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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
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9.2 Preventing errors
Authorisation procedures
Documentation
Organisation of staff
Safeguarding assets
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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
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Documentation
Documentation should be used to give
evidence of transactions, and should be
properly filed and referenced
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Organisation of staff
Staff should be properly recruited, trained
and supervised
segregation of duties
Duties should be shared out
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Safeguarding assets
Assets should be properly maintained,
insured, utilised, valued and recorded
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Other Prevention Activities
Physical controls
Accounting and arithmetic controls
Management of staff (including
supervision)
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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
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9.3.1 Spot checks
particularly useful in detecting fraud
Commonly carried out on:
Petty cash
bank balances
ledger accounts
inventories
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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
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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 .
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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.
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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
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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
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“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.
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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
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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
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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
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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
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X
X
X
X
X
X
$
X
(X)
X
X/(X)
X
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bank reconciliation
an important control to ensure that
no unauthorized transactions go
through the bank account
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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
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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
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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
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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.
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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
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Study tip
Essential topics as it is highly examinable
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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
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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
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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
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Recording receivables
Receivables:
recorded in 2 places
Memorandum: Sales
(Receivables)
ledger
Nominal ledger:
Sales ledger account
(control account)
individual customer balances
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total receivables
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Recording payables
Payables:
recorded in 2 places
Memorandum Purchase
(payables)
ledger
individual supplier balances
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Nominal ledger:
purchase ledger account
(control account)
total payables
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Control accounts - introduction
Transaction
Books of Prime Entry
Memorandum
Ledger
Sales Ledger or
Purchase Ledger
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Nominal Ledger
Sales Ledger Control Account
(SLCA) or
Purchase Ledger Control
Account (PLCA)
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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
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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.)
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Examples
Sales ledger control a/c (SLCA)
$
Bal
X
Sales
Dishonoured cheque
X
X
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$
Cash and cheques
Discounts allowed
Returns inwards
Bad debts
X Purchase ledger contra
Bal c/f
X
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X
X
X
X
X
X
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Control a/cs
Purchase ledger control a/c
$
Cash and cheques
Returns outwards
Discounts received
Sales ledger contra
Bal c/f
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X
X
X
X
$
Bal b/f
Purchases
X
X
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X
X
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Advantages of control accounts
Checks the accuracy of the ledger
accounts
Allows segregation of duties
Reduces the volume of nominal ledger
a/cs
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Disadvantages
Duplication of effort
Reconciliations are necessary
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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
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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
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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.
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Study tip
Essential topics as it is highly examinable
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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
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Suggested approach
Decide what the correct entry should be
Work out what entry was actually made
The difference between these determines
the correction necessary
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Note
Not all corrections will affect the suspense
a/c
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Study tip
Highly examinable topic as it thoroughly
tests your knowledge of double entry
bookkeeping
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Computerisation
advantages of computerisation
Speed
Flexibility
Accuracy
Storage facilities
Automated checking
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Disadvantages of
computerisation
Errors and omissions difficult to identify
System processing difficult to follow
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Study tip
This obviously leads to a lack of audit trail
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Typical configurations
Mainframe + PCs
Networked computers
Standalone computers
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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
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Study tip
Even the smallest of businesses will now
use an accounting software package, and
so you should understand how these work
in practice
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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
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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
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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?
$____________
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B list of receivable ledger
balances DR/CR?
Answer
A Dr $750
B CR $250
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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
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Answer
$1,625
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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
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Answer
B
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