PAYROLL SYSTEM

CONTROL DEFICIENCY RECOMMENDATION TEST OF CONTROL

There are no Clocking in and out should Observe whether a
monitoring/supervision be monitored by a supervisor monitors
procedures relating to the supervisor or CCTV the clocking in and
clocking in and out of cameras can be installed. out process.
employees. The CCTV should be
This may lead to staff asking monitored by a staff with If CCTVs have been
other colleagues to clock the relevant authority. installed, inspect its
them in even when they are footage to see if it
not present, leading to an actually works.
increased payroll cost for
the organization.
Payroll calculations Payroll supervisor should Inspect the evidence
performed by the system periodically calculate the of review by the
are not reviewed. net pay and compare it to payroll supervisor.
This will lead to undetected the system generated net
and uncorrected errors in pay to ensure the accuracy. Review how any
the payroll costs calculation. The payroll supervisor discrepancies were
As a result, employees should evidence his review investigated and
might be under or over with a signature and the dealt with.
paid, leading to either transfers to employees
unsatisfied employees or should not be made until
unnecessarily high payroll this task has been
costs for the performed.
company.
HR Department uses verbal Any increase in the pay Inquire with the
authorisation to should be approved by the payroll staff the
communicate with the board members in a procedure to
payroll department about written form. increase the pay of
any increases to the pay. an employee.
This could lead to the
payroll department or HR
department giving extra pay
to their friends. There is an
increased chance of fraud.
The factory supervisor is The night shift workers Inquire from one of
trusted with may be paid via bank the night shift
substantial cash sums in transfer. workers the method
advance of the distribution of receiving their
of the wages to the night payment.
shift.
There is an increased risk of
theft of cash.
The factory supervisor The wages of absent Inquire about the
keeps absent employees’ employees should be wage collection
wages over the weekend returned to payroll process from a
before handing back to department and they worker who was
payroll. should be told to collect absent on a
there is an increased risk of their wages from the weekend.
theft and fraud. payroll when they come to
work next.
Staff holidays in the HR The HR Department should Investigate whether
department lead to payroll allocate duties among the any delays occurred
information about new staff in such a manner that in communicating
joiners not being there is no communication information about
communicated on a timely gap between HR and new joiners and how
basis. payroll. it was dealt with.
There Is a risk that new
joiners will not be paid
timely and payroll costs will
be misstated.
The clerks update the Clerks should not be Review the log of
standing data to reflect the allowed to make standing changes made to the
increase in wages in each data changes. standing data for
year. Changes should be made evidence that they
The apparent lack of by a senior member of the were made by a
authorisation to changes in payroll department. senior member of
standing data increases the the payroll
risk of errors, leading to These changes should be department and that
misstatement of wages and reviewed by another they have been
incorrect payment of wages. responsible official to reviewed by another
This also increases the risk identify any errors or responsible official.
of fraud, as the clerks have inconsistencies.
the ability to make
unauthorised changes to
standing data.
Finance director reviews The finance director should Inspect payment lists
the total list of transfers agree a sample of for evidence that the
and compares this to the employees on the payroll finance director has
total payable per the records to the payment list agreed a sample of
payroll records. and ensure only bona fide payees to the payroll
There is an increased risk of employees are paid. records, and vice
fictitious employees being These checks should be versa.
paid. As a result, fraudulent evidenced by finance
payments may be made. director’s signature.
Only payment of overtime All overtime hours worked Review a sample of
in excess of 30% of the must be authorised by the weekly overtime
standard hours are Relevant department head. sheets for evidence
authorised by department The authorisation should of signature by the
heads. be evidenced by head of the
This increases the risk of signatures. department
employees claiming for concerned.
overtime not worked,
leading to additional payroll
costs
The payroll clerks do not Payroll clerks must agree Review a sample of
always check the overtime holidays taken in lieu to holidays taken in lieu
report before employees the overtime report, and of overtime to verify
take time off in lieu of record that this has been whether the payroll
overtime worked. done. clerk has agreed the
This increases the risk of Where differences arise, time taken in lieu to
employees taking the payroll clerk should the overtime report.
unauthorised leave, leading notify the relevant
to wages being paid for days department head.
which have not been
worked.
Overtime worked report is Departments should be For a sample of
emailed by the payroll required to respond to the overtime worked
department to department payroll department reports, inspect the
heads, who report only by regarding each overtime responses received
exception if errors are worked report, regardless from each
identified. of whether it is correct. department head.
The authorization of No payment should be
overtime sheets by an made until the report has
alternative responsible been authorized by the
official while the relevant official
department heads are on
leave does not always
occur.
The fact that the
department heads only
report by exception can
cause the payroll
department to mistakenly
assume that the overtime
report is correct when
it is not- leading to the
payment of incorrect
overtime.
The lack of holiday cover for
the authorisation of
overtime can lead to
overtime pay being delayed,
resulting in the loss of
employee goodwill.
Overtime reports which All overtime should be Review whether the
detail the amount of authorised by a responsible responsible official
