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9 Controlling the Bookkeeping System Examining the need for and types of financial controls Topics Errors Bank reconciliation Supplier statement reconciliations Control a/cs Computerisation Coding system JAN 2010 CIMA C2 YUAN LI 2 9.2 Preventing errors Authorisation procedures Documentation Organisation of staff Safeguarding assets JAN 2010 CIMA C2 YUAN LI 3 Authorisation procedures Transactions should be authorised at an appropriate level purchase of major non-current assets should be justified/agreed by senior management and recorded in the minutes of meetings; cheques for large amounts should require two signatures; new receivable and payable accounts should be authorised by a senior person; all purchase orders should be authorised by a responsible officer all payments made should be approved. In particular, – payments to suppliers should be checked against goods received, invoices and credit notes; – refunds to customers should be authorised; – payrolls should be checked and authorised prior to making payment JAN 2010 CIMA C2 YUAN LI 4 Documentation Documentation should be used to give evidence of transactions, and should be properly filed and referenced JAN 2010 CIMA C2 YUAN LI 5 Organisation of staff Staff should be properly recruited, trained and supervised segregation of duties Duties should be shared out JAN 2010 CIMA C2 YUAN LI 6 Safeguarding assets Assets should be properly maintained, insured, utilised, valued and recorded JAN 2010 CIMA C2 YUAN LI 7 Other Prevention Activities Physical controls Accounting and arithmetic controls Management of staff (including supervision) JAN 2010 CIMA C2 YUAN LI 8 9.3 Detecting errors Spot checks Comparison with external evidence Produce TB Bank reconciliation Supplier statement reconciliation Control a/c reconciliation Carry out an audit JAN 2010 CIMA C2 YUAN LI 9 9.3.1 Spot checks particularly useful in detecting fraud Commonly carried out on: Petty cash bank balances ledger accounts inventories JAN 2010 CIMA C2 YUAN LI 10 9.3.2 Comparison with external evidence most useful in determining the reliability of records e.g. confirmation of balances with receivables and payables; confirmation of bank balances with the bank JAN 2010 CIMA C2 YUAN LI 11 9.3.3 Reconciliations a comparison of records to identify differences and to effect agreement trial balance Reconciling the accounts of the organisation with records received from other organisations – bank reconciliations – supplier reconciliations Reconciling groups of ledger accounts with a control account . JAN 2010 CIMA C2 YUAN LI 12 9.3.4 Carrying out an audit a check on the accounting records and financial statements not entail a complete check on every bookkeeping entry, but rather examines the systems and procedures in place that should contribute to the reliability of the accounting records. JAN 2010 CIMA C2 YUAN LI 13 9.4 Bank reconciliation statements Bank Book + bank not received, but + business not received, business received but bank received - bank not paid out, but business paid - Business not paid out, but bank paid +/- errors +/- errors X1 JAN 2010 = CIMA C2 YUAN LI X2 14 The bank statement a common practice for a business to issue a monthly statement to each credit customer if a customer has money in his account, the bank owes him that money and so the customer is a payable of the bank JAN 2010 CIMA C2 YUAN LI 15 “mirror image” If a business has $8,000 cash in the bank, it will have a debit balance in its own cash book, but the bank statement will show a credit balance of $8,000. JAN 2010 CIMA C2 YUAN LI 16 differences Time differences Items shown in the cash book but not currently on the bank statement Only: – unrecorded lodgements – outstanding cheques • Adjust bank statement balance JAN 2010 Errors by the bank Items on the bank statement which have been omitted from the cash book Examples: – standing orders – direct debits – bank charges – interest paid and received – dishonoured cheque • Errors made by the busisiness Examples: – transposition errors – casting errors • Adjust in the cash book CIMA C2 YUAN LI Errors by the business Examples: – cheque incorrectly debited to the business's account – lodgement incorrectly credited to the business's account • Adjust bank statement balance 17 Proforma bank reconciliation Cash Account bal b/d Undercast error in bal b/d X X Dishonoured cheque Bank charges Standing orders Direct debits bal c/d X Reconciliation statement Balance per bank statement Less unpresented cheques Plus outstanding lodgements Plus/less bank errors Balance per adjusted cash a/c JAN 2010 X X X X X X $ X (X) X X/(X) X 142CIMA C2 YUAN LI 18 bank reconciliation an important control to ensure that no unauthorized transactions go through the bank account JAN 2010 CIMA C2 YUAN LI 19 What to look for when doing a bank reconciliation (a) Correction of errors Items on the bank statement which have been omitted from