Internal control weaknesses

Purchase system

A purchasing system is a process for buying products and services encompassing purchase from
requisition and purchase order through product receipt and payment. Purchasing systems are a
key component of effective inventory management in that they monitor existing stock and help
companies determine what to buy, how much to buy and when to buy it.

Internal Control weaknesses that can be identified in current purchasing system are as follows:-

 The clerk need to check the amount and quantity of goods with its supporting document
to ensure its accuracy.

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When selecting vendors it should be based on the past reputation and not on other

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important factors such as prices, terms and delivery time.

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 Manually preparing receiving reports subject to more errors.

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There should be a second officer to double check all the invoices, reports and orders
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made by clerk.
 As the clerk is doing many work there is no segregation of duties.
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1. Daily report from Purchasing Department on accounting the sequence of pre-numbered

purchase requisitions and orders with corresponding delivery docket to make sure all have been
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purchased and arrived.

3.Daily report from Goods Inward Clerk on accounting the sequence of delivery dockets with
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corresponding Receiving Report Document to determine what items have been received and not.
4.Inspection Clerk’s signature must be evident on each Delivery Docket and its corresponding
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Receiving Report Documents signifying that all items received are in good condition. Written
report on any items received with damages and defects must be provided to Purchasing
Department to contact the suppliers to settle the issue.

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 Purchases System:

Not independently checked with stock against the purchase requisition which may result to
overstock.

Sequence of the orders is not accounted including the cancelled orders which may result to
misplaced orders and no purchase transaction occurs.

Suppliers are selected based on the past reputation and not on other important factors such as
prices, terms and delivery time

All incoming goods including fixed assets are not cleared through a goods inwards / receiving

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department.

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Any discrepancy between order and delivery docket only approved by Goods Inward Manager.

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There is no second person authorized approval in the absence of the Manager.
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No independent check on the purchasing against the ordering.

Cash Disbursement
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Cash disbursements are how an organization, such as a business or government agency, governs
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its use of funds. Disbursements are made to different areas of the business or different accounts
set up for employee benefits and other uses. Organizations develop internal controls, or self-
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created rules and regulations, for disbursing money this way. Such internal controls are typically
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required for the organization to operate, but they come with inherent weaknesses that the leaders
of the organization should note.
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Internal control weaknesses that can be identified in current system as follows:-

 Only the account payable clerk approves the payment of all invoices or the purchase of
inventory. There should be a second officer should make double check of all invoices
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made by the clerk. Different personnel responsible to approve different amount of

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  The account payable clerk only focus on vendor name and not compared and matched
with other supporting documents. The clerk need to check the amount and quantity of
goods with its supporting document to ensure its accuracy.
 The foundation of a good internal control system is segregation of duties. The duties of
authorization (signing a check or releasing a wire transfer), custody (having access to the
blank check stock or the ability to establish a wire transfer), and recordkeeping (ability to
record the transaction in the accounting system) should be separated so that one
individual cannot complete a transaction from start to finish. The concept behind
segregation of duties is that in order to misappropriate cash, individuals would have to
collude, rather than one individual acting alone. The clerk do many work which prepares
and record the cheques in the register. This means that there is no segregation of duties.

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The clerk should only prepares the cheques. Another person should record the cheques in

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the register.

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 When signing cheques there should be an authorized person and verified by second
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officer. The cheques are required two signature to avoid any fraud happen. A dual
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signature policy includes the establishment of a dollar threshold over which checks
require two signatures. The utilization of dual signatures establishes an element of
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segregation of duties for disbursements over a specified threshold in that these

disbursements require more than one individual to authorize the transaction.

 Reconcile bank accounts in a timely manner. The bank reconciliation should be

completed in a timely manner by someone who is independent of the cash disbursement

process. The bank reconciliation should also include a review of the bank statement and
the check images that are returned with the bank statement for unusual transactions. Any
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unusual items should be investigated and evaluated when necessary.

It is never too late to review your internal controls. While processes often vary among
companies, implementing the items in this checklist should significantly reduce the
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likelihood of your business becoming the subject of another one of those stories.

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 Payroll Weaknesses

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The payroll process refers to the steps required to pay employees each pay period and involves

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employees’ hours worked, their pay rate, and deductions. Processing payroll ensures employees

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are paid based on their employment status and other Department of Labor (DOL) requirements.
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Entering Payroll Time Data

Payroll systems use individual employee codes or other methods of recognition to ensure that
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employees report their own hours worked. Since codes can be shared, one employee could still
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falsely clock in for another simply by using another employee's code. Employee handbooks
should clearly state the proper procedure for clocking in and out and the consequences for falsely
entering payroll information. Human resources should establish clear procedures for requesting
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time off and changes to employee pay rates. Signatures should be required for any transaction
affecting an employee's rate of pay or payroll processing.
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Division of Payroll Processing

Human resources is often responsible for setting up new employees in the payroll system,
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processing payroll data and distributing paychecks. Entering payroll data and processing
paychecks should be split between human resources and accounting to ensure that one person or
department cannot complete the payroll cycle without scrutiny. Without a separation of
responsibility, a dishonest employees could set up a false employee, record time worked or

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 vacation hours and divert the money to a personal account through direct deposit. There is less
opportunity to divert funds when one department inputs data and the other processes the payroll
data and receives paychecks.

Lack of a Payroll Preview

Prior to processing paychecks, payroll systems will produce a set of reports that can be reviewed
for accuracy before "live" checks are printed and direct deposits activated. The payroll preview
should be done by an employee or department other than those responsible for payroll
processing. Terminated employees who are still receiving paychecks, inordinate amounts of
hours worked or vacation hours posted can indicate processing errors or manipulation of data.

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While legitimate errors can occur, deliberate attempts to divert funds could go unnoticed without

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a "time out" for a quick audit.

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Payroll Risk

Risks in the payroll process include financial reporting problems, such as understatement of
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payroll and employee benefit-related liabilities or misclassification of labor costs between cost of
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goods sold (COGS) and selling, general and administrative (SG&A) expenses. Operational
efficiency can be compromised by paying phantom or terminated employees (usually the result
of collusion) and by using incorrect wage and salary rates. Regulatory compliance is
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compromised through violation of federal and state wage and hour laws or violation of Internal
Revenue Service (IRS) regulations related to employees versus independent contractors.
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An important goal of any internal control system is safeguarding assets. Because payroll
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processes affect both human and financial resources, problems or weaknesses in payroll internal
controls can be costly. Recognizing the risks inherent to the payroll process, understanding their
potential affects and knowing how to address them can result in significant loss prevention over
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time.

Today's computerized payroll systems make reporting time worked and handling other payroll
functions easy and automatic. They provide dozens of payroll reports for auditing and

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 documentation. They offer security through hand, fingerprint and even eye recognition time
clock systems to prevent false work-time reporting. They can automatically accrue paid time off
and other employee benefits based on time worked. They are also vulnerable in the hands of
dishonest employees who have access to and administrative rights to those systems.

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