Examination of the Accounts Payable Internal Controls of a Private Corporation
An Analytical Review of the Internal Control of Accounts Payable Paper for DFS 603 Directed Field Studies in Auditing For Dr. Claudia Parker Presented by Greg Switzer Bachelor of Applied Business Administration – Accounting NAIT School of Business Sunday, September 19, 2004 EXECUTIVE SUMMARY 4 INTRODUCTION TO THE FIRM 7 Background 7 My Position 7 FACTS AND FINDINGS 8 Internal Control 8 THE INITIATION OF THE ACQUISITION AND EXPENDITURE CYCLE 10 INTRODUCTION TO COMPUTER RESOURCES 11 INTRODUCTION TO SYSTEM RESOURCES 12 ACQUISITION AND EXPENDITURE COMPUTER CONTROLS 13 CASH DISBURSEMENTS PROCESSING 14 ANALYSIS 14 Strengths 14 Weakness and Recommendations 17 CONCLUSION 22 EXHIBIT 1 23 Access to System Resources 23 EXHIBIT 1 B 25 Cash Disbursements Processing 25 EXHIBIT 1C 26 Acquisition and Expenditure Computer Controls 26 EXHIBIT 2 28 Purchase Order Flow Chart 28 EXHIBIT 3 29 Vendor Invoice Flow Chart 29 WORKS CITED 30 Executive Summary Purpose of the Report The paper investigated and evaluated accounts payable internal controls of a private corporation in their acquisition and expenditure cycle. The paper tests and examines the internal controls of the accounts payable department. The paper reveals my erudition of the firm’s computerized accounts payable and their accounting controls. ... The paper’s objective is to document this assessment and provide recommendations to streamline accounts payable transactions. The paper’s purpose is examine this internal prospective of the operations for ways to improve and assist with the achievement of timely, accurate and reliable payables. Scope and Limitations The task of analysing the firm’s computer and accounting controls during the acquisition and expenditure cycle has boundaries. ... Although from day one to current there is confidence that sufficient information was gathered to give credible suggestions that will assist Management’s internal control objectives based on my observations and experiences in the Accounting Department. ... There was work to be done in addition to evaluating accounts payable controls, and therefore the focus of the controls had limitations. The examination of the controls was in addition to an introduction of new and unfamiliar accounting and computer software. ... Management’s objective has always been to ensure there are internal controls present and effectively presenting accurate assets, liabilities, revenues, and expenses. ... One method used to gain further prospective on the control measures in the acquisition and expenditure cycle was internal control questionnaires. The questionnaires assisted the examination of the acquisition and expenditure computer controls. ... Another method utilized is a document flow chart to analyze the flow of paper and accounting controls. ... As a further result, I learnt the firm’s operational internal controls while learning the ropes in the firm’s accounts payable department. The paper will review the current accounts payable process to gain the necessary knowledge to determine any control deficiencies and recommend corrective measures. ... My analysis will examine the path of vendor invoices and evaluate any deficiencies of system resources, cash disbursement processing, in the acquisition and expenditure computer controls. Facts and Findings Internal Control The Canadian Institute of Charter Accountants handbook section 5200.03 describes internal control as “consisting of the policies and procedures established and maintained by management to assist in achieving its objective of ensuring, as far as practical, the orderly and efficient conduct of the entity’s business”. ... There are internal control limitations such as human error, management override, and collusion. The internal control structure consists of three elements, the control environment, accounting system, and control procedures. ... The “tone at the top” is a prerequisite for good internal controls. ... “The control environment is the aspect of internal control that allows for the creation and maintenance of effective policies and procedures. ... Several methods can be used to obtain an understanding of a company’s internal controls. ... Internal control questionnaires act as memory aids and are a convenient way to document the understanding obtained. ... The activity process starts when the project manager approves a pre-numbered requisition then a pre-numbered purchase order is issued by Purchasing and the numbered copy is passed on to Accounts Payable and the original to a vendor to supply the service or product. The accounts payable clerk matches the purchase order to the vendor’s invoice with its packing slip. The receiving department located at each project forward the packing slip to the accounts payable department. ... The approved document is returned to the accounts payable clerk who then attaches it to a cheque disbursement stub and the cheque is released to the vendor. While the documents are out to get approved by the PM, the accounts payable clerk initiates a check run. ... Corporate Office has control over the blank checks, as well as, printing, signing, and sending them to the accounts payable clerk to distribute to the payee and attach the documentation to the disbursement stub. ... System resource controls are in place to prevent unauthorized access to program and company files. ... Acquisition and Expenditure Computer Controls “The basic acquisition and expenditure activities are purchasing goods and services and paying the bills” (Robertson et el. ... This segregation of duties ensures purchasing officer make the purchases, the project managers make the purchase requests, and accounts payable clerk pays the bills for the purchase orders. ... The check run is performed at head office, and the checks are forwarded to accounts payable. ... Once all invoices that are noted on the disbursement cover sheet are matched, the package is given to management to review and initial for disbursement by accounts payable to the vendor. ... The company’s main source of strength of their system controls, are the system administrators. ... For example, when l was first introduced to the accounting software Agresso, it was discovered by our efficient financial accountant that all the accounts payable entries l had entered in the general ledger was not recorded with a vendor invoice number. As well, for an unexplainable reason, instead of setting up the liabilities to the correct vendor, an accounts receivable vendor would be credited. Rather posting to the intended vendor in accounts payable, the recorded transaction would post to an accounts receivable account number. ... An important strength is that all inputs are logged to provide restart processing when a terminal becomes inoperative during the processing of accounts payable entries from computer generated purchase orders. ... After entering the receipt of goods the operator is given a transaction number to enter on the accounts payable requisition that is stamped on the invoice. ... Another noticeable strength in controls is the amount of eyes from management that review the invoices before they are processed and up to the stage of payment disbursements. This examination is inclusive of computer generated and hand written purchase orders. ... This is important when attesting to the balances in the general ledger accounts. ... They are returned to accounts payable for disbursement. ... c) Cause: The accounts payable clerks deal directly with the vendors. ... This gives opportunities for the accounts payable clerk to release the cheque supported by wishful thinking the approved invoices will be matched to the disbursement.