allowing overpayments. Another function not mentioned in the procedure is responsibility for setting up new vendor accounts. This should be accomplished by one individual who is not involved in posting invoices for that vendor. This would help to safeguard against the creation of fictional vendors.
A noticeable weakness is the tasking of the Accounts Payable personnel with printing and signing the checks. This is definitely an area that should be managed by separate personnel, one with the function of cutting the check, another with the responsibility of reviewing and signing the checks. Once the checks are printed, a report should be generated listing the checks and their sequential numbers.
The receipt of the bank statement by the office manager is another strength, that maintains separation of responsibility. The accounts payable department’s responsibility for reconciling the bank statement, however, seems to be a weakness in that there may too much potential for hiding discrepancies and duplications.
The accounts payable individual is the check signer, mailer, and bank reconciliation statement recorder. This violates a basic principle of internal control--the separation of cash handling duties from accounting duties. Once a check has been signed, it becomes a form of cash, and no one involved in the bookkeeping process should be allowed to handle cash. Separation of duties, monitoring, and communication are some of the control procedures which pertain to management to ensure control over weaknesses within daily organizational operations.
Separating duties is the most important element of any system of internal controls. It refers to separation of cash handling from accounting duties. These functions can be easily determined within your company by thinking of each employee who physically handles cash or checks. The accounts payable clerk, who was responsible for maintaining accounts payable in
the books, was also allowed to handle cash in the form of signed checks. This could have been easily avoided if the check signers had given the checks to someone outside the accounting department, such as a receptionist or secretary, to mail. In addition the accounts payable clerk also performed the bank reconciliation. An employee who does not prepare them should review of all bank reconciliations monthly. Also to ensure strengths after implementing internal controls, organizations must monitor their effectiveness periodically to ensure that controls continue to be adequate and continue to function properly. Management must also revisit previously identified problems to ensure that they are corrected. Communication also plays a vital part in the internal control process. Communication must be ongoing both within and between various levels and activities of the organization to be useful, information must be reliable and it must be communicated to those who need it.
An internal control can either be detective, corrective, or preventive by nature. Detective controls are designed to detect errors or irregularities that may have occurred. Corrective controls are designed to correct errors or irregularities that have been detected, and preventive controls, on the other hand, are designed to keep errors or irregularities from occurring in the first place. Preventive, detective, and corrective controls operate together, with or without dependencies. Some errors would be severe and must be prevented. Others may be costly to prevent, but easy to detect and correct. While some problems are accepted and insured against, others that are impossible to predict or avoid must be recognized so appropriate recovery controls can be employed.
The accounts payable person should act as the detective, preventive, and corrective control person. As stated before, the person who is in charge of reviewing and entering the data should check to make sure the computer is coding the correct information. Once the computer
finishes coding the information, the person should detect errors if there are any. After detecting any errors, the next step should include correcting it. This responsibility should not be done by one person, but divided among two to three people. There should be a person there to check and detect errors, correct the errors, and another one to come up with a solution to prevent the error from occurring again.
Next the office manager or managers should check to make sure everything is correct before all invoices are filed and bank statements are reconciled. If there is one person doing all of the work and handling all of the responsibilities, then a mistake or error can be easily overlooked.
An Internal Control System is usually put in place for clients to follow during various stages. For instance, each time a payment is to be made to a supplier, a person within the Accounts Payable Dept. should be assigned the task of proofing for errors, while another team member should complete a Payment Request Form, and compare the information on the invoice with that on the following documents, and initial the invoice to indicate that he/she has done this comparison and resolved any discrepancies:
the purchase requisition
the purchase order
the receiving report
When an audit is conducted, an auditor will select a sample of Payment Request Forms and make sure that appropriate approval by Accts Payable personnel appears on the invoice. In a way to determine or compare, the auditor should count as deviations, the invoices missing evidence of such approval.
In conclusion, the strengths and weaknesses of a company’s internal control process should be reviewed and determined if changes need to be made, they should review and recommend the various controls to cover the weaknesses. Finally, identify the controls as a way to prevent future errors and have a proof reader to find errors and correct them immediately.
Reference
Marshall, D. H., McManus, W. W., & Viele, D. F. (2004). Accounting: What the numbers mean (6th ed.). New York: McGraw-Hill/Irwin.