overtime worked are sent official prior to the has signed the
out quarterly by the payroll payment being processed overtime reports.
department to production by the payroll department.
supervisors for review. This authorisation should
These reports are reviewed be evidenced in
after the payments have writing.
been made which could
result in unauthorised
overtime or amounts being
paid incorrectly and payroll
cost increasing.
Employees are entitled to a Employees should be Observe whether a
30-minute paid break and allocated set break times supervisor is present
do not need to clock out to and there should be a and is ensuring that
access the dining area. supervisor present to only the allowed
Employees could be taking ensure that employees break is taken by the
excessive breaks resulting in only take the breaks they employees.
a decrease in productivity are entitled to.
and increased payroll costs.
Although there is a HR All appointment of staff, Inquire with the staff
department, appointments whether temporary or the procedure to
of temporary staff are permanent, should only be appoint temporary
made by factory production made by the human staff.
supervisors. resources department.
The supervisor could
appoint unsuitable
employees and may not
carry out all the required
procedures for new joiners.
This could result in these
temporary employees not
receiving the correct pay
and relevant statutory
deductions.
Production supervisors The bonus should be Inspect the written
determine the amount of determined by a more bonus records to
the discretionary bonus to senior individual, such as ensure that a
be paid to employees. the production director, responsible official is
Production supervisors are and this should be authorising the
not senior enough to communicated in writing bonuses.
determine this as they could to the payroll department.
pay extra bonuses to friends
or family members.
Holiday request forms are Employees should be Inquire of an
required to be completed informed that they will not employee the
and authorised by relevant be able to take holiday method for applying
line managers; however, without completion of a for a holiday request
this does not always occur. holiday request form, with and confirm that
This could result in authorisation from the line authorisation from
employees taking manager. line manager is
unauthorised leave, required.
resulting in production
difficulties if an insufficient
number of employees are
present. It could also lead to
overpayment of wages.
The senior payroll manager Authorisation of the bank Inquire of the staff as
reviews the bank transfer transfer listing should be to who authorises
listing prior to authorising undertaken by an the bank transfer
the payments and also individual outside the listing prior to
amends the payroll records payroll department, such payments and
for any changes required. as the finance director. inspect the signature
There is a lack of on the list.
segregation of duties as it is
the payroll team which
processes the amounts and
the senior payroll manager
who authorises the
payments. The senior
manager could fraudulently
increase the amounts to be
paid to certain employees,
process this payment as
well as amend the records.
The bonus is input by a Once the clerk has input Inquire from the staff
clerk into the payroll the bonus amounts, all who inputs the bonus
system. entries should be double into the payroll and
If this process is not checked against the also inquire whether
reviewed, it could lead to written confirmation from another team
errors or fraud resulting in the production director by member cross-
incorrect bonus payments. another member of the checks it.
team to identify any
amounts entered
incorrectly.
A payroll clerk distributes Payroll clerks should be Observe how payroll
cash pay packets to informed that all clerks distribute the
employees without cash wages can only be cash pay packets and
requesting proof of paid upon sight of photo ID whether or not they
identity. proof and employee’s clock ask for photographic
Even if most employees are card. identity proof prior
known to the clerk, there is to handing the pay
a risk that without identity packet
checks, wages could be paid
to incorrect employees.
 PURCHASE AND PAYMENT SYSTEM
CONTROL DEFICIENCY RECOMMENDATION TEST OF CONTROL
The purchasing manager The purchasing manager Discuss with the
determines store inventory should consult the store store managers to
levels without consulting managers and a joint confirm whether
store manager or sales decision should be made they have been
manager. on the initial inventory consulted on
Certain goods may be over- levels to be ordered. inventory order
ordered leading to them levels.
being sold at lower prices.
This may lead to the
inventory being overvalued.
Also, some inventory may
not be ordered in enough
quantity to meet the
demand, leading to loss of
sales and customer goodwill.
Store managers are When inventory falls Use test data to
responsible for reordering below a predetermined process sufficient
through the purchases level, the purchasing sales so that the
manager and it can take four manager should be inventory levels of a
weeks for goods to be prompted to raise a sample of items fall
received. purchase order. The below the reorder
The store manager may be system may generate an level.
late in ordering and the automatic reorder request check whether an
inventory may run out for a which is emailed to the automatic reorder
period up to four weeks, purchasing manager. request is emailed to
resulting in loss of revenue the purchasing
and customer goodwill. manager.
Stores cannot transfer goods An internal ordering Process a sample of
between each other to meet system should be set up orders between
demand. Customers are which allows for the different stories in
directed to try another transfer of goods between order to determine
stores/the website when an stores. whether the internal
item is sold out. Additionally, stores with ordering system
The system is inconvenient extremely low inventories operates
to the customer and hence should be able to order it as documented.
there might be a loss of from stores with excess
revenue and the perceived inventories to meet
lack of customer service may demand while goods are
damage the store’s reordered
reputation.
