(c) this question requires you to discuss the controls that the owner of a medium size wholesale business should put in place to facilitate the detection and prevention of errors and frauds.
The controls should include the following:
(i) Organisational Plans/Chart
The business should have proper organisation plans. An organisation plan shows clearly the various departments within the business, their functions and the persons charged with ensuring that such functions are fulfilled. Fir example there should be a unit to carry out the purchase of stock and another to sell the stock and make the collections from customers.
The functions of every department are specified and the duties of every individual in the department are specified. Delegation of authority and limits of authority should be well and clearly defined. Such a plan boosts accountability within the organisation and reduce the incidence of fraud and error..
(ii) Segregation of Duties
This refers to the separation of the various duties and responsibilities such that one person cannot process and record complete transactions from beginning to the end without being checked by another person. For example in the purchase of stock the duties of raising the purchase order, authorising the order, placing the order with the supplier, receiving the stock and recording the transaction in the ledger should be performed by independent persons. This will deter fraud and detect since the work of every person in checked by another person.
(iii) Physical Controls
These are security measures concerned with the custody of assets by limiting access to authorised people only.
For example cash received at the business should be kept in saves awaiting banking. Within the business premises there should be CCTVc cameras. These measures will reduce the risk of misappropriation of assets.
(iv) Authorisation and Approval
Transactions that commit organisation‘s resources should be subject to authorisation and approval by a responsible official. The limits for authorisation should also be specified in the organization plan. For example before paying suppliers a senior manager within the business should authorise the payments. This will deter fraud by checking that all payments being made are genuine.
(v) Arithmetical and Accounting Control.
These are controls within the accounting function, which check that transactions are authorised, correctly and accurately recorded. This is aimed at ensuring completeness and accuracy of the accounting records. For example before paying suppliers a reconciliation should be prepared between the suppliers statement and the ledger balance. This will assist in detecting any transactions that have not been recorded in the ledger or where the supplier is claiming payment for fraudulent supplies. A bank reconciliation statement should also be prepared as a check against any errors or fraudulent transactions going through the cash book.
The proper functioning of any system is dependent on the competence and integrity of those operating it. The business must therefore recruit competent staff that have integrity. Staff should be assigned responsibilities that match their capabilities. Staff should undergo proper training to ensure that the operations are carried out in the best way possible.
Day to day transactions and their recording should be subjected to supervision by competent responsible officials. This will increase the level of accountability and consequently reduce the possibility of fraud and errors.
(viii) Management Controls
These controls are exercised by management outside the day to day routine of the system. They include:
– Review of management accounts.
– Comparison of actual performance with budgets.
Such reviews by the management of the business will assist in highlighting if there are any significant errors and frauds that manifest themselves in the financial records.
(ix) Rotation of Duties
Duties should be rotated between personnel at the same level. Staff should be encouraged to take annual leave; this will provide an opportunity for their work to be checked by an independent person.
(x) Routine and Automatic Checks.
These are checks conducted on routine duties and operations to ensure that they are operating efficiently. Such checks are conducted on a surprise basis to minimise errors and frauds. These include controls such as surprise cash counts and physical inspection of stock at the shops. Such checks will deter staff from perpetrating any frauds.