4000302260center7/5/2018 33000950007/5/2018 420003175000880009408795 450000 420003175000175001870710Inkwell Ltd Report ICAS450000Inkwell Ltd Report ICAS Contents TOC o “1-3” h z u 1

4000302260center7/5/2018
33000950007/5/2018
420003175000880009408795
450000
420003175000175001870710Inkwell Ltd Report ICAS450000Inkwell Ltd Report ICAS

Contents
TOC o “1-3” h z u 1.Terms of Reference PAGEREF _Toc514225170 h 22.Executive Summary PAGEREF _Toc514225171 h 33.Methodology PAGEREF _Toc514225172 h 44.Introduction to the Organisation PAGEREF _Toc514225173 h 55.The Accounts Department PAGEREF _Toc514225174 h 76.Review of the Accounting System PAGEREF _Toc514225175 h 97.Internal Control and Analysis of Fraud PAGEREF _Toc514225176 h 108.Recommendations to Improve PAGEREF _Toc514225177 h 119.Cost Benefit Analysis PAGEREF _Toc514225178 h 12Appendix 1 – Organisation chart PAGEREF _Toc514225179 h 14Appendix 2 – SWOT Analysis PAGEREF _Toc514225180 h 15Appendix 3 – Fraud Matrix PAGEREF _Toc514225181 h 17Appendix 4 – Technical Notes PAGEREF _Toc514225182 h 18Appendix 5 – Testimonial of authenticity PAGEREF _Toc514225183 h 19

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Terms of ReferenceThis report has been prepared to investigate the accounting systems and internal control of Inkwell Ltd with recommendations on improvement thereof in order to ensure that the company is protected and minimise the risk of fraud.

The report investigates the company as a whole as well is all internal and external stakeholders.

The costs and benefits of the recommendations and potential for fraud in terms of the risk to the organisation are analysed.

Finally the report has been prepared to cover the course requirements of the Internal Controls and Evaluating Accounting Systems as set out in the course material and is part of the AT(SA) Level 5 Diploma.

Executive SummaryTesting
Testing
Testing

Methodology Research from books and the internet was used as reference to produce this report.

The case study and review of the company’s accounting system for a 6 month period to enable a SWOT analysis to be produced.

A fraud matrix was prepared in order to investigate potential fraud within the accounting system and analyse the control and systems in place to prevent the fraud.

Introduction to the OrganisationInkwell Ltd is a company established by two of its three controlling shareholders. The two shareholders who started the company are Paul Farnon who owns 40% of the company’s shares and Veronica Dawson who owns 30% of the company’s shares. Anil Gupta who is the third controlling shareholder and owns 30% of the company’s shares, was brought in after seven years of operation for his professional accounting expertise.
Inkwell Ltd is a company who acquires empty used cartridges and recycles it for the purpose of resale. They are well known for good quality products with 100% guarantee.

The company emphasises the green advantages of its business model and prides itself on being environmentally friendly. Inkwell Ltd will need to pay special attention to the maintenance and building of relationships with external stakeholders due to them operating on a Just in time system. If one supplier supplies poor quality or late delivery, it can cause a major delay in the operations. The delay will have a cost impact as this may lead to customers not being satisfied and ultimately lose the customers, which will in turn affect Inkwell Ltd profits.

The accounting function and system is therefore pivotal in the company. A delay in the financial information will lead to incorrect business decisions.
The company will use financial statements for guidance and decision making. For example, the Income statement and statement of financial position can be used to calculate various ratios to determine how well the company’s operations are doing. The Cash flow statement is integral to the operations especially due to the company operating on a just in time system, so that they have a rough estimate of cash available for operations.

External regulations affecting the organization:
HMRC – Her Majesty’s Revenue and Customs will set the Vat and is responsible for collection of taxes (PAYE and corporation tax).
The Company’s Act 2006 – sets out the standard to which the financial statements should be prepared.

UK Accounting Standards – Further define the policies and procedures in the preparation of accounting statements in the United Kingdom. They are either known as Statements of Standard Accounting Practises (SSAPs) or Financial Reporting Standards (FRSs) depending on when they were issued.

International regulations such as, Internal Accounting standards (IASs) and International Financial Reporting Standard (IFRS), issued by the International Accounting Standards Board (IASB).