Goods received are not A copy of order should be Inspect a sample of
checked against purchase checked against GRNs. If GRNs to confirm that
orders. all details are correct, the they have been
Goods which were not order should be marked checked back to the
ordered may be received, completed and sent to the original order.
leading to unnecessary head office.
purchases. Some goods Any incomplete items
ordered may not be received should be reviewed and
leading to insufficient investigated why these
inventory levels and loss of have not been completed.
revenue.
Purchase orders reviewed A country-by- country Inspect the
and authorised by the review of orders should documentation
purchasing director are be carried out by the relating to the review
aggregated by region. purchasing director. of orders to
Where appropriate, determine whether
The lack of detail does not discussions should take they have been
allow the purchasing director place between the reviewed in sufficient
to make an informed purchasing director and detail.
assessment of the buying local purchasing managers
policies and they may be before authorisation of
unsuitable for specific orders.
markets within regions.
Quality of goods is not Goods should be checked Observe a sample of
checked by sales assistants, on arrival for quantity and goods being received
only quantity is checked. quality prior to in order to determine
Poor quality goods may be acceptance. whether goods are
accepted and may not be checked for both
saleable quality and quantity.
Inventory may be overvalued
Purchase invoices and GRNs A purchasing system Process a sample of
are manually matched, should be adopted which orders using test
which is time consuming. allows for logging of GRNs data. Trace the
The manual processing of against original invoices, orders through the
high volume of documents is and then purchase system to
prone to human error. electronic/automatic verify that all
Invalid invoices may be matching of invoices appropriate checks
processed as a result against GRNs. and authorisations
A regular review should are requested by the
be done to find system.
unmatched items.
A purchase invoice is not put A list of invoices not Review the list of
on the system until it is posted should be invoices not posted
ready for authorisation by prepared on a monthly to ensure they are
the purchasing director. basis and passed to the being prepared on a
The purchase ledger will not purchasing director for monthly basis, and
have all invoices posted, authorisation and an that they are
understating liabilities. Also, accrual made to ensure authorised by the
payables may be paid late. completeness of payables. purchasing director.
When raising purchase An approved supplier list Attempt to create an
orders, the clerks choose should be compiled, this order from a supplier
whichever supplier can should take into account not listed in the
dispatch the goods the the price of goods, their approved list and
fastest. quality and also the speed confirm that the
This could result in ordering of delivery. All orders system rejects it.
goods at much higher price should only be placed
or a lower quality than they with suppliers on the list.
would like, as the only factor
considered was speed of
delivery.
Purchase orders are not All purchase orders should Review whether
sequentially numbered. be sequentially numbered sequence checks are
The ordering teams will be and on a regular basis a performed and how
unable to monitor if all sequence check of any unfulfilled orders
orders are being fulfilled in a unfulfilled orders should have been
timely manner. This could be performed. investigated.
result in stock outs.
Purchase orders below All purchase orders should Review the
$5,000 are not authorised be authorised by a signatures of
and are processed solely by responsible official. authorized
an order clerk. Authorised signatories signatories according
This can lead to unnecessary should be established to the amount of
purchases. In addition, clerk with varying levels of purchase as per the
may place orders for purchase authorisation. list.
personal goods up to the
value of $5,000.
Purchase invoices are input The purchase ledger clerk Observe the
daily by the purchase ledger should input the invoices purchase ledger clerk
clerk and due to his in batches and apply while he is inputting
experience, he does not application controls such the data to confirm
utilize any application as control totals, to whether he applies
controls. ensure completeness and application controls
Without application controls, accuracy over the input of or not.
there is a risk that the purchase invoices.
invoices could be input into
the system with inaccuracies
or they may be missed out
entirely. This could lead to
suppliers being paid
incorrectly, leading to a loss
of supplier goodwill.
The purchase day book The purchase ledger Review the update of
Automatically updates with should automatically general ledger and
the purchase ledger but this update the general confirm that an
ledger is manually posted to ledger. A responsible official oversees
the general ledger. official should then the correct posting
This increases the risk of confirm through purchase by evidencing the
errors occurring and hence ledger control account reconciliations with
payables balance could be reconciliations. his signature.
misstated in the financial
statements.
Bank reconciliation is Bank account Inspect whether the
performed once in two reconciliations should be reconciliations have
months. performed on a monthly been performed and
There is a risk that errors will basis and a responsible reviewed by a
not be identified on a timely official should review it responsible official by
basis. Also, the employees and evidence their review. looking for their
can commit fraud knowing signature.
that these accounts are not
regularly reviewed.
GRNs are only sent to the GRNs should be created inReview the file of
accounts department. three parts and a copy copy GRNs held by
Failing to send a copy to the should be sent to the purchase
ordering department could purchase department, department, and
result in significant who should agree this to review for evidence
unfulfilled orders leading to the order and change the that these are
loss of sales and stock- order status to complete.matched to orders
outs. and flagged as
complete.
