MISSION STATEMENT

To offer variety good, quality products that will suit your wants and needs at every hour of the day. You our valued customers are our first priority and we attend to your every need at your time and cost.

AIM
1

To investigate the various internal control methods used in Morgan Grocery Shop.

OBJECTIVES
2

To descri e the various internal controls used y Morgan Grocery Shop over areas such as inventory, cash, accounts receiva le and accounts paya le.

To discourage occurrence of errors or irregularities in the Morgan Grocery Shop. To assess the effectiveness of the internal controls used y Morgan Grocery Shop.

To ma!e recommendations to improve the internal control system used y Morgan Grocery Shop.

METHOD OF DATA COLLECTION

" qualitative research was done on Morgan Grocery Shop. #oth primary and
$

secondary sources were implemented in assessing the internal controls of the company. The primary sources were interviews with the Sole %roprietor and the manager. &uestionnaires were also used for other employees in the organi'ation. The secondary sources were te(t oo!s and rief researched notes. The sources were su stantial and relia le to a great e(tent as the data was current and was o tained from personnel within the usiness. The owner and manager would have in depth !nowledge of the daily activities and the control strategies implemented in the company. The employees were also relevant as their involvement in the day)to)day operations in various aspects of the company information and clarification on certain usiness processes. The research instruments, questionnaires and the interview schedules were used. These instruments were relevant to the study as the questions were geared towards directly focusing on the areas intended for the research to investigate, analy'e, assess and evaluate the internal controls implemented in the usiness. These rought forth detailed

instruments also allow for understanda ility and validation of the accounting information presented y the usiness. * servation was also useful as it allowed the researcher to assess the relia ility of the data presented y the wor!ers and highlight other controls that may not have een mentioned y them.

LIMITATIONS
The duration of the interview was insufficient as the only time availa le was during wor!ing hours when persons were very usy. Some of the data required for the report was not o tained as the information was confidential to the usiness, hence the study was not as detailed as it could have een.

PRESENTATION OF FINDINGS INTERNAL CONTROL OVER STOCK

The inventories used in the usiness daily operations are. perisha le food items, liquor, /uices, snac!s, cigarettes, phone cards, leach, all meat !ind, etc. These are

materials that are generally purchased on a wee!ly asis depending on the supply and demand level of the goods. 0n order to prevent or minimi'e theft or tampering of stoc! from occurring, management may implement internal control measures. 0n the usiness staff is rotated in order for wor!ers to understand what the other positions are li!e and necessarily to reduce fraud caused y eing too comforta le in the position. *nly the manager and

owner are allowed to access certain high level security areas. 1or e(ample, the 2loc!ed ca inets3 where the ul! of the stoc! items are stored. Stoc! requisition and purchases movements are authori'ed and approved y the owner and manager thus reducing

pilfering. The owner orders stoc! ased on the supply availa le on generally on a wee!ly asis approves all orders requisitioned and authori'es the payments made for the stoc! requisitioned. The manager records all the stoc! documentations necessary and organi'es all the documents such as purchase requisitions and invoices related to stoc!. The manager also records the stoc! purchased, physically verifies the quantity and document the stoc! quantities. These activities performed y the manager pertaining to stoc! are overseen y the owner who verifies the inventory records ased on the source
4

documents and the entries recorded y the manager. 0n order to prevent stoc!s from eing ordered for personal use under the

usiness name, the owner ma!es direct contact with the suppliers. The source documents are filed, and then the copies are processed and !ept in the owner5s office. The records of the stoc! is stored on a computerised system which is entered y the manager and overseen y the owner. The computerised system is secured y a

password which is only accessi le to the owner and the manager. " ac!up copy of these files is stored off location. 0n addition to this, the fenced to prevent unauthori'ed access. usiness property is securely

INTERNAL CONTROL OVER CASH

"ll transactions involve authori'ation and approval, custody of oth fi(ed and

current assets and recording of the transaction. 0n order to ensure that all transactions are recorded, they are authorised and approved y the owner only. *nly the manager is authori'ed to handle cash receipts efore properly accounted for in the oo!s. "ll

usiness cheques used in the usiness are pre)num ered and the sequence in which they are used, is recorded at the an! so if there are discrepancies, they can e

identified or verified and reported to the usiness. Source documents are !ept safely in the loc!ed ca inets or drawers which only the owner and the manager has access to. 0t is the duty of the manager to loc! away the cheques each night and only the manager and the owner have access to the safe. *nly the owner is authori'ed to sign cheques. 7ash in hand is reconciled with copies of the receipts collected from customers y the manager and also with records entered in the cash oo!s. The owner performs all reconciliation on a wee!ly asis with the records provided y the manager. 8uring the wee!, while the company operates cash is loc!ed away safely in loc!ed cash o( and is only accessi le y the manager and the owner. 0t is sent to the an! and a an! reconciliation statement is prepared and done monthly y the owner. The manager to employee ratio is 1.9.

