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Executive Summary

Bell Studio Limited Company sources its inventories from the manufacturers in China, Japan, and New Zealand. The company has centralized its accounting system. The central system is in terminal with other locations. The internal control system has been designed, such that it targets the areas which may be vulnerable to corruption. The system focuses on the purchasing department, cash disbursement and payroll system. Each of these departments have clerks, who generate invoices for all the payable.  The cash disbursement manly oversees disbursement of cash, based on cheques which have been generated from other departments. The company’s Internal Control system is however, very long, with little separation of roles and minimal authority over clerks. This makes the system vulnerable to bureaucratic procedures, which may ultimately make the transactions to take unnecessarily long. The company should therefore consider reviewing the system, to make it simpler.

Internal Control System for Bell Studio

Introduction

Internal Control system, is defined in accounting and auditing, as the process through which, an assurance is given for achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting and compliance with the regulatory laws and policies (Adeyemi & Olarewaju, 2019:p.145). A broad perspective of internal control involves everything which controls the risks of an organization.  Organizations which have an efficient and effective Internal Control Systems (ICS), will have all its resources directed, monitored and measured. According to Sun (2016:p.308),ICS plays a very critical role in fraud detection and protection of the resourced from embezzlement. Internal control system helps in managing both the tangible and intangible assets. This is due to the fact that, zero rate of corruption in organization makes it reputable to the public. This may lead to customer loyalty.

Bell Studio is a company with a very strong internal control system.  The company sources its inventories from the manufacturers in China, Japan, and New Zealand. The company has centralized its accounting system, which is in terminal with other locations. The internal control system has been designed, such that it targets the areas which may be vulnerable to corruption. It is however, worth to note that the system covers all the functional departments of the company.  The system focuses on the purchasing department, cash disbursement and payroll system. Each of these departments have clerks, who generate invoices for all the payables. The amounts to be paid are however, processed centrally, before disbursement of cash to the respective areas. Despite these measures, which ensures that the safety of the company’s assets, risk within this system is still a possibility. This report will therefore analyze the Internal Control System (ICS) of Bell Studio, in order to establish its appropriateness.

Analysis of the Bell Studio’s Internal Control System

Data Flow of Purchases and Cash Disbursements Systems

Purchases is one of the departments, which Bell Studio company has strengthened its internal control systems. Purchases department mainly deals with purchase of materials, which are used in production of products sold by the company. In this flow, the process commences with inventory clerk checking the level of inventory. If the inventory is low, then the clerk prints la local purchase order, to the identified supplier. A copy of the printout must remain in the department’s file.  Upon receiving the goods, they are inspected and a reconciliation is done between the packing slip and the purchase order. The clerk takes a copy of the reconciliation to the warehouse, though a soft copy is also maintained at the warehouse as well. A copy is also given to the accounts payable department, where it is filed, until an invoice in relation to the supplied goods is received from the vendor. Upon receiving the invoice, the accounts payable clerk reconciles it with the purchase order and the package note. At this juncture, the accounts payable also updates the accounts payable subsidiary ledger, the accounts payable control account and inventory control accounts ledger. An invoice is then sent to the finance department for cash department.  This flow can be summarized diagrammatically as follows:

Data Flow Diagram/System Flow Chart of Purchases and Cash Disbursements Systems

Source: Author (2019)

Data Flow of Data of Payroll System

Payroll refers to the list of a company’s employees and their level of remuneration. Payroll is prepared by the human resource department, before channeling the amount of due to the cash disbursement department.  Cash disbursement can either be done, either by the company’s treasurer, or the finance manager. In Bell studio, employees are required to record on a daily basis, the number of hours they have delivered their services to the company. This is what determines the final amount which an individual is paid. Recording of the number of hours for service is done overseen by the departments or employees’ supervisors. The supervisors, must therefore review the number of hours recorded on a daily basis, to ensure that they are accurate.  Review of the payroll is done on a weekly basis by the supervisors.

A computer system is which is terminally connected to the central payroll system, is fed with a correct data by the payroll clerk. A hard copy is then printed, after which a duplicate  and posts a copy to the specific employees’ digital records. The payroll clerk also sends the pay cheques to the supervisors, for purposes of cross checking and distribution to the specific employees within the various departments. This is done upon filing of a copy for record purposes. A copy must also be sent to the accounts payable department. The accounts payable reviews the data in the cheques and manually prepares a disbursement voucher, which is also sent to the general ledger department. A cheque for the entire payroll is then written and deposit in the imprest account at the bank account at the bank. Finally the clerk also files the cheques in the accounts payable department. Upon receipt of the voucher by the general ledger clerk, he or she posts to the general ledger department computer terminal and files the   voucher and payroll register in the department. The above flow of events can be summarized diagrammatically as follows:

Diagram for Data Flow of Data of Payroll System

Source: Author (2019)

Data Flow Diagram and Data of Accounts Payable

Nazarova, et al., (2018), defines accounts payables refers to the short term liabilities or obligations which a company owes to other companies or individuals. In Studio Bell Limited, the department of accounts payable relies on information given to it from the accounts payable department. Upon receipt of the documents from the accounts payable department, the clerk of this department files the pay slip until the due date is reached. When the due date reaches, the accounts payable clerk prepares a cheque, which is then taken to the treasure for signing or endorsement. Once the cheque has been signed, the treasurer takes it to the either   the clerk in case it relates to the goods supplied or the general ledger department, in case it relates to the payroll. This therefore trigger cash disbursement to the specific individuals.