GRNs are sent to the Copy of sequentially Inquire of accounts
accounts department every numbered GRNs should clerk as to the
two weeks. be sent daily to the frequency of when
This could result in delays in accounts department who GRNs are received to
suppliers being paid as the should also undertake a assess if they are
purchase invoices could not sequence check to ensure being sent promptly.
be agreed to a GRN and also none are missing for
recorded liabilities being processing.
understated.
Additionally, any prompt
payment discounts offered
by suppliers may be missed
due to delayed payments.
There is a policy of Cash flow forecasting Review the trade
delaying payments should be undertaken to payables payment
to suppliers for as maximise bank balances. period to make sure,
long as possible. Suppliers should be paid that the suppliers are
There is a risk that company in a systematic manner paid within a
is missing out on early such that supplier reasonable
settlement discounts. This goodwill is not lost. period.
can also lead to loss of
supplier goodwill as well as
the risk that suppliers will
refuse to supply goods to the
company.
The finance director Finance director should Inspect whether the
authorises the bank review the whole list prior finance director has
payment transfer list for to authorising. reviewed the list
suppliers; however, he only He should agree the prior to signing by
reviews the total amount of amounts being paid to the inquiring the staff
payments to be made. supporting documents. whether the finance
Without looking at the Also review the supplier director asked for
details and the supporting names to identify any supporting
documents, there is a risk duplicate or unfamiliar documentation.
that suppliers could be paid names.
an incorrect amount or that This review should be
sums are paid to evidenced by his
fictitious suppliers. signature.
 WAREHOUSE AND INVENTORY COUNT
CONTROL DEFICIENCY RECOMMENDATION TEST OF CONTROL
The count will be Members of alternative Attend the year-
undertaken by teams of departments should end count and
warehouse staff. undertake the counting enquire of the
There is lack of segregation rather than the warehouse counting teams
of duties as those who have staff. which department
day-to-day responsibility for they normally work
inventory are themselves in.
checking it. There is an
increased risk of fraud
and error.
The inventory sheets Count sheets should be Inspect a sample of
contain quantities as per the sequentially numbered and counting sheets
inventory records. contain product codes and being used by the
There is a risk that the descriptions but not counting teams to
counting teams may simply quantities. verify that only
agree with the pre-printed inventory product
quantities rather than codes and
counting the inventory description are pre-
correctly, resulting in printed on them.
significant errors in
inventory.
There are 15 teams of One member should count Observe the
counters, each team having and the second member counting teams to
2 members of staff. should also undertake a assess if they are
There is no clear division of count and then record the counting together
responsibilities within the inventory on the inventory or if one counts
team. Both members should sheets correctly. and the other then
count together rather than Additionally, the member of double checks the
checking each other’s count. staff supervising the count quantities counted.
could undertake sample
checks of inventory counted
by each team.
Inventory owned by third All inventories belonging to Enquire of the
parties is also being counted third parties should be kept count supervisor
by the teams, with in one place and clearly where the third-
adjustments being made by marked that this has to be party inventory is
finance team to split these excluded from the count. to be stored,
goods out later. confirm through
There is a risk that these inspection of the
goods may not be correctly counting sheets
removed from the inventory that these areas
count sheets, resulting in are not included in
inventory being overstated. any pre- printed
forms.
High value inventory which Only senior members of the Attempt to access
is normally stored in a team should be allocated to the area where
secure location will be count these goods and they high value
accessible to all team should only be given the inventory is stored;
members as they will be access code to enter the this should not be
given the code. area. possible without
There is an increased risk of Once the goods have been the access code.
theft as any counting team counted, the access code
member could subsequently should be changed.
access these goods.
Each bay of the warehouse Once all inventories have Observe the
is counted once only. been counted once, each counting team
If inventory is only checked area should be recounted undertake second
once, then counting errors by a different team. Any counts of all areas;
may arise resulting in differences on the first confirm that
misstated inventory. count should be promptly different teams
notified to the count undertake this
supervisor and if necessary, process.
a third count may be
undertaken.
If a full second count would
be too time consuming for
the company, then sample
checks on the inventory
counted should be
undertaken by a different
counting team.
Once areas are All bays should be flagged Physically confirm
counted, the teams are not as completed once that the completed
marking the bays as inventory has been bays have been
completed. counted. flagged to indicate
There is a risk that some At the end of the count, the that the goods
areas may be counted twice count supervisor should have been
or not counted at all. confirm that all bays have counted.
been flagged.
The inventory sheets are After the count has finished, Review the
sequentially numbered and each team should return all sequence of the
at the end of the count they their sequentially numbered inventory sheets
are given to the count sheets and the supervisor for any gaps in the
supervisor who confirm with should check the sequence sequence and
each team that they have of all sheets at the end of obtain an
returned all sheets. the count. explanation from
Since no sequence check has the count
been performed of the supervisor.
sheets, inventory records
could be understated if
sheets are missing.

