Analysis of Current Accounting System Essay

1. Terms of reference1.1.1 This publish has been prep atomic number 18d to protract the requirements of the learning and assessment ara Principles of Internal work and Evaluating Accounting systems at Level 4 of the Association of Accounting Technicians (AAT) parchment in Accounting qualification. 1.1.2 This report forms an evaluation of the Accounting System of the inkwell Limited. 1.1.3 The main purpose of the report isTo evaluate the be transcription and procedures that atomic number 18 currently in house at IWL To identify weaknesses inwardly the system, arouse possible improvements and make recommendations for improvement. To analyse costbenefit for suggested improvements.2. Executive stocky3. Methodology3.1.1 This report has been prep atomic number 18d using discipline provided by AAT gaucherie study text and study materials from Home Learning College. 3.1.2 Research for the recommendations has been do using internet. A list of websites use passel be free-b ase in Appendix 1. 3.1.3 In developing the report support and monetary aid from my Home Learning College tutor was provided.4. Introduction4.1. Inkwell Ltd (IWL) was formed vii years ago. IWL is the medium-sized comp whatsoever that supplies a complete range of re-manufactured inkjet and laser toner cartridges that argon fully compatible with every major printers. Since its launch IWL has aimn steadily and now has revenue of over 16 million. The gild employs around one hundred eighty full-time employees. 4.2. IWL has adopted the functional structure system with three departments i.e. pay, gross revenue and purchases. The BODs comprised of Managing theatre director, sales Director and Finance Director is responsible for only finale-making activities in the community. The concern structure chart female genital organ be institute in Appendix 2. 4.3. The main purpose of story function of the IWL is to collect and carry stunned information from other departments i n regulate to prep are statutory and management accounts as well as to determine the price of cartridges the follow substructure pay for in monastic assure to achieve indispensable usefulness leeway (management accounting). The Finance Department is also responsible for making sure that inventorying levels meet IWLs policy, the companys de nonation rating is unploughed impregnable, management accounts are prepared every month, orders from suppliers are manageed and supplier payments are arranged for.4.2 To make an effectual use of the accounting systems and procedures in place the finance department has been divided into two main areas of accounting i.e. fiscal accounting and management accounting (cost accounting). The area of financial accounting has been merely sub-divided into the subdivisions of general account book and inventory, purchase leger, salesledger, paysheet and personnel infobase. The chart showing the structure of The Accounts Department is provid ed in Appendix 3. 4.2.1 Sections inwardly the finance department interact and maintain a relationship with other departments. The information devolves to general ledger from the sales ledger, purchase ledger and payroll, personnel member and shops.The general ledger provides information to the keep company Accountant for the purpose of preparing periodic management accounts and approving supplier payments, to The Finance Director for the purpose of preparing financial statements and to the Sales Director for the purpose of costing IWLs products. The Purchase record plane section has a direct relationship with the General daybook and the IWLs suppliers. The Sales Ledger section maintains a close relationship with the sales department as well as with the General Ledger. The Payroll and personnel department entropybase section is working closely with shop managers from whom it collects the information to prepare payroll for employees. The department also co- lives with extern al users such as HMRC in order to be with statutory requirements. The Costing Section is working closely with The Sales Director.4.3 The objective of financial statements is to provide information roughly the financial position, instruction execution and throws in financial position of an enterprise that is useful to a childlike range of users such as suppliers, customers, government agencies or financial institutions in making economic decisions, for instance, whether to grant a loan or to pull credit to the company. At the financial year end the Finance Director at IWL prepares the following financial statements 4.3.1 Income bid this statement provides information about the financial performance of the company in terms of revenue from sales, be and expenses incurred to generate the profit. It also provides information about gross and net profit generated for past financial periods.It is also referred to as the Profit and Loss Account. 4.3.2 assertion of Financial Position this statement shows the financial position of the company at the end of severally financial year. It provides the information about the companys assets, liabilities and the equity claim of its shareholders. It is also referred to as the Balance Sheet. 4.3.3 The Statement of immediate payment Flow this statement provides a link surrounded by the Income Statement and Statement of Financial Position as at the year end of the previous(prenominal) and current financial years. Its main purpose is to reconcile liquid property to profit by providing an analysis of cash inflows and outflows from operating, investing and financing activities.4.4 A stakeholder is an entity that bottomland be affected by the matters of a company in which they are said to be stakeholders, i.e. that in which they film a stake. The searing external stakeholders for IWL have been set as follows 4.4.1 The financial institutions- IWL has a strong relationship with its bank. Through producing a series of con vincing annual pedigree plans, the company directors have been able to raise sufficient finance to grow IWL into a substantial player in the cartridge supplies sector. Without this co-operation it would be overmuch harder to expand the Company to its current position. They are IWLs stakeholders because they lent funds to The Business and they would be affected in case The Company generates insolvent. 