the cash book Examples: – standing orders – direct debits – bank charges – interest paid and received – dishonoured cheque • Errors made by the busisiness Examples: – transposition errors – casting errors • Adjust in the cash book JAN 2010 CIMA C2 YUAN LI 20 What to look for when doing a bank reconciliation (b) Adjustments to the cash book • Payments by standing order into or from the account, not yet entered into the cash book • Dividends received direct into the bank account, not yet entered in the cash book • Bank interest and bank charges, not yet entered in the cash book JAN 2010 CIMA C2 YUAN LI 21 What to look for when doing a bank reconciliation (c) Timing differences reconciling the corrected cash book balance to the bank statement • Cheque payments credited in the cash book, not yet on the bank statement • Cheques received, paid into the bank and debited in the cash book, but not yet on the bank statement JAN 2010 CIMA C2 YUAN LI 22 Key terms Unpresented cheques are cheques sent out which do not yet appear on the statement. Uncleared lodgements are cheques received and paid into the bank which do not yet appear on the statement. Unpresented cheques reduce the balance at the bank, uncleared lodgements increase it. JAN 2010 CIMA C2 YUAN LI 23 Example – bank reconciliation Balance as per the cashbook Bank charges omitted Dishonoured cheque omitted Corrected cashbook balance Balance as per bank statement Uncleared lodgements Unpresented cheques Balance as per corrected cashbook JAN 2010 CIMA C2 YUAN LI 24 Study tip Essential topics as it is highly examinable JAN 2010 CIMA C2 YUAN LI 25 9.5 Reconciliation of suppliers ’ statements Many suppliers send monthly statements to their customers, to check the accuracy of the organisation’s records with those of another JAN 2010 CIMA C2 YUAN LI 26 Steps This is done in a very similar way to bank reconciliations The payables (of purchase) ledger a/c is compared to the statement sent by the supplier Any reconciling items would be due to omitting items from the ledger or timing differences JAN 2010 CIMA C2 YUAN LI 27 9.6 Control accounts Control account an account in the nominal ledger in which a record is kept of the total value of a number of similar but individual items contains exactly the same information as in the individual accounts in the ledger that it controls, but using totals rather than individual transactions JAN 2010 CIMA C2 YUAN LI 28 Recording receivables Receivables: recorded in 2 places Memorandum: Sales (Receivables) ledger Nominal ledger: Sales ledger account (control account) individual customer balances JAN 2010 149CIMA C2 YUAN LI total receivables 29 Recording payables Payables: recorded in 2 places Memorandum Purchase (payables) ledger individual supplier balances JAN 2010 149CIMA C2 YUAN LI Nominal ledger: purchase ledger account (control account) total payables 30 Control accounts - introduction Transaction Books of Prime Entry Memorandum Ledger Sales Ledger or Purchase Ledger JAN 2010 Nominal Ledger Sales Ledger Control Account (SLCA) or Purchase Ledger Control Account (PLCA) 149CIMA C2 YUAN LI 31 Control a/cs procedure Represents total of the personal ledger accounts Prepared using totals from the books of prime entry Bal b/f on the control a/c should equal the total of the individual a/cs If control account is used, then individual receivables/payables ledger accounts are not part of the double entry system but recorded only as a memorandum JAN 2010 CIMA C2 YUAN LI 32 Study tip The bal c/f on a purchase ledger accounts should normally be a CR but it is possible to find a small amount of DR (due to overpayments for example.) JAN 2010 CIMA C2 YUAN LI 33 Examples Sales ledger control a/c (SLCA) $ Bal X Sales Dishonoured cheque X X JAN 2010 $ Cash and cheques Discounts allowed Returns inwards Bad debts X Purchase ledger contra Bal c/f X CIMA C2 YUAN LI X X X X X X X 34 Control a/cs Purchase ledger control a/c $ Cash and cheques Returns outwards Discounts received Sales ledger contra Bal c/f JAN 2010 X X X X $ Bal b/f Purchases X X CIMA C2 YUAN LI X X X 35 Advantages of control accounts Checks the accuracy of the ledger accounts Allows segregation of duties Reduces the volume of nominal ledger a/cs JAN 2010 CIMA C2 YUAN LI 36 Disadvantages Duplication of effort Reconciliations are necessary JAN 2010 CIMA C2 YUAN LI 37 Control a/cs reconciliations Differences may occur due to errors in the ledgers and/or the control a/cs Need to check all individual entries, additions in daybooks, totals of list of balances and transfers to control a/cs JAN 2010 CIMA C2 YUAN LI 38 Example example List of sales ledger balances X Credit balance listed as debit (X) Debtor omitted from list X Revised list X Balance per SLCA X Incorrect total in sales daybook X Bad debt omitted (X) Discounts allowed entered as DR (X) Balance per corrected SLCA JAN 2010 X CIMA C2 YUAN LI 39 Note The list of balances and SLCA should now balance. This is only