1. Potential errors and irregularities
Liabilities being set up for goods or services which are either not authorised or not received.
Implications: Unreliable records as they do not show the true position of liabilities, there may cause loss due to paying for goods or services never received.
Measures: If suppliers are in collusion with employees, fictitious charges can be approved for payment with a share subsequently going to the employee. This can most easily occur at the goods inwards stage and is particularly possible if the inspection procedures are inadequate. False invoices can be introduced at any stage in the processing and false supporting documentation can be produced as well and this type of fraud is difficult to prevent. Therefore, the purchases function should be such that only specified employees have the power to requisition goods and then only up to an authorised limit. Such limits increasing with the level of seniority. The requisitions should be serially numbered and should be sent to the buying department. The buying department will be charged with the responsibility of negotiating the best prices and delivery dates from suppliers and ensuring that quality goods are received. Central buying has some advantages such as: ability to buy in bulk and therefore reduce the volume of small orders, knowledge of the most reliable suppliers and being able to plan optimum reorder times and quantities. The existence of a separate purchasing department considerably strengthens internal control because it prevents user departments from ordering goods without the order being subjected to independent check. At the same time the user department checks on the buying department. When the order is raised, it should contain information about price and delivery dates requirement. A delivery address should be quoted. Several copies of the order are usually required. One for the supplier, one for the buying department, one for the accounts department, one for the requisitioned to advise him, that the matter is receiving attention and one to the stores to inform them of what to expect. These LPO's should be pre-numbered. When goods are received, they should be received in areas specially designed for receipt of goods. Goods received notes should be raised, they should be pre-numbered and issued sequentially. Numbering strengthens internal control and reduces the possibility of fake documents. For a goods received note this is very important because it is the prime supporting document for the supplier's invoice. A copy of the goods received note should therefore go straight to the accounts department for this purpose. A copy should be sent to the buying department for matching off in the order file. Any shortages should immediately be notified to the buying department so that appropriate credit can be claimed. The accounts department on receiving the invoices should stamp them, they should then collect all the relevant supporting documents such as goods received notes, copy orders etc. and on this basis should approve the invoice for payment. There should exist a purchases journal, purchases ledger, and a creditors control account.
Before invoices are authorised for payment, they should be checked and the system should require that they should all be presented with their supporting documentation for approval.
2. Potential errors and irregularities
Liabilities being incurred but not recorded:
Implications: Understatement of liabilities hence disputes with suppliers.
Measures: The use of pre-numbered goods received notes, the matching of the goods received notes with suppliers statements and invoices, the use of pre-numbered purchase orders and their subsequent matching with goods received notes, investigation of unmatched goods received notes, regular reconciliations between the creditors ledger and the suppliers statements, having a list of approved suppliers.
3. Potential errors and irregularities
Making payments without proper documentation and proper authorization e.g. incomplete documentation, forged or fraudulent documentation and duplicate payments.
Implications: Paying for services and goods not received. Overstatement of purchases and expenses.
Measures: A requirement that before any payment is made all invoices must be originals and they must be supported with proper and complete documentation. Once payment has been made on a set of documents, they should be clearly marked that they have been paid to prevent their representation.
4. Potential errors and irregularities
Misallocation of charges to the wrong general ledger accounts.
Implications: Mis-statement of various expenses and accounts not giving a true and fair view.
Measures: Coding of all expenses and creditors accounts. On receipt of an invoice, it should be coded and the coding should be checked by an independent clerk. Use of budgetary control measures.
5. Potential errors and irregularities
Goods being returned to suppliers without being recorded in their records. Credit notes not being raised or recorded for short deliveries.
Implications: Overstatement of purchases and loss of receipts due to the company.
Measures: All goods returned should have a despatch documentation raised for them. A copy of the despatch documentation concerned should be passed over to the accounts department and the purchasing department for them to liaise with the supplier and follow up the receipt of a credit note. All claims should be subject to numerical control.
Other matters to be considered
Unless a documentation is cancelled at the time the cheque is signed, it is possible for a genuine invoice to be represented for a second payment. This usually involves collusion between an employee and the supplier and the company can lose substantial sums of money in this way. Cheque payments should be authorised on the basis of validly approved documentation. The cashier normally draws the cheque which should be crossed account payee. The cheque should then go to the first cheque signatory for signing. There should be a second cheque signatory to act as a check on the first signatory. Limits should be imposed on the signatory and all supporting documentation should be cancelled at the time of signing. When the cheques have been signed they should immediately be despatched to the payee. They should never be returned to anyone who has had anything to do with their preparation or authorization especially not to the cashier for in the right hands, signed cheques are as good as cash as it only takes little skill to be able to alter the name or amount on the cheque.
The cashier should record the payments in the cash book and regular bank reconciliations should be prepared. Where suppliers send statement, reconciliations should also be prepared. Suppliers’ statements should never be used as the sole documentation supporting a cheque payment.
The best system to maintain for cash payments is the imprest system. In this system a fixed sum or imprest is assigned to the petty cashier and more cash is only obtainable on the production of vouchers that have been paid. The advantages of this system are:
a) The fixed balance prevents escalation of the amount held, so the amount at risk can be kept small.
b) The system is self checking because each time a reimbursement is required the petty cashier must present his records to the official responsible for examination.
c) Reconciliation of petty cash book is made easier. The amount of the imprest should be as low as possible and the number of floats in use should be kept to a minimum. IOU should not be allowed nor should staff cheques be cashed out of petty cash. No other receipts should go into the petty cash. At the time of the reimbursement, the responsible official should check the petty cash book with the supporting vouchers and should sign it accordingly. Regular surprise cash counts can usefully be made. The accountant has to be on the look out for use of falsified vouchers and the representation of used vouchers. A properly run imprest system is reasonably well protected from material fraud.
Bank and cash balances
Money in all forms is highly susceptible to misappropriation. For this reason regular bank reconciliations should be carried out by senior independent officials. Outstanding items should be investigated, particularly if they are long outstanding.