4.4.2 Customers- the IWL has a base of around 120 large trade customers.These customers account for 20% of IWLs revenue. It is imperative to maintain good relationship with customers in order to remain competitive and have high customer satisfaction level. Customers are categorised as stakeholders because the companys actions can affect their financial position. 4.4.3 giving medication- The government is interested in businesses as they set out the regulations and rent the businesses to do well to keep the economy healthy. Economic policies introduced by The Government with task ation, and the ability of The Government to influence interest rates, impact on the business through prices and costs. The company guides to make sure that it is give the right amount of tax and VAT and that it complies with all governments policies and accounting exemplars.4.5 IWL is the medium-sized, centralized, manufacturing company operating nationwide. For a small sole principal or partnership type scheme, like off-licence shop, thither are in all likelihood to be few transactions to process. As a result the basic iodine entry record system, with detailed cash book, would some likely be used. A simple structure where the owner or partners make all the decisions related to the business would also be adopted. However, the single entry system insufficiencys gives necessary to verify the accuracy of the postings and therefore would not be practical in circumstances where a high mickle of business transactions had to be processed. Medium and large sized companies testame nt most likely use more than sophisticated, double entry book keeping system. Higher amount of transactions would require more people to operate it and therefore the structure would be more sophisticated too, with either divisional or matrix structure adopted. The IWL uses double entry system.5 analysis of the Current Accounting System5.1 The main external regulations the IWL has to espouse with has been determine as 5.1.1 The Company Law- compulsory legislation that governs the formation and registration of limited companies. It sets out the responsibilities of companies, their directors and secretaries and also determines the requirements relating to the cooking of Financial Statements of a company. It is legally medical dressing on all limited companies in UK. In case of any changes in The Company LAW, cater look ating may be required to vouch compliance which will affect The IWLs cash flow and availability of resources i.e. faculty released for genteelness. 5.1.2 The Pay As You Earn (PAYE) Regulations- this regulation put one over when a business organisation employs individuals and sets out the requirements for deducting PAYE income tax and matter Insurance component parts (NICs) from payments made to employees. The regulation also stipulates rules for sending PAYE income tax and employees NICs to HMRC and identify the forms and returns that must be kept and submitted when administering the scheme. Any changes to the regulations i.e. change of the company tax rate or the National Insurance Contri neverthelession (NIC) has a direct effect on IWL because these are statutory requirements and The BODs need to make sure the staves are capturely trained and that they comply with the regulations. This may require substantial cash outlay as well as additional labour to provide cover for absent staff so these sorts of changes may significantly affect the Companys finances.Accounting Standards-these are the regulations and codes of practice whic h have been developed to try to reduce the number of incompatible interpretations and treatments used by accountants in preparing and presenting the Financial Statements for limited companies. This regulation have a direct impact on the companys actions, as IWL is a limited company and have to prepare Financial Statements each year. TheFinance Director, being ACCA qualified, is applying accounting standards while preparing the financial statements. Changes made to the standards may require the Finance Director to undertake additional training which once a net will affect the companys finances and the availability of staff. 5.1.4 The information Protection Act 1998- the act lays down the principles by which the personal selective information should be managed by information matchlers. Business organisations that keep personal data in respect of living and identifiable person are data controllers. The IWL has Payroll and Database section in the Accounts Department therefore is ob liged to comply with the regulation. Only authorised atoms of staff are to use IWLs computers. In case of any changes in the Data Protection Act 1998, the Company may be required to, for example, purchase sunrise(prenominal) safe for keeping the records in safe and secure way or to purchase new database software to meet the requirements of the regulation as well as train staff and review and implement changes in companys policies.5.2 hoax is an intentional act by management or employees in order to obtain an unfair or illegal advantage. The most common causes of actor in a business can be place as a insufficiency of available sexual control procedures within the business, insufficiency of internal anti- phoney controls, especially risk management, as well as a lack of internal study. In order to improve fraud and stealth detection, the BODs needs to regularly review companys fraud policies and procedures to condition that they effectively reduce risk, improve processes and are in compliance with familiar laws and regulations. This involves identifying the companys specific fraud risks and thus developing and implementing controls, procedures and operational changes to mitigate those risks. 