The Data Protection Act 1988 – This act regulates the processing of data and how sensitive information on customers, suppliers and employees are stored inside the organisation. Inkwell will need to ensure they comply with the act or risk heavy penalties if data is found to be misused and/or stolen.
Key External Stakeholders
Customers – The customers of Inkwell Ltd are smaller non-trade retail customers who account for 80% of Inkwell Ltd’s revenue and the larger trade customers. These customers are expecting high quality products with 100% guarantee.

Suppliers – The suppliers are businesses who are contracted to deliver two days after receiving the order. Suppliers will be concerned with prompt payments for goods supplied. Inkwell Ltd also receives supplies from walk-in customers who would like to recycle their empty cartridges and by customers who post their empty cartridges. These customers become suppliers and are offered a 10% discount when returning the empty cartridges for recycling.
Bank Manager – Inkwell Ltd produced a series of robust business plans which enabled them to raise sufficient finance from there bank to grow the company into a significant player in the cartridge supplies sector.

The Accounts Department
The accounts department of Inkwell Ltd is based at the head office located in Birmingham and they use a centralised accounting system. The team consists of eight staff members. The purpose of the accounts department is to produce reliable financial information for management to make sound robust business decisions.

Anil Gupta is the Finance Director and is in charge of corporate strategy, capital investments and the overall financial position of the company. He has delegated the running of the department to the company accountant.

Michael O’Payne is the company accountant who has been in charge of all financial relations since before Anil Gupta joined the company. The rest of the finance team reports to him.

The team reporting to Michael consist of, Accounting Technician, General Ledger and Inventory clerk, Purchase Ledger clerk, Sales Ledger clerk, Costing Technician, Payroll and Personnel Database clerk.

The accounts department – key internal stakeholders
Anil Gupta, BSC, FCMA, Finance Director is responsible for the overall financial position, Legal, Accounting procedures and systems of the company. He also owns 30% shares since he joined the company in 2008.

Michael O’Payne, ACCA, Company Accountant has been with the company since inception in 2003.His main responsibilities include the running of the accounts department, producing monthly management accounts and personally approves all payments to suppliers. There is a low level of tension between him and Anil, due to him seeing the appointment of Anil as a demotion.

Alex Fox, Accounting Technician is responsible for the review of the accounting system and recommend changes if necessary. He reports to Michael, however he has a dotted line to Anil as due to project work.

Michelle Labelle, General Ledger and Inventory Clerk who is responsible for capturing data into the general ledger and produce the month end trial balance. She also maintains the company cashbook and petty cash system. Her other responsibilities includes the upkeep of financial control of inventories which requires her to have close relationships with the store managers.

Liana Khan, Accounts Payable (Purchase Ledger) Clerk is responsible for entering all suppliers’ invoices and credit notes into the accounts payable ledger and arrange payments to suppliers. She reports to Michael who is her father in-law.

Greg Morris, Accounts Receivable (Sales Ledger) Clerk is responsible for inputting all data into the Accounts Receivable ledger and for Credit Control. The duties include chasing customers for payment, working out discounts and sending out monthly customer statements.

Alan Cook, Costing Technician is responsible for operating Inkwell Ltd.’s costing system. He has to work closely with the Sales Director as Inkwell uses a target costing system. The Sales Director advisors Alan what the market price is of an ink cartridge, Inkwell then takes of its required profit margin to arrive at a price which the cartridge has to be manufactured at. Alan then monitors the cost and profitability of each cartridge and advises management from variance to targets.

Sharon Ward, BA (Hons), Payroll and Personnel Database Clerk is responsible for running both monthly and weekly payroll. She also issues all statutory submissions required by HMRC. She uses the SAGE payroll system and makes sure the Personnel database is always up to date.

Review of the Accounting SystemThis report makes recommendations to enhance the accounting system used by Inkwell Ltd and analysis it.

The weaknesses have been identified in the SWOT analysis and expanded in Appendix 2. This section also investigates the system within the context of the financial reports the accounting system should provide to the stakeholders like suppliers, financier and whether it is suitable to meet their and the company’s needs.

Working Methods and practices
The accounting system comprises of 8 computers which are all linked to the same printer.

