Chic Paints Ltd
Terms of Reference
The current paper examines the requirements concerning internal control and application of the accounting system of the company engaged in the paints industry. The range of emphasized refers to the verification of accurateness and thoughtful consideration of crucial aspects of AAT accounting qualification. This report notifies the practical meaning and role of the payroll function of the accounting subsystem of the common management system of any enterprise.
The practical outlook is based on the payroll system used in Chic Paints Limited. The findings are provided with recommendations to improve the functionality of the payroll and accounting system of the company. Internal control seems to be important to achieve sustainability of the organization and ethical conduct of the business as well as its payroll system. The report focuses on the attention of the interested persons on the optimal functionality and sustainability of the payroll system, especially on the conditions of possible improvements.
The accounting system of Chic Paints Limited (CPL) is imposed on external and internal influences. It was revealed as fragile to the fraud and failures that may cause significant economic and financial threats to the production system of CPL. Enhancement and improvement of its basic functional peculiarities will enable to protect the financial and logistics flows that guide the market success of the company and determine further corporate development and business growth. Implementation of improvements is connected with high flexibility, improved protection, and more efforts and contribution from the CPL managers.
The research is dedicated to the research of the CPL accounting system and its internal control over it against any influences and changes. The methodological toolset is the applied methods of data analyzing, summarizing, and suggesting. Research information is obtained through the secondary sources that are indirect towards the company. Although CPL is an open enterprise system, its accounting system requires authorized access and, therefore, remains closed to unauthorized and inconsistent users. The internal building of the accounting system of the company was examined through primary sources that confirmed the validity of the research. Nevertheless, the major part of the research paper used the secondary information gathered by observers and interested individuals. Furthermore, primary research includes individual opinions of CPL employees that come from their decisions and actions within the internal organization of the company. The research uses mainly qualitative information as the analyzed object refers to the qualitative phenomenon that is considered from the provisions of business management and its separate positions. The preparation of the project would be unreasonable without the assistance of facilitators.
Chic Paints Limited was launched as the business subsidiary through a buyout by management decisions of the Ashstead Plc Corporation’s directors. The composition of CPL consists of its owners with a different share in the business and employees exploited in basic and server processes (Appendix I). A special role in the organizational chart is played by the accounting team linked to other managers and directors by informational and financial flows circulated within the internal environment. Market expectations were made to occupy the market niche of paints for automotive and industrial industries, to enjoy high gross margin, and to attract skilled candidates of this majority. The mission of CPL is to manufacture paints and related products to satisfy the ultimate consumers in accordance with clear and ethical business relations with all stakeholders including external suppliers, banks, and customers. Financial statements of the company include accounts and payments connected also the company with the customers, banking establishments, and the employees as well. They are guided by the internal policy in preparation of financial statements.
As a large, the company engaged in numerous operations, it operates its accounting system integrated into the IT system of the parent company. The applied software of the CPL part of the accounting system was decided to simplify. Therefore, the company explores Microsoft Excel and periodically updates the versions. Alternatives are rather expensive than more efficient. The internal network of hardware ensures the connection within the internal environment, though only full-time employees have PCs. The accounting system including trial balance, financial reports, and accounts receivable and payable are updated by the appropriate department of the company. CPL has a specific payroll system. Among other IT controllers, there is CAM and CAD installed to manage and record the manufacturing processes. The company has developed an IT policy, hired responsible persons, and determined practical procedures.
The accounting and payroll systems of CPL were imposed on the results of poor internal control over the financial outflows and their management. The existing practice of overdraft of account receivable and emerged issues of payroll system invoked the necessity to check the adherence of these systems to the company’s policies, ethical conduct, mission, and theoretical framework of accounting technology.
Review of Payroll Accounting System
The requirements of the payroll system of CPL include the regular software updating, usage of account ledgers, control system, etc. The leadership wants the accounting system to serve as coordinator of all transactions, to include controlling of overdraft of accounts receivable, to operate payroll according to the IT and accounting policy. The qualified accountants as the users of the accounting information system do not require the necessary automation of accounting tasks only, but the obtaining timely and accurate financial information to improve the efficiency of the company’s management, preservation of the financial equilibrium, and producing steady profits.
The accounting system still needs to be secured. Access to account ledgers remains open to the general composition of the account team. Ledger software of the CPL accounting system provides the settings of security, but the company did not set up the list of authorized users. Therefore, the system is fragile to fraud by authorized users. Account falsification is also a threat to the management of CPL as it misrepresents facts and delay of payments in relationship with the suppliers. Furthermore, the accounting system must provide internal control over the backing up the updates. Input information should be presented to provide regular daily changes. Therefore, the accounting system of CPL should supplement the managers with accurate, relevant, and quality data.