5.3 The most common types of fraud can be identified as the stealth of assets and corruption. The effects of the fraud activities can devastate the company in various ways, for instance, financial loss, external confidence, company morale or increased audit costs.Theft- this is probably the most common method of fraud, usually carried out because staff are presented with opportunities due to lack of physical controls and minuscule or no segregation of duties with individual members of staff being disposed(p) too much personal control over procedures. Impact of the theft can be fairly easy quantified. If, forexample, the manager overstates the hours worked by an employee, these can be easily calculated by multiplying the rate per hour by hours worked. In f act this is stealing the companys time and by and by money. There is a high risk of such an application occurring within IWL shops as the company has no procedure in place for sales, store or administrative staff to sing in or out when they arrive or leave work. This type of fraud often happens without knowledge of the management. 5.3.2 Corruption- this form of fraud usually involves a dishonest member of staff working in collusion with others to commit acts of fraud. The example of such an activity is changing contract terms and conditions after it have been awarded in favour of the supplier. There is a great possibility of this type of fraud occurring in the IWLs due to lack of internal control procedures for purchasing inventory. This results in loses to the company because, the company is paying more for the product therefore cut back the Companys revenue.5.4 The accounting system can support internal control by means of setting the standards and using of control systems. 5.4.1 Standards go forth the organisation to define its expectation of how things should be achieved. They allow the management to monitor the performance of the employees. These standards can be based on what the organisation expects from the staff, for example, implementing of companys procedures. The organisation will generally outline to the staff what it expects in relation to performance levels, like cost of ensuring work is carried out effectively and that the deadlines are met, as well as in relation to the error allowance. Standards should be set in relation to the organisations objectives and goals. A instrument commonly used for the purpose of measuring performance is that of standard costing. A main feature of standard costing is variance analysis, where differences between budgeted and actual figures are monitored. This allows the organisation to identify where changes may be required. 5.4.2 rehearse of control in systems is aimed at ensuring that the plans of organ isation are being met. Deviations found by the control monitors should be investigated and if they negatively affect organisation then go underive action should be taken. An internal control system includes all the policies and procedures adopted by the organisation to achieve the objectives of Effective conduct of the business, executing of internal policies and procedures,Safeguarding the assets of the organisation,Detecting and preventing incidences of fraud and error,The accuracy and completeness of the financial records,The timely preparation of reliable financial information.Regardless of the size of the organisation the accounting system must be reliable, cost effective and capable of being used effectively by the person(s) operating it. An accounting system of the IWL is a order of battle of computerized and manual of arms accounting processes, procedures and controls created to collect, record, classify, summarize and interpret financial data for decision making by manage ment. The record keeping systems of IWL meet organisations requirements for financial information. The Strengths, Weaknesses, Opportunities and Threads (SWOT) analysis has been prepared to identify those areas of the current accounting system that do not operate satisfactory and can be found in appendix 4. The analysis showed that the work is going through the correct sequence of events and processes and that there is good segregation of duties within the department. However, there are areas where the systems could be improved. These have been identified as better staff training and introduction of audit trail. Better trained staff would capture specialised in the area they operate which would enable them to complete tasks more efficiently and effectively and therefore reduce costs. The audit trail would downplay voltage for error and would act as a control tool for staff activity.Weaknesses Identified Within The Accounting SystemThe weaknesses that rise potential for error and p ossible exposure to fraud within The Accounting System of the IWL have been identified as insufficient staff training and lack of audit trail procedures. 6.2 Insufficient staff training caused many problems during the uttermost(a) six months period. There was not enough cover in the sales ledger section when the clerk was off sick or on holiday leave which caused accumulation of work that affected other departments as the financial information was not presented in the timely manner. The fact that no one was able to provide cover was evident proof of staff training needs. Another area where problemsoccurred due to lack of training is that of the payroll and database section. The clerk was provided with only one day in-house training of how to operate payroll software and this resulted in mistakes with the staff salaries calculations. This is the example of error that occurred because of the lack of training. slightly of them have been underpaid what may result in lower staff morale and de-motivate them which will result in worse productivity or instead may give a reason to commit fraud. Work could be delegated to different persons what would also act as an anti- two-faced control because the person providing cover could spot any unauthorised or suspicious activities and report it to the management. It is recommended that all staff should be sent for training in order to become multi skilled. 