CASH SYSTEM
Control Deficiency Control Recommendation Test of Control
Each branch maintains a A petty cash log should be
petty cash float of, and at maintained so the purchase
any point in time the of sundry items is recorded
receipts and funds present in the log along with the sum
should equal the float. borrowed, date and
This could be as a result of employee. On purchase of
sundry items being the items, the relevant
purchased without the employee should return the
relevant receipt or voucher relevant receipt or voucher
being returned. There is also and any funds not spent. The
a possibility that the cash is log should be updated to
being misused by staff confirm return of funds and
members, or being spent on receipts. On a weekly basis,
non‐ business-related items. the restaurant manager
should reconcile the petty
cash and if any receipts are
missing, these should be
followed up with the relevant
employee. If it is cash which
is missing, then this should
be investigated further with
the employees who made
petty cash purchases during
that period.
To speed up the cash Each employee should be
payment by customers, for provided with a unique log on
each venue the tills have code and this is required to
the same log on code and be entered when using the
these codes are changed tills. In order to facilitate the
fortnightly. investigation of till
In the event of cash differences, employees
discrepancies arising in the should be allocated to a
tills, it would be difficult to specific till point for their
ascertain which employees shift. Any discrepancies
may be responsible as there which arise should initially be
is no way of tracking who double checked to ensure
used which till. This could they are not arithmetical
lead to cash being easily errors. If still present, the
misused. relevant employees who had
access to the till can be
identified and further
investigations can be
undertaken.

