Biniyam Beyene, Christie Ferrell, Gabriel Mendoza and Paula Strahl
ACC/544
May 2, 2015
Professor Tracie Youngblood
Controls for Outflows Purchasing, accounts payable, cash disbursements, finance, investment, and payroll are key components to a successful and efficient business. Internal controls are needed in these outflow process to prevent fraud and theft within the business. The follow proposal will list the types of controls that are needed and reason for the controls.
Finance
One of the things that cannot be overlooked when it comes to controls is finance. Finance is the lifeblood of an organization. Without proper controls and functionality and control, a company’s finances can be out …show more content…
of distorted and may cause a business to possibly go under and close for business. One of the things that a business can do with controlling its finances is to have more than one person of management sign off on orders that have to do with financial transactions. An example of this would be a work or purchase order. This is something that should be controlled and documented by more than one person of management. The last thing that upper management wants to see is a mess of finances where one individual may end up taking too much control and could very well not be aware of the right amount of inventory they could be purchasing where there may not be a need. A second person can look over the order themselves and may have the ability to intervene and consider other action before the order takes place, or go ahead and approve the order. With the approval of orders, there also needs to be a documented amount of paper trail when it comes to finances. Many companies handle this practice different but to be proficient, there should be forms and understanding between the employee and upper management of what paper trail needs be filled and recorded in order to stay in compliance. A practice would be to set a guideline of filling out a form that explains the expenses. Along with the proper form, proper receipts should be attached to support the reasons for reimbursement back to the employee.
Cash Disbursements Cash disbursements can make or break a business. There are many forms of cash disbursements that can take place for a business. They can range from spending cash, paying dividends, and perhaps paying to run a business. It is very important to control all of these elements. The obvious element to control for cash disbursements is the actual spending of cash itself. This can definitely be the one thing that makes a business or puts a business out. Perhaps a business is spending more than it is receiving in returns. This is a sure sign that a company may head towards insolvency if not corrected. One of the controls that can be put in place is to set a budget for the business, or different departments of the business. The funds available to a business should be planned out for the day, week, month, quarter, and the year. Also what should be done is forecasting of cash disbursements. This is a good idea in order to determine what a company can spend on payroll, expenses, goods, inventory, and other needs. It can look and see what may be needed in order to grow or perhaps cut back on unnecessary expenses.
Investing
The type of forms for investing are tangible or intangible. This type of form is accounted for through authorization, custody, and record keeping. Companies usually have certain individuals that can approve investments. These individuals could be board members, CEO or owner of the company. “The board of directors or its investment committee should approve all investment policies.” (Louwers et al., 2007). When investments are reviewed the board they concentration is based on the risk and growth for the company.
Acquisitions are investments that companies review to determine if this will help build the capital and growth of the company. Companies can decide that an investment was not the best option, but the future goal of the company could be the success. Some investments are high risks for the company and the industry it is necessary to complete.
Controls are necessary with investments to make sure the ending result is accomplished. Depending on the type of investment and expected outcome, monitoring is involved. Management needs to work to make sure that the boards and company expectations are met. Investing will help to build the business and make it more profitable to the industry. Financial statements are also important when investing and making sure to do audits should be done.
"The procedures for the purchase of most investments involve the voucher system. Authorization by the board of directors or other responsible officials is the approval for the accounting department to prepare the voucher and the check. The treasurer of CFO signs the check for the investment." (Louwers et al., 2007) The accounting process regarding the investment can be time-consuming but making sure to keep all documentation is necessary, especially at audit time.
Payroll
Controls for payroll should involve more than one individual. This process is something that needs to be accurate and timely for a company. If there were no type of controls in place for payroll, it would affect employees and business owners. Payroll is an accounting method that involves many checks and balances with numbers. .Tracking of employee’s hours and the number of employees with the company can cause unnecessary discrepancies if not handled accurately. Organization is a key control with payroll because if the information is not organized then there could be discrepancies in the output.
Management is responsible for making sure employees are working the schedule hours. If an employee is out sick, then the coding should be done by management. Once the timecard is sent to payroll for processing, management should have signed on the hours worked. Another key item is that if controls are not in place with payroll, then the company could lose unnecessary money.
Electronic time cards would be beneficial for the company to use for time keeping. This way the employee logs in their work schedule and signs off on it. Then management will review the timecard and sign off if they are in agreement. The information is sent to Payroll to process checks per this approved information. Technology has improved over the years, and most employees have an electronic system on computers to process payroll. Checks are prepared either on a weekly, bi-weekly, 15th or 30th or monthly basis depending on the company. It can also depend on the employee 's salary how the company would like to pay the individuals.
Once payroll information has been sent over through system, a review of information should be completed. Reviewing the hours, salary, employee name, and address should be verified. This information should be reviewed by the payroll clerk and their supervisor. Once this is done then, the checks can be issued through the system. Signatures on the checks should be the CEO name and electronic. The process should not be handled manually due to time-consuming if there are several employees. Companies look for employees to sign up for direct deposit so the payroll can prepare a wire into each employee account. Direct deposit helps to avoid misplaced checks by employer or employee.