an example – check the question for the errors found. The reconciliation of the purchase ledger control a/c would follow a similar pattern. T a/cs presentation can also be used for the reconciliation instead of a vertical column, as above. JAN 2010 CIMA C2 YUAN LI 40 Study tip Essential topics as it is highly examinable JAN 2010 CIMA C2 YUAN LI 41 Suspense a/cs procedure Used to “plug” TB, i.e. force it to balance until errors can be found For example if DRs exceed CRs then a suspense a/c would be needed with a CR balance on it Journals (and ledger a/cs if necessary) are used to make corrections JAN 2010 CIMA C2 YUAN LI 42 Suggested approach Decide what the correct entry should be Work out what entry was actually made The difference between these determines the correction necessary JAN 2010 CIMA C2 YUAN LI 43 Note Not all corrections will affect the suspense a/c JAN 2010 CIMA C2 YUAN LI 44 Study tip Highly examinable topic as it thoroughly tests your knowledge of double entry bookkeeping JAN 2010 CIMA C2 YUAN LI 45 Computerisation advantages of computerisation Speed Flexibility Accuracy Storage facilities Automated checking JAN 2010 CIMA C2 YUAN LI 46 Disadvantages of computerisation Errors and omissions difficult to identify System processing difficult to follow JAN 2010 CIMA C2 YUAN LI 47 Study tip This obviously leads to a lack of audit trail JAN 2010 CIMA C2 YUAN LI 48 Typical configurations Mainframe + PCs Networked computers Standalone computers JAN 2010 CIMA C2 YUAN LI 49 Coding system Codes should be Unique = only one possible code per item Useful = required to improve information to the users of the output Compact = brief enough to be learnt Standardised = each code contains the same number and type of character Relevant = give some meaning by being connected to the transaction it represents Self-checking = validation process to give immediate feedback as to whether the code exists Flexible = allow expansion of the coding system JAN 2010 CIMA C2 YUAN LI 50 Study tip Even the smallest of businesses will now use an accounting software package, and so you should understand how these work in practice JAN 2010 CIMA C2 YUAN LI 51 Practice questions 1. A. B. C. D. E. F. A suspense account shows a debit balance of $250. which TWO of the following could offer a TRUE explanation of the error in the bookkeeping records? Omitting a credit note of $250 from the purchase ledger Miscalculating the depreciation charge for the year on vehicles by $250 Failing to make an allowance for receivables for $250 Recording the payment of casual wages of $125 by debiting the bank account and crediting the wages account Recording cash sales of $250 twice in the sales account Omitting to record goods returned by a customer of $250 in the goods inwards account and in the sales ledger Answer: A E JAN 2010 CIMA C2 YUAN LI 52 Practice questions 2. The purchase ledger control account at 1 Nov had a balance of $65,000. during Nov, purchases of $240,000 were made on credit. Payments to suppliers amounted to $122,500 and cash discounts of $12,500 were received. Goods at a cost of $6,250 were returned to suppliers. The closing balance on the purchase ledger control account at 30 Nov is: $163,750 ------------JAN 2010 CIMA C2 YUAN LI 53 Practice questions 3. When reconciling the sales ledger control account with the list of receivable ledger balances of Shah Ltd, the following errors were found: The sales daybook had been understated by $750 The personal ledger balance of a customer had been overstated by $250 What adjustments need to be made n the sales ledger control account and the list of receivable ledger balances? A sales ledger control account DR/CR? $____________ JAN 2010 CIMA C2 YUAN LI 54 B list of receivable ledger balances DR/CR? Answer A Dr $750 B CR $250 JAN 2010 CIMA C2 YUAN LI 55 Practice questions 4. Z’s bank statement shows a balance of $2,200 overdrawn. The bank statement includes interest charges of $75, which have not been entered in the cash book. There are unpresented cheques totalling $825 and deposits not yet credited of $1,100. The bank statement incorrectly shows a standing order payment of $300, which had been cancelled the previous month. The figure for the bank balance in the balance sheet should be: $__________overdrawn JAN 2010 CIMA C2 YUAN LI 56 Answer $1,625 JAN 2010 CIMA C2 YUAN LI 57 Practice questions 5. A supplier sends you a statement showing a balance outstanding of $6,900. your own records show a balance outstanding of $6,600. Which of the following is NOT a possible explanation for the difference? A. The supplier sent an invoice for $300 that you have not yet received B. The supplier has allowed you $300 cash discount that you had omitted to enter in your ledgers C. You have paid the supplier $300 that he has not yet accounted for D. You have returned goods worth $300 that the supplier has not yet accountedCIMA forC2 YUAN LI JAN 2010 58 Answer B JAN 2010 CIMA C2 YUAN LI 59