System Flowchart of Cash Disbursements System

Cash is the most liquid asset in an organization, besides being the most critical and sensitive. This is the reason as to why it is the only asset which has a separate book keeping or else ledger. The separate ledger in which cash and cash equivalence is kept or recorded, is known as cash book. A company can either decide to have a treasurer, who will be in charge of its finance, or have a finance manager, who not only monitors cash flow, but also manages the cash resource of the organization. All cash transactions must be endorsed by either the treasurer or the cash manager before money is released. In case of Bell studio, the treasurer performs the role of the current finance manager. The main activities, in which the company’s cash is involved to a great extent revolves around settling of the accounts payables. Payables arise either from the payroll or from the purchases.

In case of purchase, the cash disbursement receives an invoice from the inventory clerk, which describes the amount owed by the company, to the short term creditors. It is the role of the accounts clerk to reconcile the invoice with the purchase as well as the delivery note, to ensure that it is accurate before it is sent to the cash disbursement department.  Once the invoice is received, the cash disbursement department prepares a cheque which is then released to the particular vendors. In case of payment emanating from the payrolls on the other hand, the cash disbursement department receives a written cheque from the general ledger department.  Before the general ledger department writes a cheque and channels it to the cash disbursement department for endorsement or approval, cross checking must be done with the supervisors of the various  employees, to ensure that the amounts due are very precise.

Once the cash disbursement department receives a cheque from the general ledger department, the cheque, which is written in lumpsum for all the employees, is endorsed, before being taken to the bank, for disbursement to the various employees’ bank accounts. The flow of data within cash disbursement department can be summarized as follows:

Diagrammatical   Representation System Flowchart of Cash Disbursements System’s Data Flow

Source: Author (2019)

System Flowchart of Payroll System

As had been stated above, payroll system revolves around payment for the services which have ben deliverer by the company’s employees. The payroll is prepared in relation to the employment qualification of the employee, the job group, the number of hours on duty, as well as recommendations (if any), from the employees’ supervisors. In the case of Bell Studio, the department relies heavily on the supervisors’ report, when making this document.   The supervisors are required to update their junior’s records of attendance on a weekly basis, and submit it to the payroll department. At the end of the month, the weekly report are compiled by the payroll clerk, in order to generate the amount payable to the specific employees. Once the payroll has reconciled the records with the supervisors, he or she channels it to the accounts payable department, which in turn channels it to the general ledger department.

At the general ledger department, a cheque is written, which is then taken to the cash disbursement department to be endorsed by the treasurer.  The treasurer then writes a common cheque, which is then take to bank, for deposit to the individual employees’ accounts. It is worth to note that in performing this role, the payroll department relies heavily in the central terminal, which has data for all the operations of the company, and has a direct link with other functional departments.

Description of Internal Control Weakness in Each System and Risks Associated With the Identified Weakness

According to Hightower (2009:p.110)At the organizational level, an internal control system objectives relates to reliability of the financial reports prepared either on interim basis, or on final, timely feedback on the achievement of the operational and strategic goals, and compliance with the laws and regulations which have been set. At the specific transaction level, internal control refers to the actions which are taken, in order to achieve the specific set goals. The procedures set in an internal control system, as in the case of Bell Studio Limited, reduce the process variation, leading to a more predictable outcomes (Jong-Hag et al., 2013:p.120).Though an Internal Control system is usually designed to reduce the risks, to which the assets of a company are exposed to, the way the subject system operates, can either lead to more efficiency or even expose the company to more risks.  Wilson et al.,(2014:p.117), argues that, an effective or a good Internal Control System, should have competent and trustworthy employees, should clearly separate responsibilities, separate the custody of assets from accounting and should be verifiable.  The risks and weaknesses of Bell Studio’s internal control system can be analyzed as follows:

Purchases System

This system’s main objective is to ensure that the goods purchased are not defective, hence, guaranteeing quality products produced by the company (King, 2011:p.112).The system also ensures that the invoice which are generated are not overstated, as this may make the cost of sales high, hence reducing the realizable profit (Paletta &Alimehmeti, 2018).  Bell Studio’s purchase system has been designed, such that every department has its own responsibilities. However, the system does not have the officers being in charge of responsible for certain issues. This makes the various employees in charge not answerable to any individual. Besides, the system is very long, which may lead to bureaucracy. This weaknesses, makes the company to be at potential risk of transactions taking too long, hence ineffective production and market flow. Besides, the employees who are not answerable to specified authorities may perform their duties with laxity, at the cost of the company’s reputation.

Cash Disbursements System

The weakness of this system is that it is too short and without proper verification activities before cash is disbursed to the specified individuals. Besides, there is no authority which this department is answerable. This therefore makes it prone to compromise. It is possible for the cash disbursement to collude with the accounts payable department or even the vendors to inflate the price charged. In the event that cash is over disbursed, detection will only take place at the time of auditing, as the officer are not answerable to another higher authority.

Payroll System

This system is put in place to ensure that the remuneration to the various employees of the company are true and fair.  This objective may not be fully met in the case of Bell Studio Limited, as the system is very long without proper distinction of the various responsibilities of the officers involved. The system has also given more powers to the supervisors, as opposed to the employees who perform the actual task.  Owing to the length of the system, payment of the employees may take unnecessarily long, making the company to have a high employee’s dissatisfaction and even turnover.  The supervisors may also punish the employees in charge of them unjustifiably, as they have a more say on the paid days and the amount thereof.

Conclusion

Based on the above analysis it is possible to conclude that, while Bell Studio’s Internal Control System may be effective in protecting the company’s assets from fraud, the system   cannot guarantee timely procession of the transaction timely. This is due to the fact that two out of the three systems are very lengthy. This will in turn delay preparation of the financial statements and giving of the required feedback.  Bureaucracy in the departments may also discourage some key stakeholder, such as employees, hence affecting adversely the company’s productivity. The company should therefore, consider reviewing the system, to make it more efficient and simple.