The reports indicated that the emerged problems are the regulations and investigations carried out by the accounting team and the chief accountant (Camfferman & Zeff 2007). These reports will be useful when determining the compliance of accounting outcomes of CPL to regulations. The requirements include the full reflection of all accounts provided by the company, especially in the composition of the corporation. As the accounting clerk occasionally used access to the accounting system given to limit the access to it, internal controls were not successful in ensuring the sustainability of the contained information. Ethical issues emerged when the pay packages were collected by other employees for their delivering to certain targeted employees of the company. It was easiest for the chief of the accounting department, but this situation regarding payroll would be much painful for the financial system of CPL.
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The payroll system is a risky mechanism of management of business accounts, ledgers, and financial flows. The company is imposed on them. Fraud is a distortion of the information that may have occurred in the financial statements and clarified as a deliberate perversion to falsify information (Kedia & Philippon 2009). Probable frauds of CPL’s accounting system concern the access to even authorized users and his/her illegal actions that would not respond to a factual change in accounts (Collier, Berry & Burke 2007). Furthermore, the accounting system is threatened by other deliberate actions, including manipulation, change records and documents, falsification, misappropriation of assets, the concealment or omission of information on transactions in the documents and accounting records, the carrying out transactions unusual in accounting, improper use of accounting policies, incorrect and improper asset valuation write-offs, and inappropriate display in the accounting records.
Responsibility for the prevention and detection of fraud and error are vested in the management of the company and carried out through the introduction of efficient and continuous operation of the accounting and internal control system. Outsourced or domestic auditors are required to identify the part of the accounting system, which resulted in distorted reporting. Deviations in the financial statements could be significant and committed intentionally.
Significant deviations are distortions of information or its lack that could influence the economic decisions of the accountants taken on the basis of the financial statements. The significance of fraud depends on the size of the item or error estimated under specific circumstances, the absence, or distortion of information content. The concept of fraud significance allows the auditor and accountant to carry out a continuous inspection of CPL or the whole of its statements up to the units in which it is developed (Kedia & Philippon 2009). During the planning, audit and reporting procedures, the accountants of CPL should assess the risk of the existence of significant distortion of the financial statements, which may be the result of normal errors or the result of fraud.
The mentioned problems may be addressed to the establishment of quality internal controls. To mitigate and indicate financial and inventory based frauds, the company may use the following internal controls:
· Employees accountability;
· Internal checks and data verification on the financial and economic activities;
· Comparison of the results of counting of cash, securities, and inventories from the accounting records;
· Data comparison obtained from internal sources of data with external information sources;
· Verification of analytical accounts and current statements and the arithmetical accuracy of records;
· Exercising control over applications and computer information systems;
· Restriction of access to assets and records;
· Comparison and analysis of financial results with target figures (Collier et al. 2007).
Other weaknesses of the accounting systems are the low efficiency of payment delivery to the targeted employee. The personnel of CPL obtains the remuneration in a different manner. Payroll payments are carried put through the cashbook and automated system. The lack of this approach is that the pay packages are delivered to the employees through their colleagues. Shop floor workers are paid partly in cash and through the automated bank system. These payments are approved by particular authorized signatories. The possible problems are the lack of clearness and efficiency of such a system. The practice of payments to colleagues, not directly to the employees, was questioned by the leaders of CPL due to the misunderstanding issue. Thus, it is hard to control who is paid and what will happen with these pay packages. Consequently, usage of two payrolls is represented as CPL’s weakness that complicates the motivation and lacks control over the targeted finances (payroll payments) of the company.
Another problem is the simplicity of accounting software. The exploitation of Microsoft Excel is too easy to break as for the internal and external interested persons as well. Moreover, it is a well-known structure, interface, and order of using. The lack of more specialized and complicated software threatens by fraud and hacking of automated accounting systems, especially through the network of computers. Therefore, this obstacle makes the accounts more sensible to outside influence.
When considering applications to the approved accounting policy of CPL, it was found that the schedule of document circulation was not developed. Its absence does not entail any adverse consequences in the form of fines and penalties. However, a lack of control in the field of information flow can lead to a large number of violations, which in turn can lead to negative consequences. These disorders may include:
– Loss of documents;
– Lack of necessary documents;
– Late registration of documents;
– Various abuses of document exploitation.
As a result, it weakens the control function of accounting and may lead to untimely reporting.
The impact of the mentioned problems and weaknesses on CPL is significant. The problems with the authorized users of access may cause fraud and increase risks of uncertainty. The access should be limited, while all participants should be aware of their limited access to the accounts. As the payroll system is divided into two types, each of them may counter with another when recording and reflecting in the ledger. The chief accountant is obliged to reflect both payments in the ledgers, but it comprises time to waste. Moreover, the risk of intentional or unintentional theft and appropriation may rise and affect the reputation of the company against the employees. Furthermore, this tradition is prohibited by the policy. Therefore, each unsatisfied employee may be a claim and the court case for the company that is affected additionally by external market deviations from optimal conditions. Inadequate function of accounting and payroll systems may cause the failure of management systems, delay of circulation of the financial and information flows, and losses of the business.