6.3 Another weakness identified is the lack of internal audit procedures within the accounts department of the IWL. The impact on the organisation may be significant to the company in terms of money and reputation, should the fraud activities took place. Internal audit has proved to be the most successful method of detecting fraud. It would be advantageous to any organisationif its internal audit function were able to hash out management on identifying and assessing the risks associated with fraud could review and monitor the internal control procedures in place to minim ise the risk of fraud and also actively engage in detection of fraud within the accounts function. Internal controls are also successful as means not only of deterring or preventing fraud, but also of exposing acts of fraud. Many of the causes of fraud can be guarded against and, together with analysis of reports and trends and the investigation of errors and anomalies, fraudulent activities are often expose.The emblematic measures introduced in practice to encourage deter and prevent fraud has been identified as Educating staff and raising sense of the possible types of fraud and the likely impact of fraud on the organisation and its stakeholders. Whilst there is a flavour that that such education could not only alert staff to types of fraud but could also encourage staff to indulge in fraudulent activities, research shows that money spent on educating staff and promoting staff awareness does in fact deter fraud and in the long stomach benefits outweigh costs. 6.4.2 Monitorin g performance and making sure that accounting procedures are being followed. One member of staff, for instance accounting technician when his review and recommendation process iscompleted, could be delegated to perform this task with all the discrepancies and suspicious activities account to the management and appropriate action taken to mitigate risks. 6.5 The company can support individuals who operate accounting systems using training, manuals and written information and help menus. 6.5.1 Training- well trained staffs operate their accountancy systems more effectively than the wild staffs. A review of the training needs of the company and its accounting staff has been undertaken, these have been identified as follows General ledger and inventory clerk- appropriate training in the work of the Sales Clerk would relieve pressure from the Sales clerk who has no accounting or credit control qualification and who has a heavy workload during busy periods. 6.5.1.2 Purchase ledger cler k- this member of staff is already familiar with the work of the sales ledger section and an update of skills in this area is worth considering.The Purchase Ledger clerk is part AAT qualified and expressed an interest in canvas for intermediate level 3 exams. 6.5.1.3 Sales ledger clerk and credit controller- this staff member has experience of the purchase ledger having worked as a Purchase Ledger Clerk before joining IWL. Some encourage training in this area would give a greater breaker point of flexibility. The clerk has expressed an interest in professional accountancy training and this should be encouraged. 6.5.1.4 Payroll and Personnel Database clerk- this staff member is working on a recently installed system has a heavy workload and is in need of additional training. Further training by a company who sold IWL new system is recommended. The clerk has an accounting qualification but further training should be discussed. 6.5.1.5 Costing technician- this is the only member of staff that has the experience to operate costing system. This member of staff shows reluctance to gain accounting qualification. The issue needs to be resolved to the benefit of the company.6.5.2 Manuals are files containing documents which provide the user with detailed information relating to procedures and operating activities. An example of the manual is handbook created by the Finance Director of the IWL relating to the IT systems. 6.5.3 Help menus- are aimed at providing assistance to the system user by allowing them to query items relevant to their effective use of the system. It provides the information on how to usethe software in the correct manner. Sage payroll has such a facility in place. 6.5.4 pen information- the example may be company policy handbook issued by the Finance Director. 6.6 Every member of accounting staff is required to comply with statutory and organisational requirements. The types of controls that can be put in place to ensure compliance may include data security controls and administrative controls. 6.6.1 Data security controls are put in place to ensure that the organisations data files are not subject to unauthorised access, change, apocalypse to unauthorised persons, loss, damage or destruction.The IWL has a data security controls in place, however these are not being adhered to properly. It is recommended that staff should be advised about requirements of changing the password regularly and that unauthorised person should not be given access to the companys computers. 6.6.2 Administrative controls can be categorised as segregation of duties, written policies and procedures and supervision. Due to lack of staff training, it is not possible to segregate and share duties between workers as they are not multi-skilled. This rise a possibility of error occurring as well as fraudulent manipulation of the system. Written policies are in place however, accountability and responsibility for implementing should be clearly defined. Every member should be informed about the consequences in case the procedures are not followed. Supervision of individuals or groups involved in the processing, checking and use of information within the system is essential. It is recommended that the activities of staff should be controlled by either member of the BODs or the Company Accountant. 6.7 The potential areas of fraud arising from lack of control within the accounting system have been identified as inventory control section and the purchase ledger section. Inventory control system would benefit from acquiring the Purchase Order Processing module which would improve the accuracy and dependableness of the inventory control and would minimise risk of fraud. The Purchase Ledger section need more supervision as the Purchase Manager seems to be the most unreliable and suspicious person.