The reconciliations of the The reconciliations should be

tills to the daily sales undertaken on an individual
readings are performed in till by till basis rather than in
total for all five tills at each aggregate and any
venue rather than for each discrepancies noted should
till. be investigated immediately.
This means that when
exceptions arise, it will be
difficult to identify which till
caused the difference.
Therefore, employees may
require further till training or
may have undertaken
fraudulent transactions
The cashing up of tills The cashing up process
along with the recording of should be undertaken by two
any cash discrepancies is individuals together, ideally
undertaken by just one an assistant manager and
individual. the restaurant manager. One
There is a fraud risk as the should count the cash and
manager could remove some the other record it. Any
of the cash and then simply exceptions to the till reading
record that there was an should be double checked to
exception on the daily sales confirm that they are not
list. In addition, as there is no simply arithmetical errors. If
segregation of duties, the still present, the relevant
restaurant manager could, employees who had access
fraudulently or by error, to the till can be identified
record the total sales as per and further investigations
each till incorrectly leading to can be undertaken.
incorrect identification of
discrepancies.
Daily sales sheets are Daily sales sheets for each
scanned and emailed to venue should be sequentially
head office on a weekly numbered and remitted to
basis. head office on a daily basis.
There is a possibility that At head office, a sequence
some sales sheets could be check should be undertaken
misplaced by the restaurant on a regular basis to identify
manager. This will result in any missing sheets and any
incomplete sales and cash gaps should be investigated
receipts data being recorded further. Once received, the
into the accounting system. cashier should post the sales
and cash data for all six
venues on a daily basis.
Once processed, they should
then be signed as posted by
the cashier and filed away
securely.
Cash is stored in a safe at The current key lock safe
each venue and the should be replaced with a
restaurant manager stores safe with a digital code. Only
the safe key in a drawer of authorised personnel should
their desk when not in use. have the code which should
Although cash is banked on be updated on a regular
a daily basis, there could still basis.
be a significant sum of cash
onsite each day. There is a
risk of significant cash losses
due to theft if access to the
safe key is not carefully
controlled.
The cashier is responsible These key roles should be
for several elements of the split between different
cash receipts system. She members of the finance
receives the daily sales team, with ideally the bank
sheets from restaurants, reconciliations being
agrees that cash has undertaken by another
cleared into the bank member of the team.
statements, updates the
cash book and undertakes
the bank reconciliations.
There is a lack of
segregation of duties and
errors will not be identified on
a timely basis.
The cashier is not The cashier should reconcile
checking that payments the credit card vouchers per
made by credit card have restaurant to the monthly
resulted in cash being statement received from the
received by Co. The credit card company. The daily
card statements are not amounts per the statement
reviewed or reconciled; should be agreed to the bank
they are just filed away. statement to ensure that all
There is a risk that receipts funds have been received.
of cash by credit card may This reconciliation should be
have been omitted and this reviewed by a senior official,
would not be identified on a such as the financial
timely basis as the bank is controller, who should
only reconciled every two evidence by signature that
months. This may result in the review has been
difficulties in resolving any undertaken.
discrepancies with the credit
card company
The bank reconciliations The bank reconciliations
are only carried out every should be performed on a
two months. monthly basis rather than
For a cash‐ based business, every two months. The
the bank reconciliation is a financial controller should
key control which reduces continue to review each
the risk of fraud and reconciliation and evidence
identifies errors. If it is not her review by way of
reconciled regularly enough, signature on the bank
then this reduces its reconciliation.
effectiveness as fraud and
errors may not be identified
on a timely basis.
The finance director only The finance director should
views the total amount of review the whole payments
payments to be made list prior to authorising. As
rather than the amounts to part of this, he should agree
be paid to each supplier. the amounts to be paid to
Without looking at the detail supporting documentation,
of the payments list, as well as well as reviewing the
as supporting supplier names to identify
documentation, there is a any duplicates or any
risk that suppliers could be unfamiliar names. He should
being paid an incorrect evidence his review by
amount, or that sums are signing the bank transfer list.
being paid to fictitious
suppliers. This will cause
loss for the company.
The IA department only Caterpillar’s IA department
undertakes cash control should have a rolling
visits to the 20 largest program of visits to all 45
stores as they feel this is stores. This program can
where most issues arise. have a bias to large and
However, Caterpillar Co high-risk stores, but it should
has 45 stores in total which ensure that all stores are
means over half of the visited on a cyclical basis
stores are not being
checked.
This increases the likelihood
of control errors, as these
stores may not comply with
company procedures. As it is
a cash business heightens
the chance of frauds
occurring
All store employees are Only employees for whom
able to use each till and criminal record/credit checks
none have an individual have been undertaken
log on code when using should be able to use the tills
the tills. to take customer payments.
Allowing all employees Each employee should have
access to the till points a designated till and a log on
increases the risk of fraud code, which is required for
and error arising. Also, in the each payment transaction
event of cash discrepancies
arising in the tills, it would be
difficult to ascertain which
employees may be
responsible as there is no
way of tracking who used
which till.
Where employees’ friends Co. should implicate a policy
or family members whereby employees are
purchase clothes in store, unable to serve friends or
the employee is able to family members at the till
serve them at the till point. points.
Employee could forget to put They should request a
the goods to put through to manager or supervisor to put
the till while retaining the these goods through the till.
cash from the family Company should carry out
member. regular inventory counts to
They could also give the identify the level of inventory.
goods away for free or
undercharge for goods sold,
thereby granting
unauthorized discounts
The daily reading of sales The reconciliations should be
and reconciliations to the undertaken on an individual
tills is performed in till by till basis rather than in
aggregate rather than for aggregate.
each till.
There will be difficulty in
identifying which till caused
the difference or which
employee have undertaken
fraud transactions.
The cashing up of tills The cashing up process
along with the recording of should be undertaken by two
any cash discrepancies is individuals together.
undertaken by just one One should count the cash
individual. and the other record it.
The store manager could Double check any difference
remove some of the cash to the till to confirm there are
and then simply record an not arithmetical errors.
exception.
The cash is kept at the The cash should be collected
store overnight in a small daily by the security
safe. company as soon as the
it is likely that the cash sales store closes in the evening.
for one day would be a Hence reducing the risk of
significant sum. cash being stolen overnight.
This cash is at risk of being
stolen overnight.
If a store needs change, a Head office should stipulate
junior sales clerk is sent to a float amount per till and
the bank by a till operator how the note denominations
to change it into smaller should be comprised.
denominations. The store manager should
Cash may be misplaced or adhere to this policy while
stolen on the way to the bank assigning cash float.
or collusion between the Authorize a member of staff
junior clerk and till operator to obtain cash from the bank
and the till operator may and transaction should be
forget to record the completely recorded.
transaction.
No confirmation is carried out
of how much cash is
returned.
One clerk is responsible These key roles should be
for several elements of the split between a few
cash receipts system. individuals, with ideally the
There is a lack of bank reconciliations being
segregation of duties undertaken by another
Errors will not be identified member of the finance team
on a timely basis.
This will also lead to increase
in the risk of fraud.
The bank reconciliations The bank reconciliations
are only reviewed by the should be reviewed by the
financial controller if there financial controller on a
are any unreconciled monthly basis, even if there
amounts. are no exceptions, and he
The bank reconciliation could should evidence his review
still contain significant errors by way of signature on the
as there could be bank reconciliation.
compensating errors which
cancel each other out.
bank reconciliation is a key
control which reduces the
risk of fraud.
If it is not reviewed, then this
reduces its effectiveness.

