Chapter 20 Financial Systems and Procedures

Chapter 20 Financial Systems and Procedures

Part 1 Terminology

System

• a group of independent but interrelated elements comprising a unified whole.
• a process for obtaining an objective.

Policy

• a guiding principle

Procedure

• a series of acts
• a set sequence of steps

Guideline

• a recommended approach for conducting a task

Part 2 Advantages of Having a Formal Procedure

• all transaction will be recorded in the same way, and the required information will be recorded in the correct places.
• The best practice, the most efficient way of recording transactions
• staff can refer to the written procedures
• new staff can be trained more quickly
• auditors can follow transaction more easily
• staff can record transactions more quickly and efficiently
• transactions which have not followed the procedure, which could be errors or frauds, may be identified more easily.

Part 3 Designing Financial Procedures

Sales systems

• objective - to record the value of sales to each customer and the amount outstanding to be collected.
• outputs - an analysis of sales by data and product type. a report showing amounts owing from receivables and how long outstanding.
• inputs - customers place orders by fax and by telephone
• sequence of events : oder received --> goods despatched --> invoice sent to customer --> invoice sent to customer --> sale recorded in accounts --> payment received from customer --> outstanding amounts followed up

odering state of the system

• objective - to receive and process orders quickly and accurately, to ensure that goods are only despatched where the amount charged will be collectable.
• outputs - instruction to despatch department to despatch goods, instruction to accounting department to invoice (charge for) goods.
• inputs - note of telephone call, fax
• what could go wrong - details of orders may be lost, details of orders may not be passed on to despatch and/or invoicing, order may be processed from customer who is unwilling/unable to pay

Part 4 Procedures Manuals

• companies will collate the formal procedures within each system into a procedure manual.
• a good procedure manual will contain sufficient detail to enable staff to understand the procedures they should carry out with minimal supervision and verbal instruction
• manual will normally contain a flowchart of each system. It enables an overview of the system to be easily gained.
• the diagram will be accompanined by detailed narrative notes, explaining in words the docment flows and the checks to be performed at early stage.
• procedure manual should be very specific as to who should perform each task, when and how frequently - this helps to ensure that staff fulfil their tasks on a timely basis and the controls performed by appropriate people
• manual should included specimens of each document referred to.

Part 5 The Purchasing Cycle

Part 6 The Sales Cycle

Part 7 The Wages Cycle

Part 8 The Cash System

8.1 The Receipts System

-Cheques are received from credit customers. (recorded in the cash book and customer's personal account)

-Cashier pays the cheques into the company's bank account

-Controls must be in place to ensure that the cheque cannot be misappropriated before it is paid into the bank.

-Some Customers may pay money directly into the company's bank account.

8.2 The Payments System

-Companies pay their suppliers (usually monthly by cheque)

-A cheque requisition is prepared for each payment.

-Cheques for a large amount of money will usually require two signatories.

8.3 The Petty Cash System

-Companies will need to keep a certain amount of cash on hand to pay for small expenses. (Postage stamps, biscuits)

-A cheque will be made out to cash, to generate the initial cash for the system.

-As staff claim against the petty cash system, they complete vouchers.

-At regular intervals a further cheque is made out to cash to replenish the petty cash which has been spent. Supervisor then inspects.

Part 9 The Inventory System

-The production decides on the required inventory purchases.

-The goods are received and are stored in the raw materials store.

-When goods are required for production, a Materials Requisition Form is completed by the production manager.

-The goods are then made into 'Work in Progress' (Partially complete goods)

-Record is made of the quantity removed from inventory upon goods sold.

-Year-end - All inventory will be counted and valued.

Part 10 The Purpose of Organisational Control

Part 11 Why Controls in Systems are Important

Part 12 Automated Systems

-Computerised systems used by most of the organisation.
-Have following features:
a)Uniform processing of transactions
b)Lack of segregation of functions
c)Potential for data to be corrupted easily
d)Potential for increased management supervision

Part 13 A Comparison of Manual and Automated Systems

Manual System:
Advantages
-Low capital cost
-No computer experience required
-Easy to correct errors
-Ledgers are portable
-Can review transactions
Disadvantages
-Slower at performing calculations
-More calculation errors
-Analysis of information is more time-consuming
-Less easy to audit

Automated Systems:
Advantages
-Quicker
-Can perform complex calculation
-Few errors
-More security
-Easier to sort and analyse data
Disadvantages
-Capital cost
-Training cost
-Less easy to correct errors
-Systems can crash