The payroll department handles all tax information, and if there is coding in the system, then there is fewer discrepancies. If this process were handled manually, then errors could happen, which would cost either a discrepancy with the government or employee. Accounting should look to pay this information out per the details in the system. Federal and State taxes have to be paid out and sent over for payment. 941 reports are processed on a monthly basis, and year-end report for this information is called 940. Annual W-2’s are sent out by January 31st of the following year to employees either through the mail or provided online. Controls regarding payroll is helpful for business owners, employees, and government. Controls in place will help to make sure everyone is receiving accurate income.
Accounts Payable
To ensure that payment documents are processed correctly the company needs to have different people involved in the payment processes. With having different people involved in the accounts payable the company can have a separation of duties. The best practice is to have different people doing each of the follow:
Approve purchases
Receive ordered materials
Approve invoices for payment
Review and reconcile financial records
Some of the potential consequences if duties are not separated could be erroneous or fraudulent invoices approved for payment, unauthorized payments made to non-existent vendors. Having accountability, authorization, and approval, can lower the risk of these events happening. Having accountability ensures that the company authorizes, reviews, and approves invoices for payment based on signed agreements, contract terms, and purchase orders.
Your reconciliation activities confirm that you 're paying for approved purchases and are being billed correctly. Perform monthly ledger reconciliations to catch improper charges and validate transactions.
Best practices:
Review vendor invoices for accuracy by comparing charges to purchase orders.
Verify that the goods and services purchased have been received.
Perform monthly reconciliations of operating ledgers to assure accuracy and timeliness of expenses.
Potential consequences if review and reconciliation is not performed:
Improper charges made to your department budgets
Disallowances resulting from costs charged to incorrect accounts/funds
Payments made for items or services not provided
Some of the best practices to follow is to review and update signature authorizations periodically, obtain pre-approval of consultant agreements by purchasing, verify receipt of goods and services to contract/ purchase order and invoice information, reconcile ledgers for accuracy of recorded transactions, and monitor that invoices are paid in a timely manner.
Potential consequences if accountability does not exist:
Unauthorized, unnecessary, or fraudulent payments or purchases
Unauthorized work performed by vendors
Loss of supplier discounts due to late payments
Improper charges to incorrect account/ funds
Security of assets
Once the company has received its purchased goods, a designated employee needs to secure the materials in a safe location. To account for resources, periodically a count will be done on inventory and compare the results with amounts shown on control …show more content…
records.
Purchasing
Purchasing is one of the primary activities that need a clear policy and guideline in an organization. Uncontrolled and unplanned purchasing action might lead an organization to a cash flow problem that affects all other activities in an organization. Therefore, organizations should clearly identify all the activities involved in purchasing and set a control system that checks that the activities are done in a right way with the right person. Activities like identifying the need, selecting the Vendor, Comparing prices, and performing the Purchase. Then there should be a system that also checks that the right items were purchased and takes action if not. In addition to that organization should also consult existing internal as well as external rules related to buying of items with their funding agencies. For example, the funding agencies of organization might have rules that set the amount of money that can be spent on purchasing of different items. In order to avoid future in compliance consequences, an organization should make sure that they consult federal, state, City or any other funding agencies purchasing rules. All the purchasing activities need to be structured in a way that puts a definite purchasing control system that can be used as a guideline as well as a rule for performing procurements in an agency. All purchasing in organizations should undergo through the following control system:
Assign a Purchasing Manager
Assign a personnel for each purchasing activities
Identify the need
Select the Vendor
Perform the Purchase
Check the Purchased Items
Perform the Validity of the overall process
Create a Standard for the item that is going to be purchased
Develop a Vendor List
Set a Criteria for Selecting the Vendor
Select a Vendor who fulfils the Criteria for a particular purchase
Create a Submission and approval Process
Conclusion
In conclusion without internal controls in purchasing, accounts payable, cash disbursements, finance, investment, and payroll the outflows of the business with have high risk of fraud, theft and late payments.
These are all risks that can minimize with internal controls on outflows in the above proposal. Giving the business the opportunity to succeed in the company goals.
References:
Louwers, T. J. Ramsay, R. J., Sinason, D, Strawser, J. R. (2007) Auditing and Assurance Service, McGraw-Hill/Irwin
Demand Media. (2015). Steps for Internal Control on Purchases. Retrieved from http://smallbusiness.chron.com/steps-internal-control-purchases-69919.html
University of California. (2015). Internal Control Practices: Purchasing. Retrieved from http://blink.ucsd.edu/finance/accountability/controls/practices/purchasing.html
McCarthy, M. P. & Flynn, T. P. (2004). Risk from the CEO and board perspective: What all managers need to know about growth in a turbulent world. New York, NY: McGraw-Hill.
Raval, V. H. & Fichadia, A. (2007). Risks, controls, and security: Concepts and applications. Hoboken, NJ: John Wiley & Sons.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Managerial accounting: Tools for business decision making (4th ed.). Hoboken, NJ: John Wiley &
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