STRENGHTS AND CONTROL

STRENGHTS CONTROL
The purchasing department In order to also ensure that goods are
researches the lowest price from of required quantity, an approved list of
suppliers before raising a purchase suppliers could be made, with
order. purchases only being permitted from
This helps with economy of the those suppliers on the list.
process, attaining resources at the
lowest cost.
Overtime rates have been increased Increased hours will affect overall
and this has incentivized the staff to
efficiency given that same staff is
fill staffing gaps. carrying out extended shifts.
Ideally, more permanent staff should be
As a result, company has saved money recruited to carry out overtime.
by decreasing the level of expensive
temporary staff.
Additionally, permanent staff may be
more effective as they are familiar
with the company’s systems and the
way work is done.
Card clocking is in place to ensure System may allow payable overtime to
employees are only paid for hours accumulate simply because an
worked. employee clock out late. The system
should be set to automatically clock out
It also provides a means for recording after the normal number of shift hours.
hours worked which is valuable Staff can clock back in case they work
management information. overtime in an authorised
shift.
A capital expenditure committee of An authorisation policy can be drawn
senior managers has been set up to up setting out the different levels of
authorize significant capital authorisation needed depending upon
expenditure items. the amount of expenditure for capital
items.
This will help prevent cash outflows for
unnecessary assets, or assets not
budgeted for.
There is an internal audit department. The remit of internal audit could be
extended to advising on
It will advise on value for money and implementation.
monitor the internal control
environment.
Orders are authorised by a purchasing Orders below a certain monetary level
director. should be authorised by the lower level
of management.
This will help to ensure that only Orders over the specified monetary
necessary expenditure is incurred. value should be authorised by purchase
director.
New equipment purchased has The company should look at providing
improved the effectiveness and targeted training for existing staff and
efficiency of operations. look to recruit staff that have the
appropriate
skills.
Pay packets are prepared by two Observe the preparation of pay packets
members of staff with one preparing ensuring that two members of staff are
and one checking the pay packets as involved and that pay packets are
this is evidenced by each staff checked for accuracy.
member signing the weekly listing.

This ensures there is segregation of

duties which prevents fraud
and errors not being identified.
The company has separate HR Discuss with the members of payroll the
department which is responsible for process for setting up new joiners and
setting up new employees. for confirmation that the process is
The segregation of duties between HR initiated by HR.
and payroll reduces the risk of
fictitious employees being set up and
paid.
Pre-printed forms are completed by Select a sample of edit reports for
HR for all new employees and changes to payroll during the year;
includes assignment of a unique agree a sample of new employees
employee number. Payroll is unable added to payroll to the joiners forms.
to set up new joiners without
information from these forms.
This minimises the risk of incorrect
wage and tax payments. In addition, as
payroll is unable to set up new joiners
without forms and employee number,
it reduces the risk of fictitious
employees
being set up by payroll.
Quarterly production bonus is input Obtain listings of quarterly bonus and
by a clerk into the payroll system, review for evidence of signature by the
each entry is checked by a senior clerk senior clerk who checks for input
for input errors prior to processing, errors.
and they evidence their review via
signature.

This reduces the risk of input errors

resulting in over/underpayment of the
bonus
to employees.
Production employees are issued Confirm the security team is supervising
clock cards and are required to swipe the process and following up
their cards at the beginning and end discrepancies through discussions with
of their shift, this process is the
supervised by security staff 24 hours a security staff.
day.

