received including cash and bank balances;
b) Cash and cheque payments;
c) Salaries and wages;
d) Purchases and trade creditors;
e) Sales and trade debtors;
f) Stocks including work-in-progress;
g) Fixed assets and investments.
However, it is more usual now to classify transactions in accordance with their related cycles. These cycles are recognized in a typical manufacturing organization as: sales cycles, purchases cycle, wages cycle and conversion cycle.
The Sales Cycle
1. Potential error or irregularity:
Goods being despatched or leaving the premises without being invoiced, services being rendered without being invoiced, goods on consignment or in transit to other branches not being recognised in the books.
Understatement of sales, wrong management accounts, loss of assets of the company and accounts that will not give a true and fair view as sales and debtors are understated.
The sales department should acknowledge orders received. This can be done by the organization ensuring that all customers' orders are transcribed their own internal sales orders which should be pre-numbered. The objective is to initiate the accounting trail and reduce the possibility of disputes with the customers. The sales department should also be responsible for fixing selling prices and delivery dates and any special discounts should be approved by a responsible official. Before the order is processed further, it is passed on to the credit control department, they check the credit worthiness of the customer and if he is an existing customer they have to check that the new order will not exceed the credit limit. If the customer has not dealt with the company previously, then bank and trade references should be obtained. The credit control department if it is satisfied that this is a customer who should be supplied with the goods will then check with the stores to confirm the availability of the stock items. They will then approve the sales order and pass it on to stores to despatch the goods. Stores should despatch the goods ensuring what they are despatching is in accordance with what the customer ordered and what has been approved by the credit control department.
They should raise documentation to evidence the despatch of goods. This should be a pre-numbered document and is usually called a despatch note or a goods delivery note. They should be issued numerically in sequence. Copies of the despatch note should be sent with the goods. One copy as advice to the customer and a second copy to be signed by the customer and returned to the company as proof of delivery. To ensure that all goods leaving the premises are invoiced the delivery note sequence should be checked prior to raising invoices and each delivery note should be checked to ensure that an invoice is raised.
This involves an independent clerk matching all the delivery notes or despatch notes with the invoices and the investigation of any unmatched delivery notes.
2. Potential error or irregularity
Goods being sent to bad credit risk:
Implications: incidents of bad debts, loss of assets.
Measures are: the establishment of a credit control department that examines all the orders received by the sales department and establishes the credit worthiness of the customer before authorising stores to despatch the goods. A review of long outstanding debts and investigations as to why payment is not being received.
3. Potential error or irregularity
Overdue accounts escaping follow-up:
Implications: increased incidents of bad debts.
Measures: the production of an aged debtors list. The ageing must be checked for correctness. The credit control department should review this listing regularly and ensure that overdue accounts are constantly followed up. The company can institute a stop service list where all delinquents are placed and this list distributed within the organization to ensure that any transactions with the concerned parties are closely monitored.
4. Potential errors or irregularities
Invoicing errors occurring: that is sales invoiced but not recorded, sales invoiced incorrectly.
Implications: mis-statements in sales and debtors either up or down. Loss to the organization as money will not be received for sales made and increased disputes with customers due to errors in invoicing.
Measures: the use of pre-numbered sales invoices and the requirements that they be issued in sequence. The existence of proper journals - that is the sales journal and the debtors ledger. The checking of the invoices raised by an independent clerk of the arithmetical accuracy, the pricing, the discounts allowed, the coding and the cross referencing to the customer's order. Sending statements to customers on a regular basis, quantity reconciliations compared with actual documentation.
5. Potential errors and irregularities
The receipt of cash or cheques not being banked including teeming and lading.
Implications: misappropriation of cash and hence loss to the organization. Increased interest expense due to late banking. Exposure to theft by burglars.
Measures: the requirement that mail should be opened by the managing director's secretary in the presence of some messenger. She should then prepare a pre-list of all cheques received by mail. Cross all cheques and pass them on to the cashier promptly for his banking. The organization should use pre-numbered receipts and have a requirement that for all money received, a receipt must be raised. The receipts should be promptly entered in the cash book and pay-in-slips prepared accordingly. There should be a requirement that all receipts be banked promptly and intact thus if we have received cash, cash should be banked and if cheques have been received, then cheques should be banked and no substitution should be allowed. Regular bank reconciliation should be prepared, checked and approved by a responsible official. An independent clerk should on a regular basis compare the pre-list prepared by the secretary to the pay-in-slip and on to the bank statement.
6. Potential errors and irregularities
Cash sales being improperly dealt with by persons initially receiving cash and persons handling cash from initial receipt to final banking.
Implications: misappropriation of assets as cash is the most readily realisable assets.
Measures: use of pre-numbered cash sales receipts, restricting the number of people who can handle/receive cash, requiring that returns be filed on a daily basis, quantity reconciliation, close supervision of the cash handlers, encouraging customers to pay by either cheque or credit card, surprise cash counts and reconciliation with the supporting records.
7. Potential errors and irregularities
Debtors accounts being improperly credited. A debtors accounts can be credited either by receipt of cash or by the issue of a credit note.
Implications: unreliable records, increased incidents of bad debts, disputes with customers, loss for the organization.
Measures: coding of customers. An independent clerk selecting credit entries in customers account and matching those to their initial receipts or credit notes.