According to the identified shortcomings in the function of the accounting and payroll systems, CPL should bring innovations and improve these internal tools of common management of financial and informational flows. Improvements will connect with appropriate costs, but these measures will be returned by the obtained benefits.
Proper accounting systems, regardless of their size, software and hardware platform, and the cost, should provide quality accounting, be reliable and easy to operate. In the functional aspect, the accounting system should, at least, accurately perform arithmetic calculations; provide training, filling, inspection and printing of primary documents and reports of arbitrary shape; implement error-free transfer of data from one printing device to another; make accumulation of calculus percent of any degree of complexity; provide treatment to data and reports for past periods, and to archive.
To provide these capabilities, the system must have a single database on the current state of accounting in the company and archival materials of any information that can be easily prepared at the request of the user. Depending on the features of accounting, the CPL’s database maybe just the personal structure, but must necessarily follow the structure of the chart of accounts adopted by defining the basic settings of particular user activity. System modules providing settlement of accounts, the sum totals, and accrual of interest should use the design standards that are accepted in modern samples. The reliability of the system in terms of computer security means its protection against random failures and theft.
As is known, modern personal computers are sufficiently open, so the accountant cannot reliably guarantee protection purely physically. It is important that the database can be easily restored after a crash and resumed as soon as possible. Good accounting systems meet these requirements. It is equally important that the developer of accounting software had considerable experience and a solid reputation. When choosing a system, CPL must take into account the fact that the retailer will have to be repeatedly contacted in the future for advice or consultation, and replacement of obsolete versions by more recent.
Record-keeping systems integrated into the software accounting systems should provide the reservation, collection, and processing of the input information. The records should meet CPL’s requirements for production and managerial processes and appropriate official responsibilities. Each block of information delivered by the chief accountants and its subordinates should be properly recognized and compared with the planned and expected indicators. Then, the information should be approved to avoid errors and possible fraud. The consequent procedure will save it in the archival depository or temporal location within accounting software with strictly limited access. The process of regular updating is included in the record-keeping module.
The creation of a formal schedule of document circulation is necessary as it is reflected in the path of motion for each document, the term of its submission to the accounting department as well as the responsible person. At the initial stage of the designing, the chief accountant should establish a circle of persons who were treated with primary documents and bring it to them in official information about the rules of registration of primary documents and deadlines for submission of these documents to the accounting department. The managing director of the company should issue the corresponding order for the organization, which would establish liability for the late submission of documents to the accounting department.
Improving the accounting system will be directed at the strengthening and focusing management system installed by the company management in certain aspects and areas of economic activity to ensure efficient and reliable management.
The directions of this work are the following:
· Style and the basic principles of data management of the accounting system;
· The organizational structure of the company;
· Personnel policy carried out in the company;
· Responsibilities and powers;
· Procedure for the preparation of financial statements for the external users;
· Procedure of internal management accounting and reporting for internal purposes;
· Ensuring that the company’s business requirements meet the current legislation;
· Existence and characteristics of the organization of the internal audit as part of the management body of the company.
The weaknesses of the improvements are comparative compatibility with the existing organizational processes and the official duties of the responsible persons. These characteristics of improvements are not stable and can be flexibly changed and modified. Furthermore, the existing order of accounting procedures and the duties may be aligned to the required changes as they will supplement the managerial decisions and common business by the efficient toolset. Despite certain weaknesses, the offered measures will enable the employees to facilitate the accounting performance and ultimate outcomes to fulfill the business mission of CPL.
The sustainability of the economic and accounting system will be provided by the development and design of a smooth and gradual sequence of procedures that would protect the internal accounts and the process of information security. The accounting personnel should be trained to renew the order of the payroll system in CPL to ensure its improved function. Moreover, a new order of payroll function should be implemented.
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Costs of the improvements include the costs of updating, training, and manuals for the employees, implementation of the system of control over their knowledge and skills, introduction of a new order of procedures, purchase of accounting software, and expenditures of job design in the framework of organizational changes. Consequently, the business will get the following benefits after the improvements are used: the business growth, the sustainability of payroll system, retention of the accounting team, the safety of payroll transactions, clear and stable procedure, support of information security, and financial health of CPL (Aghion & Howitt 2007).
Chic Paints Limited (CPL) uses the accounting system to manage its financial and informational flows, to connect the accounting team with other departments of the company with appropriate functions. The accounting team has developed and specified the accounting system structure. The payroll system of CPL is imposed on external and internal influences. The weaknesses of the payroll system of CPL were caused by two separate processes of its performance, weak unspecified software, and complications of integration of this system in common accounting process of the business. Moreover, there are possible threats and frauds that may damage the payroll system. Therefore, offered improvements of its informational support, protection from violations and hacking, and easy performance will ensure safe conditions for the financial performance of the business. To implement the improvements, the business should prepare its internal resources for the required facilitating changes.