Sage Payroll is used as the payroll system to calculate weekly and monthly salaries and wages. Quickcost is used as the costing system.

The inventory information is operated within excel.

Bank reconciliation statements and receipts are produced manually.

All work within the system is password protected, using a general password ‘Go Green’.

Part time employees within the accounts department are not always present and therefore may lead to delays in the day to day work to be fully completed on time and there is no necessity for them to all be in the office at the same time. Working overtime by part time staff to catch up on work will cost the company, as Inkwell would need to pay more overtime hours.

Having no backup in the company, reflects lack of plan and vision, because once an employee is not around the work stops.

Keeping cheques and cash on the premises overnight is a great risk to the organisation.

Record Keeping Systems
Weakness in the record keeping system was recognised in the SWOT analysis (appendix 2).

Errors and inaccuracies may possibly be found due to the shortage of skilful staff covering for those who are absent, therefore less skilful staff will attempt to cover in their absence leading to errors and inaccuracies.

The manual reconciling of bank statements may cause errors and is slow compared to using a computer or reconciling tool.

The manual upkeep of staff clock-in times may lead to underpayment or overpayment of salaries/wages. Underpaying will lead to staff demotivation and overpaying will lead to Inkwell Ltd paying overtime which was not deserved.

Training
The SWOT analysis in Appendix 2 analyses the weaknesses within the system.

Training periods are too short and may lead to inaccuracies, errors and employees will not be confident doing the job, which may lead to them becoming despondent and frustrated.

The employment of unqualified or incompetent staff may cause massive confusion and inaccuracies.

Internal Control and Analysis of FraudInternal Control
Leaving cash and cheques on the premises until the banking day will attract theft as highlighted in the SWOT analysis (Appendix 2) which analysis the weakness within the system.

The time sheet clocking system is very manual and based upon trust. An automated system will benefit the accounting system and diminish the chance of fraud.

There are no authorisation procedures in place for payment to suppliers.
Customers paying via internet by giving debit or credit card details is high risk as it leaves room for identity theft.

Any member of Inkwell limited staff is able to access the computers due to one password being used for all computers, therefore no restrictions are in place for the staff to utilise the computers for personal usage.

Fraud Analysis
Leaving cash and cheques on the premises until banking day is a fraud risk, as it could temp staff to steal and believe that they could get away with it.

One person is responsible for petty cash, cash book, month end trail balance and inventory control this could lead to fraudulent transactions. There is also currently no review process in place.

There are currently no access restrictions in place, as unauthorised staff members can access the systems. The one password across all computers make accessing the systems easy for anyone which leaves room for fraudulent activities.

The manual submissions process of timesheets relays on a trust system which exposes the Company to fraudulent timesheet submitted and in return over or underpays staff their wages/salaries.

The use of unlicensed computers is a fraudulent and criminal offense which could result in huge penalty costs to the Company.
The purchases and inventory systems current review process leaves room for fraudulent activity as it is not done on a monthly basis and errors or possible fraud will be picked up very late or not at all.

All of these potential fraud, current controls in place and recommendations to improve can be found in the fraud matrix (Appendix 3).

Recommendations to ImproveStaff needs to be employed with the relevant qualifications in order to be competent in their roles and responsibilities in order to deliver the best results for the Company as well as act as back-up when others are absent. This will give confidence to external stakeholders to invest in the Company if it is well equipped with qualified competent staff.

Implement a policy that each computer should have its own password as this will restrict all staff members from being able to openly access all computers and also hold them accountable upon investigation (where applicable).

Adequate training should be provided to staff in order for them to be confident in their roles, which will able them to work efficiently and be more productive.

All approved payments should be thoroughly monitored especially the material or large amounts, as this will prevent fraud of overstating purchases/price as was done by the purchasing manager who went against the Directors instructions.

The use of an automated clock-in system will be useful as it will prevent fraud and log the exact hours worked which will prevent over and under payment of staff wages and salaries.

The use of an accounting package like Pastel, should be implemented as this will minimise errors and save time. This will also automate reconciliations.

Security systems should be implemented (camera etc.) in order to minimise theft especially around cash and cheques.