INTERNAL CONTROL OVER ACCOUNTS RECEIVABLE

Morgan Grocery Shop offers goods on a credit ased system. Most customers are regarded as de tors, hence their personal information is collected such as their address, contact num er, occupation, to ensure creditworthiness and a ility to repay their de t. This is stored on the computer in a customer data ase which is ac!ed up monthly and is done y electronic mail. 7ustomers receive a receipt of their transaction which includes the amount that they have paid for their goods and the outstanding alance owing. " copy of this receipt is !ept and monitored y the manager who is responsi le for securing it away in the loc!ed ca inets, thus reducing fraudulent interference within the usiness. These records are recorded in the accounts receiva le oo! y the manager. ;hen de tors pay their alance, the receipt oo! is updated showing the date of payment and the amount paid. The accounts receiva le oo! is also updated with the amount paid for y the respective de tor. The accounts receiva les are an asset which is suscepti le to fraud and so is closely monitored y the manager and supervised y the owner. The accounts receiva les are recorded y the manager in an accounts receiva le oo! which is loc!ed away y the manager in file ca inets each day. The only authorised persons are allowed to view these documents are the manager and the owner. The manager responsi le for the accounts receiva les ledger is independent of the owner who manages the general ledger with the de tors control accounts. The
9

accounts receiva les are monitored y the manager. These records are transferred to the owner who is responsi le for preparing the proper accounting statements and ensures that the de tors5 ledger control account is consistent with the accounts receiva le figures.

1<

INTERNAL CONTROL OVER ACCOUNTS PAYABLE

The usiness accounts paya le system is mainly monitored y the owner. The owner is the only person that controls the crediting of supplies and goods used in the usiness. *nly authori'ed personnel allowed to see these documents are the manager and the owner. 7opies of these documents include receipts and invoices which are stored in a loc!ed ca inet. The owner implement the following internal control methods to reduce fraudulent actions, these methods are. separation of duties, rotation of employees, documentation and proper authori'ation. The accounts paya le accounting records is done independently !eeping the general ledger with the creditors control account. 7opies of these receipts and invoices from the suppliers are also sent to the manager. Some creditors are paid y cash and some y cheque. The manager ma!es payment which is authori'ed y the owner.

11

ANALYSIS OF FINDINGS

The effectiveness of the internal controls of Morgan Grocery Shop is shown elow with 1 eing most effective and - eing the least effective. The Effectiveness of Internal Controls at Mini Laundry Mat Limited Internal Controls =sta lishment of 7lear >esponsi ilities Segregation of 8uties %hysical 7ontrols %roper "uthori'ation and "pproval %roper 8ocumentation and >ecords 7ompetent %ersonnel Supervision and Management 0nternal 7hec! 1-Most Effective 5 Least Effective 1igure 1 The ta le a ove shows all the internal controls used y Morgan Grocery Shop are effective to a small e(tent. 0t went on to show that esta lishing clear responsi ilities is the most effective internal control. %hysical controls, proper authori'ation and approval, proper documentation and records are lac!ing to an e(tent. Segregation of duties and supervision and management are not as effective. 0t also shows that
12

internal chec! is the least effective internal control.

IE C!"#T $!%&I'( T!E LE)EL %* $+ E#)I$I%'

1igure 2 The chart a ove shows the ratio of supervisor to employees is 1.9.

,ar Chart $ho-in. The Im/ortance of Internal Control "s erceived 0y Em/loyees

1$

1igure $ The chart shows the importance of internal controls as perceived y the employees in the organi'ation. 0t shows that internal chec!ing is seen as the least important while the esta lishment of clear responsi ilities is the most important. %hysical controls are also viewed as important to a large e(tent as well as competent personnel, supervision and management and proper documentation and records.

1+

1igure + The chart a ove shows that cash is the main focus of the organi'ation pertaining to internal control and accounts paya le is the least important focus of all the other areas while cash and accounts receiva le are considered to focus. e the areas with the most

1-

EVALUATION
The internal controls at Morgan Grocery Shop are overall effective to a small e(tent. The level of competence of the wor!ers is poor and does not help to ensure that the internal controls of the company are maintained and as a result this may ultimately affect the profita ility of the firm. The segregation of duties in the organi'ation is e(tremely poor in various areas, there is moderate control when it comes to the security of the stoc!s in the organi'ation, however this is not very effective or efficient as there have een reports of attempted rea!)ins despite the

loc! placed on the ca inet. "n efficient security system should e present as proper measures should e in place to safeguard assets. There is an efficient way of ensuring that all transactions are recorded and the cash is safeguarded against theft which is in !eeping with the controls, however the segregation of duties are lac!ing in this area. The sole trader is responsi le for handling the receipts, cash register as well as entering in the respective oo!s, thus increases the possi ilities of errors and inaccuracy of financial statements in the organi'ation. This manager has the opportunity to defraud the company to a large e(tent as he or she is responsi le for a wide range of activities. 0t is also unsafe to have cash on the premises for such a long period of time as this increases the opportunity for theft and other fraudulent activities in the period of time. 0n addition to this, the same employee may e allowed to ma!e entries in oth the purchases?sales ledger and the general ledger. This invites fraud, inaccuracy of data
14