This ensures that genuine employees

are only paid for the work actually
done, and reduces the risk of
employees being paid
but not completing their shift.
The clock card information identifies Input dummy clock card information
the employee number and links into and verify that this has been updated
the hours worked report produced by into the payroll system.
the payroll system.

As the hours worked are automatically

transferred into the payroll system,
this reduces the risk of input errors in
entering hours to be paid in calculating
payroll, ensuring that employees
are paid the correct amount.
On a quarterly basis, exception Select a sample of quarterly exception
reports of changes to payroll standing reports and review for evidence of
data are produced and reviewed by review and follow up of any unexpected
the payroll director. changes by the payroll director.

This ensures that any unauthorized

amendments to standing data are
identified and
resolved on a timely basis.
For production employees paid in Review a sample of invoices from the
cash, cash is received weekly from the security company for delivery of cash.
bank by a security company.
It is likely that the sum of money
required would be considerable. It is
important that cash is adequately
safeguarded to reduce the risk of
misappropriation.

Control deficiencies (overall) Control recommendations

Physical verification of assets Additional resources should be
within the non-current asset devoted to complete the physical
register has not been undertaken verification of all assets within the
for some time. A current program register.
has started but is only 15%
complete, due to staff shortages. Following this full review, on a
If non-current assets are not monthly basis for a sample of assets
physically verified on a regular at the sites should be agreed back
basis, there is an increased risk of to the register to confirm existence.
assets being misappropriated or
misplaced as there is no check that
the assets still exist in their correct
location.
There have been significant staff Senior management should consider
shortages in IA department. recruiting additional employees to
Several members of IA are also join IA department. Also, employees
new to the company. with experience in the relevant field
If IA team has staff shortages or should be appointed.
lack of experience, this reduces the
effectiveness of monitoring the
effective operation of controls.
As HR Department has been A review must be undertaken of all
busy, payroll department has set new joiners set up by payroll to
up new joiners. ensure that all new employees are
There is a lack of segregation of bona fide.
duties between HR department and
payroll department. There is an
increased risk of ghost employees
being set up.
New customers undergo a credit Credit limits should continue to be
check, after which a credit limit approved by the sales director;
is proposed by the sales staff however, on a regular basis the
and approved by the sales sales director should review these
director, these limits are not limits based on order history and
reviewed after this. payment record.

There is a risk that credit limits may

be too high leading to irrecoverable
debts or too low
leading to a loss of sales.
The wage rate has been All increases of pay should be
increased by the HR director and proposed by the HR department and
notified to the payroll supervisor then formally approved by the board
by email. of directors.
As payroll can be a significant
expense, any decision to increase
this should be made by the board
as a whole and not just by the HR
director.
High value inventory is stored in Access codes for all the sites should
a secure location across all 9 be changed. Each site should have
warehouses and access code is a unique code, known to a small
a 4-digit code, which is common number of senior warehouse
to all sites. employees. These codes should be
changed on a regular basis.
As the code is same across all
sites, this significantly increases the
risk of fraud. A considerable
number of people will be aware of
the codes and could access
inventory at any 9 sites.
Monthly perpetual inventory The schedule of perpetual inventory
counts are supposed to be counts should be reviewed for
undertaken at each of the 9 omissions. Any lines which have
warehouses, but some of these been missed out, should be included
are outstanding. in the remaining counts.

In order to rely on inventory records

for decision making and year-end
financial statements, all lines of
inventory must be counted at least
once a year, with high value or high
turnover items being counted more
regularly.
If the counts are outstanding, some
goods may not be counted and the
inventory records may be incorrect.
Bank reconciliations are only Bank reconciliations should be
reviewed by the financial reviewed by the financial controller
controller if sum of reconciling on a monthly basis, even if the
items is significant. reconciling items are not significant,
and he should evidence his review
The bank reconciliation could by way of signature on the bank
contain significant errors, but a low reconciliation.
overall number of reconciling items,
as there could be compensating
errors which cancel each other out.

Bank reconciliations are a key

control which reduces the risk of
fraud. If they are not reviewed,
then this reduces its effectiveness
and also results in a lack of
assurance that bank reconciliations
are being carried out at all or on a
timely basis.
Invoices are authorised by The policy of making payment after
finance director but payment is 75 days should be reviewed.
only made 75 days after the Consideration should be given to
receipt of the invoice. earlier payment if the settlement
discounts are sufficient. If not,
There is a risk that the company is invoices should be paid in
losing early settlement discounts. accordance with the supplier’s
Also, this policy can lead to loss of payment terms.
supplier goodwill and they might
refuse to supply goods in the
future.