Controls on expenditure
This section explains the controls that an organisation should have on its expenditure on goods and services purchased. It is worth considering the general control objectives used by auditors for all systems:
That only authorised transactions are promptly recorded at the correct amount in the appropriate accounts in the proper accounting period, that access to assets is only in the accordance with proper authorisation and that recorded assets are compared with existing assets.
Risks associated with missing proper control procedures
- Purchases fail to meet the objectives of the organisation, resulting in financial loss and damage to reputation.
- Inappropriate or expensive goods are purchased, resulting in missed budgets and financial loss.
- Goods or services are not purchased at the right time and therefore failure to meet required deadlines.
- Fraudulent purchase transactions are made resulting in financial loss or damage to reputation.
- Poor quality of goods are received, resulting in claims against the organisation, failure to deliver objectives, and damage to reputation.
- Failure to agree appropriate terms and conditions with suppliers resulting in disputes.
- Requisition notes for purchases should be authorised.
- Orders should be authorised by a designated member of staff whose authority limits should be pre-defined.
- Major items should be authorised by the board, who should set the cut-off amount.
- Orders should be recorded on official documents showing suppliers names, quantities ordered, and price.
- Copies of orders should be retained as a method of following up late deliveries by suppliers.
- Re-order levels and quantities should be preset and preferably recorded in advance on the requisition note.
Receipt of goods
- A designated member of staff should be identified to deal with the receipt of all goods.
- All goods should be checked for quantity and quality.
- Goods received notes (GRNs) should be raised for goods accepted. The GRN be signed by a designated member of staff.
- GRNs should be checked against purchase orders and procedures should exist to notify the supplier of all over or under deliveries.
- GRNs should be sequentially numbered and checked periodically for completeness.
Invoicing and returns
- Purchase invoices received should be stamped with an approval grid and given a unique serial number to ensure purchase invoices do not go astray.
- Purchase invoices should be matched with the goods received notes and should not be processed until this is done.
- The invoice should be checked against the order and the GRN, and should be arithmetically checked.
- The invoices should be signed as approved for payment by a designated member of staff independent of the ordering and receipt of goods functions.
- Any input VAT should be separated from the expense.
- Invoices should be properly allocated to the nominal ledger accounts and by allocated expenditure codes.
- Records of goods returned should be kept and checked to the credit notes received from suppliers.
Purchase ledger and suppliers
- A purchase ledger and small account should be maintained and regularly checked against balances in the ledger by a designated member of staff.
- Purchase ledger records should be kept by persons independent of the receiving of goods, invoice authorisation and payment routines.
- Statements from suppliers should be checked against the purchase ledger accounts.
Risks associated with payroll
- Financial loss through invalid or unauthorised payments including fraudulent ones.
- Low morale because of failure to make payments promptly.
- Inaccurate payments start dissatisfaction and potential financial loss through delays or errors in payroll records.
- Censure or fines by the tax authorities because of incorrect calculation or payment.s
Control of payroll and wages
- There should be written authorisation to employ or dismiss any employee, in accordance with the organisation's procedures and legal requirements.
- Changes in rates of pay should be authorised in writing by a senior member of staff not involved with the payroll.
- Overtime worked should be authorised by a senior member of staff not involved with the payroll.
- An independent member of staff should check the payroll and sign it.
- The wages cheque should be signed by two signatories and checked against the payroll entry.
- Where pay relates to hours at work, some form of time recording should be used.
- Direct bank transfers should also be signed and checked regularly against details on personnel files.
- When an employee has been absent for a significant period, their entitlement to salary should be checked against personnel details.
- Personnel records should be kept for each employee, giving details of engagement, retirement, dismissal or resignation, rates of pay, holidays etc with a specimen signature of the employee.
Employees paid in cash
Wherever possible, employees should be paid either by cheque or direct into their bank accounts. However, where the employees are paid in cash there are a number of specific control procedures:
- Employees should sign for their wages.
- No employee should be allowed to take the wages of another employee.
- The system should preferably allow the wages to be checked by the employee before the packet is opened by using specially designed wage packets.
- The employee making up the pay packets should not be the employee who prepares the payroll.
- Normal petty cash controls should apply.
- Unused cheques should be held in a secure place.
- The person who prepares cheques should have no responsibility over purchase ledger or income ledger.
- Cheques should be signed only when evidence of a properly approved transaction is available. This evidence might be invoices, payroll, petty cashbook and so on.
- In a large concern, those approving the original document should be independent of those signing cheques.
- Check signatories should be restricted to the minimum practical number.
- Two signatories at least should be required, except perhaps cheques of small amount.
- The signing of blank cheques and cheques in favour of the signatory should be prohibited.
- The cheques should be crossed before being signed.
- Supporting documents should be cancelled as soon as they have been paid, to prevent their use to support further cheque payments.
- Cheques should preferably be dispatched immediately; if not they should be held in a safe place.
- Bank reconciliations should be prepared at least monthly.
- The person responsible for preparation should be independent of the receipts and payments function, or alternatively, an independent person should check the reconciliation.
- If the reconciliation is prepared by independent person, he or she should obtain bank statements directly from the bank and hold them until the reconciliation is completed.
- The preparation should preferably include a check of at least a sample of receipts and payments against items on the bank statement.
Read about credit control - managing your relationship with organisations or people you owe money.
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