usiness as cash should

e put away in a shorter

presented in the income statement and or

alance sheet and also

rea!s down the

a ility to detect errors readily as this will cause irregularities, e.g. a person is a le to record the same figures that would ultimately cause the alances in the #alance Sheet totals to agree. The manager is responsi le for operating the cash register, entering transactions in the oo!s, preparing receipts, controlling the accounts receiva le, collects and

verifies the stoc!. This is a ma/or violation of the segregation of duties in the organi'ation as the manager is a le to completely defraud the usiness. The manager is also responsi le for too many duties such as controlling the accounts paya le, authori'ation, approval, and stoc! requisition. This is not efficient as the manager may not always e present to play all these roles or act out these responsi ilities. =mployees are fully aware of their duties and responsi ilities in the esta lishment, however some employees fail to fulfil or carry out their respective duties thus leaving most of the wor!load on the manager. There is not an effective switch over system from electronic to manual in the case that the electricity goes. This may result in incorrect information eing inputted in the system, errors such as miscalculation of figures, delay of relevant information thus leading to inaccurate information presented in the income statement and or alance

sheet. @imitations of having a computeri'ed or an electronic internal system, will lead to ig pro lems if a power outage should occur and so there might e no evidence that the transactions had ta!en place and hence it would not e properly documented and

recorded and would ultimately lead to an error in the financial statements. The organi'ation has a direct ac!up system for its files which employees are
16

a le to use and so increases the availa ility of o taining the information at their convenience. The employee to supervisor ratio is quite distant. "s a result, wor!ers may not e monitored as is necessary and may get the opportunity to collude and will e a le to defraud the company. The Grocery Shop does not have regular internal chec!s as a result, no verification occurs of the wor! done y the employees in the usiness, which does not allow for discrepancies to e discovered. The financial statements5 relia ility and validity are strongly affected y the

assessment made on the internal controls. The stoc! figures Aopening and closingB in the alance sheet may e incorrect as the current internal control does not properly safeguard the stoc! in the usiness. The cash, accounts receiva les and accounts

paya le figures may also e unrelia le. The accounts receiva le figure in particular may e unrelia le to a great e(tent as the segregation of duties is highly lac!ing in this area. The turnover figure in the final accounts could also separation of duties. e affected due to the poor

1:

RECOMMENDATIONS

The wea!nesses highlighted in Morgan Grocery Shop can e addressed to improve the financial state of the organi'ation. 0n order to improve the relia ility and consistency of the financial statements of the usiness, the relevant internal control system for each asset studied should e

chosen for the most secure and effective means of security for the usiness. 0t is also highly recommended that there should asis to verify the wor! done e internal chec!s implemented on a regular

y employees in the organi'ation, also the internal

systems should e modified for effective security measures. 0t is also very important that the tas!s allocated to the manager should e divided so that he or she does not have full control over every aspect of the usiness. 7ash and inventory count should e done on a regular asis y another employee hired for that purpose. 0t is also advised that cash should e removed from the premises in a shorter period such as each day. =mployees should e officially provided with /o

responsi ilities. The accounts receiva le could e managed electronically, to minimi'e errors and shorten completion time, also files can e ac!ed up regularly. The password to the computer should also e regularly changed. "dditionally, the owner should ensure that the manager gets more leisure days for all the eing

done. 0t is etter if another employee who is independent of the general ledger records e responsi le for doing so.

19

CONCLUSION
"fter conducting a thorough investigation on the internal control systems used in Morgan Grocery Shop, the researcher concluded that there are good methods of internal control in place for each prominent asset ut these methods need modifications in order to e more effective in securing these assets, reducing fraud and inaccurate financial data that can /eopardi'e a usiness financial standing and performance. 0n assessing this usiness it is clear that specific duties and responsi ilities must e trusted upon other employees, for having a ig wor!load on one main employee will lead to stress, insufficient data and inaccurate information eing inputted whether in a computeri'ed or manual accounting system. There are different control methods for inventory, cash, and accounts receiva le and paya le, such methods are. segregation of duties, adequate documentation, independent internal verification, proper authori'ation, competent personnel with clear responsi ilities, physical safeguard of assets and rotation of employees. =ach method can e ro!en down to wor! as effective as possi le for each asset and should e carefully analy'ed efore eing implemented. "fter implementing the most effective and efficient control system, the owner and manager should regularly evaluate and assess the control systems to ensure ma(imum and optimum effective security of all assets, hence reducing the ris! of fraud, theft, inaccurate or unrelia le information. This will help in !eeping proper financial records for the usiness.

,i0lio.ra/hy
2<

27"%= "ccounting te(t oo!3 y Carold >andall

21