Inkwell Ltd should do daily banking as opposed to holding cash and cheques for day on end. Keeping large sums of cash and cheques on the premises poses a huge risk not only for internal theft but exposing the Company to external robbery as well.

Cost Benefit AnalysisA cost benefit analysis of the recommendation to employ qualified staff and training, monitoring of purchases, implementation of automated clock-in system, implementation of Security system and everyday banking. This has been completed as follows:
Costs
Adequate qualified staff is needed to act as assistants. New staff should be employed as clerk assistants, this will take a bit of time to implement initially however when the new staff are properly trained and settled in to their new roles, the Company will see the benefits.

Adequate training should be provided to staff who carries out work on the current account packages like Payroll and Personnel data base. Inkwell Ltd will have to choose the best Institutions with reasonable fees to train their staff accordingly. This will not only be beneficial to staffs own knowledge growth but also facilitate them with receiving their full salary on days they will be at training.

Monitoring the purchase would require a clerk to carry out an audit type piece of work where certain samples of purchases are chosen and investigated and then signed off by senior management.

Inkwell Ltd will need to install an automated clock-in system which should be a link to the Payroll system and should preferably be something that has a type of access card which is user friendly and simple to use in order to prevent any disruptions in the workplace.

Inkwell Ltd should compare quotes with different security companies in order to fund the one best suited. Security equipment such as cameras, alarms, beams, electric fencing etc. should be installed. The installation process should be done after hours to minimise disruption in the office during normal working hours.

Benefits
The benefit the system will bring are less tangible, so harder to value but possible benefits have been quantified below.

Employing qualified assistants will fill the gap, especially when others are on sick leave and this will prevent stagnation in production. This might help with client retention, as clients will be given professional service at all times.

The reputation of Inkwell Ltd will be enhanced due to the professional service received by clients from trained staff. The staff will also feel valued, as the company is willing to invest in them, by sending them on the necessary training.

The use of an automated clock-in system will enable accuracy in the payroll department and will reduce queries from staff regarding salaries/wages and fraudulent overtime submissions, which will save the company money.

The use of a security company’s service will reduce the amount of theft and will safeguard Inkwell Ltd.’s assets. The properties of Inkwell Ltd will be secured, but not fully due to inherent risks of assets like cash. The security company will also provide assistance with cash in transit on its way to the bank.

Appendix 1 – Organisation chart

Appendix 2 – SWOT AnalysisStrengths
Inkwell has a centralised account function (management and accounts department are based at the same site
All the Directors have previous experience in the industry
Recycled materials are used and they offer clients 10% if cartridges are returned by customers themselves
Environmental advantages and offers 20% cheaper than original products – which retains customers buy in
Enough inventory to meet 3 days’ worth of normal sales to assist with cash flow of the business
Weakness
Michelle is responsible for Petty cash, cash book, month end trial balance and inventory control this poses a fraud risk to the company, she is also performing too many roles simultaneously
Michelle has no qualification which poses a learning gap to the role which creates room for error or possible classification misstatements
Greg has no qualification and therefore might not have the expertise to chase possible bad debt before escalating to Victoria and possibly tarnishing client relationships
Passwords are the same for all 88 computers making it easy to hack
General Ledger was easily accessed by Greg (unauthorised personnel) which may lead to misclassification of information and fraudulent transactions
Cash and cheques are not banked daily and the frequent usage of cheques could lead to theft and fraud
Short salary payment to staff which could potential be due to errors made by Sharon’s lack of training and a manual capturing system by managers of time attendance
Potential risk for error with manual upkeep of inventory in excel
Commission paid to the various shops and not to individual staff members could lead to staff becoming despondent
Opportunities
IT system should be updated to auto backup every two hours as opposed to current backup system procedure
Opportunity to train all staff on Cyber Security to bring about awareness on hackers, passwords and potential threats to the organisation
Opportunity to train accounting staff on accounting systems and bring about awareness of controls and procedures
Opportunity to cross train staff or implement staff rotation in order to them to familiarise themselves with each other roles and responsibilities
Opportunity to outsource payroll to elevate Michelle’s workload and decrease error
Opportunity to automate inventory system to decrease error of manual capturing which could lead to material misstatements in the general ledger and profit and loss
Opportunity to install automated clock in system to avoid fraudulent activities and manual capturing of staff hours
Threats
Michael O’ Payne reluctance to report to Anil Gupta may pose a threat as he may want to sabotage Anil and cause Michael to become despondent in his role
Liana Khan married to Michael O’ Payne’s son and works a 20 hour week this could be seen by other staff as favouritism
Alan being the only costing technician and heading for retirement is a huge risk to the business as there is currently no back-up staff member in place for this integral function
Sharon is a potential flight risk and has only 1 day’s intensive training. There is currently no review process in place to ensure her work is done correctly and she too has no back-up staff member in case of her absence
Too many contractor positions which require full time employment- overtime rate is more expensive than having the role being made permanent
Shop manager allows unauthorised person to utilise company computer, this is risk as company data could be stolen or compromised and fraudulent activities could be in play. Unethical behaviour displayed by manager which goes against the Companies IT policy
Peter Chapman deliberately approved two price increases after being told by the Directors not to do so for the full financial year due to difficult economic conditions. There is a possible fraud case of £3500 worth of inventory uncounted for
Online payment collection poses a fraud risk due to identity theft
Company only holds licenses for 80 computers which means 8 computers does not have a license, which is seen as a criminal offence and could lead to hefty fines

