Untitled Presentation - Key

INTERNAL CONTROLS
Over Accounts Payable
By: Azania Francis &

Tahjay Wray
Internal controls
• This is the plan of an organisation, along with other methods and

procedures set up by management to safeguard its assets and ensure that the
accounting records are accurate and reliable.
Internal Controls Over Accounts Payable
• The purpose of accounts payable internal controls is to ensure that valid

supplier and vendor invoices are properly recorded and promptly paid by
the business.
• A bookkeeping and accounting system needs good accounts payable
internal controls in order to minimize the risk of fraud, error and loss.
Six Principles used when dealing with
Internal Controls for Accounts Payable:
1. Segregation of Duties
2. Documentation Procedures
3. Journalize Purchases
4. Post to the Accounts Payable Ledger
5. Prepare Payment
6. Cash Disbursements
Segregation of Duties
Segregation of Duties (SOD) – an internal Potential consequences if duties are not

control whereby tasks are apportioned between separated:
different departments in order to reduce the
likelihood for fraud and error. ❖ Unauthorized or unnecessary purchases made.
❖ Improper charges made to department budgets.
❖ Excessive costs incurred.
• Best practice is to have different people: ❖ Goods purchased for personal use.
•
• Approve purchases
• Receive ordered materials
• Approve invoices for payment
• Review and reconcile financial records
• Perform inventory counts
Example:
• A In a business where three employees are available, the duties could be separated as follows:
Documentation Procedures
Most purchase transactions have three ● Set authorization levels for invoice
documents, the purchase order, the vendor approval.
invoice, and the receiving report, sometimes ● Receive all invoices centrally in the
referred to as a GRN or goods received accounts department.
note.Internal Control Practices: ● Match invoice prices, quantities and
terms to purchase orders, and match
• Check the accuracy of invoice invoice quantities to goods received
calculations. notes. This process is usually referred
• Check for duplicate orders and to as the three way match.
invoices.
• Verify a vendor exists when receiving
an invoice from a new vendor.
Journalise Purchases
•
Post the purchases journal from The information in the purchases journal is
the vendor invoice as soon as the taken from the supplier invoices and typically
transaction occurs includes the following:
• Use the purchases journal totals to ● Transaction date
post the accounts payable control ● Supplier
account in the general ledger. ● Accounts payable ledger reference
● Invoice number
● Invoice Amount
● Purchase type columns (inventory, supplies,
equipment etc.)
● Other
Post to the Accounts Payable Ledger
• Post the ● Produce an aged accounts payable report and
accounts payable ledger from review the balances particularly on large and
the vendor invoice as soon as the transaction overdue accounts.
occurs. ● Review all journal entries to the accounts
• File unpaid invoices by payment due date to payable ledger accounts.
avoid missing early payment discounts and to ● Review debit balances in the accounts payable
ensure invoices are not paid late. ledger on a regular basis.
• Reconcile vendor statements to accounts ● Reconcile the accounts payable ledger with
payable balances and the unpaid invoice file. the
• Carry out random spot checks on vendor accounts payable control ac
activity and check for signs of unusual
activity.
count
• Review debit balances on accounts payable in the general ledger.
accounts.
Prepare Payment
Payment Controls Store Checks in a Locked Location
Any unused checks need to be stored in a locked
The majority of the controls listed here apply to location. Otherwise, they can be stolen and filled out
payments by check, since that is still the most common fraudulently, then cashed. Any signature stamps used to
method of payment. In the case of electronic payments, sign the checks should also be stored in a locked
these controls aren’t as helpful, but you can still track location.
payments in your accounting system. Track Check Number Sequence
To ensure there are no missing checks that aren’t
accounted for, many companies opt to maintain a log
Split Check Printing and Signing Duties that includes the range of check number used during a
With this control, one person prepares the checks, and a check run. This is helpful to determine if any checks in
different person signs them. This second set of eyes storage have gone missing. Keep the log separate from
provides a cross-check to make sure the funds are there the unused checks, to prevent someone from stealing the
for payment, while still maintaining adequate cash flow. log at the same time they steal the checks.
Cont’d
Require Manual Check Signing
As a company, you can require that all checks be signed. Though it seems like a good idea, it is a weak control because
few check signers don’t dive into why the check is being issued, and rarely take time to quest the amounts paid. If your
company chooses to use a signature stamp or plate instead, it becomes imperative to have a strong purchase order
system. This allows the purchasing staff to become the de facto invoice approvers because they issue purchase orders
early in the purchase to pay process.
Require Additional Check Signers in Certain Conditions

If a check amount exceeds a certain predetermined threshold, require a second person to sign the check. This control
allows multiple senior-level team members the chance to stop a payment, in theory. In reality, introducing another step
to the process doesn’t strengthen the control. Strong internal controls throughout the payment process are the first step
toward preventing costly errors that affect your bottom line. Streamlining the accounts payable department is one way
to do this.
Cash Disbursements
• Companies also need controls over cash ● Make all disbursements by check or from petty cash.
disbursements. Since a company spends most of its Obtain proper approval for all disbursements and
cash by check, many of the internal controls for create a permanent record of each disbursement.
cash disbursements deal with checks and Many retail stores make refunds for returned
merchandise from the cash register. When this
authorizations for cash payments. The basic
practice is followed, clerks should have refund
principle of segregation of duties also applies in tickets approved by a supervisor before refunding
controlling cash disbursements. Following are some cash.
basic control procedures for cash disbursements: ● Require all checks to be serially numbered and limit
access to checks to employees authorized to write
• Make all disbursements by check or from petty checks.
cash. Obtain proper approval for all disbursements
● Require two signatures on each check over a
and create a permanent record of each
material amount so that one person cannot withdraw
disbursement. Many retail stores make refunds for funds from the bank account.
returned merchandise from the cash register. When
this practice is followed, clerks should have refund
tickets approved by a supervisor before refunding
cash.
Cont’d
• Arrange duties so that the employee who authorizes payment of a bill does not sign checks.
Otherwise, the checks could be written to friends in payment of fictitious invoices.
• Require approved documents to support all checks issued.
• Instruct the employee authorizing cash disbursements to make certain that payment is for a
legitimate purpose is made out for the exact amount and to the proper party.
• Stamp the supporting documents paid when liabilities are paid and indicate the date and number
of the check issued. These procedures lessen the chance of paying the same debt more than once.
• Arrange duties so that those employees who sign checks neither have access to neither cancel
checks nor prepare the bank reconciliation. This policy makes it more difficult for an employee
to conceal a theft.
The End.

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INTERNAL CONTROLS

Over Accounts Payable

By: Azania Francis &

• This is the plan of an organisation, along with other methods and

• The purpose of accounts payable internal controls is to ensure that valid

Segregation of Duties (SOD) – an internal Potential consequences if duties are not

Require Additional Check Signers in Certain Conditions

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