Appendix 3 – Fraud MatrixPotential Fraud Current Control Risk to the Organisation Recommendation
Michelle is responsible for petty cash, cash book, month end trial balance and inventory control None- No review process in place 5- High Segregation of duties
Greg was able to access General Ledger None- No access control in place 4- High Proper access control/access restriction should be put in place (only authorised personnel should have be granted access with strong password protection)
Cash and Cheques are not banked daily could lead to fraudulent activities and theft None – Cheques are kept in the safe and cash stored in till 5 – High Cash needs to be banked daily (enforce policy by ensuring site manager follows procedure)
Reduce amount cheques accepted and explore internet banking options
Manuel upkeep of inventory on excel spreadsheet None- Staff are manual capturing data on excel 4 – High Implement automated inventory system
Shop Manager allows unauthorised person to use company computer None- open access 5- High Shop manager to be given written warning as this goes against Company IT policy which is signed by all employees
Peter Chapman deliberately approved two price increases after being told not to by Directors Review at year end 5 – High Monthly reviews should be implemented and signed off
Peter Chapman – Possible fraud/theft case of £3500 of inventory unaccounted for Manual monthly recons done against purchase orders 5 – High Implement automated inventory system and monthly reconciliation sign off
8 unlicensed computers None 3 – Medium Process to be put in place to ensure all 88 computers are licensed correctly
Appendix 4 – Technical NotesIncome Statement (Profit and Loss account) – In the context of Inkwell Ltd this will show the owner of the business the income/revenue/sales received and the expenditure incurred in the business for a specific accounting period. The net of the income and expenditure would reflect the profit of Inkwell Ltd for the period. This will help management make correct and relevant decisions, as it will highlight the material amounts in revenue and expenditure.

Statement of financial position (Balance Sheet) – In the context of Inkwell Ltd this will show the current assets, non-current assets, current liability, non-current liability and equity. The total amount of assets should equal total liability plus equity. This will give the management a view of receivables and payables, which will help with management decisions in this regard. This will also give management a view of the loans of the business and the length of the liability to pay these loans and help the management in making a decision of when to sell a non-current asset.

Fraud Detection – Regular checks and investigations should be carried out especially on material amounts across the business. Effective strategies and procedures that are meant to eradicate fraud can be useful in an organisation, as owners and employees would not want to be associated with fraud cases.

Impact of fraud – Fraud is effectively theft in a business. The theft can be inventory, equipment, cash or time. Staff could be using the company’s inventory, cash, equipment or time for their personal use. This will reduce the profitability of a business or it may lead to staff demoralisation, as they would be too afraid to report it due to possible victimisation.

Appendix 5 – Testimonial of authenticityInkwell Ltd
A report analysing the Internal Controls in place and evaluating the Accounting Systems.

Student Name: Ismail Mokadam
AAT Registration Number: 20100396
I testify that the following report is my own unaided work and a true reflection of the organisation.

Signed:Dated:

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