Stock, Payroll & Non –current assets Chapter 5 Stock, Payroll & Non –current assets

The Inventory Subsystem Inventory is important to both a retail business and a manufacturing business. A manufacturing business has to manage raw materials, work in process and finished goods. Stock can be straight forward where the items are large and valuable, on the other hand stock can be difficult when there are multiple items and of various sizes.

Internal Controls Basic Controls Completeness – all stock transactions need to be recorded using prenumbered and sequential despatch slips and invoices Accuracy – record transactions accurately, can use stock cards or MYOB stock reports for immediate updates, internal checking of amounts and quantities should take place. Validity – Sign off and authorise despatch slips and receiving reports. Safeguarding – Secure storage of records, insure stock, encourage a theft minimisation environment

Internal Controls Basic Controls Accountability – staff need to be accountable for stock items and stock taking Valuation – monthly review of stock items, damaged or obsolete stock.

Summary of Internal Controls in the inventory subsystem Control Objective Details Specific Internal Control Complete Records All transactions should be recorded Stock documents prenumbered in sequence Validity Recorded transactions should represent actual stock receipts/issues Transactions authorised Requisition forms authorised Authorisation procedures for receipt/issue Accuracy Record transaction correctly Transaction classified accurately Record quickly Check calculations Chart of Accounts Procedures are timely Safeguards Stock kept in locked area Restrict access to stock Authorised employee to handle stock Physical security Locked area Specific stock functions for staff Accountability Reconcile stock cards with stock on hand and general ledger Regular stock takes Verification of accounts to stock cards Valuation Valued in acceptable manner Deteriorated/obsolete items write off Check valuation basis Regular inspection, procedures for write off

Payroll Cycle and Internal Control

Outputs of the Payroll Process Payslips Payroll Register Deductions General Ledger Information Taxation Reports

Outputs of the Payroll Process 1. New employees are only to be added to the payroll system when information is received in a pre-determined organisational format with the signature of the hiring manager and second level authorisation. 2. Segregation of duties is required between the three main functions of payroll: a. Person 1 – insert the wages rate. b. Person 2 – calculate the amount owing. c. Person 3 – make payments. 3.Deductions must be notified in writing from the employee.

Outputs of the Payroll Process 4. Authorisation must be received on all time card changes to standard hours and for overtime requests. 5. Payslips must be distributed to the employee only, and kept by their supervisor if unavailable. 6. Returns and payments to the ATO must be made on time by the accounting department.

Outputs of the Payroll Process 7. Termination of employment must be notified to the payroll department as soon as practicable to avoid overpayment. 8. All changes to payroll records must be evidenced by the staff member’s signature on the source documents. 9. Bank transfer file totals should be checked against the payroll register to ensure accuracy of payments.

Outputs of the Payroll Process 10. Payroll staff should not have the authorisation to make changes to their own payroll records. 11. Personnel files should be kept in a secure place with access only given to authorised payroll staff. 12. Accounting records create a complete audit trail: time cards, job tickets, disbursement vouchers, journal information, payroll subsidiary ledger, and the general ledger accounts of Wages and Salaries Payable, Cash and Payroll Clearing.

Internal Controls Control Risk in Payroll System Payments to fictitious employees Payment of hours not worked Payment at a higher rate then authorised Payroll is a major expense to an organisation and there are a number of legislative issues to adhere to, as well as the confidential nature of payroll data

Internal Controls Inherent Safeguards Employees will complain if underpaid Payment of taxes and superannuation must generate reconciled reports to meet government requirements Payroll transactions are uniform and straightforward Review procedures at year end provide verification of balances

Payroll Functions

Internal Controls for Payroll Segregation of duties Authorisation of payroll Safeguarding payroll Proper documentation Independent checks and reconciliations Classification and accuracy

Summary of Internal Control System in the Payroll Cycle

Summary of Internal Control System in the Payroll Cycle

Non Current Assets (NCA) An organisation should have a set of procedures for recording an asset value. A Key control is an asset register which includes: Description Supplier An ID number Date of purchase Location Warranty details Estimated life Additional Costs Depreciation details

Non Current Assets (NCA) Should follow a maintenance schedule Depreciation based on set policies Any acquisition or disposal of a NCA should be authorised and documented

Internal Controls Basic Controls Completeness – All NCA transactions need to be recorded using purchase orders and invoices Accuracy – Set procedures for recording NCA, internal checks, reconciliation between the asset register and the control ledger Validity – All NCS purchase orders need to be approved, 3 quotes for large items

Internal Controls Basic Controls Safeguarding – Secure storage, physical security maintained, limited access, regular inspection, insurance cover, asset registered secured Accountability – Staff accountable for reconciliations and maintaining NCA Valuation – Monthly review of all NCA including condition, revaluation/devaluation, adequacy of accumulated depreciation, useful life and scrap value

Summary of Internal Controls in the NCA subsystem Control Objective Details Specific Internal Control Maintenance of complete records Asset purchase/disposals/additions and depreciation should be accounted for Procedures for recording asset transactions Asset register and accounts kept up to date Validity Recorded purchases should be for assets actually acquired Purchases, disposals, additions and depreciation should be authorised Check purchase order, receiving report and invoice Check authorisation for all aspects Set procedures for all aspects Accuracy NCA should be at correct value NCA transactions should be properly classified Accounted for on a timely basis Proper and accurate recording Procedures for purchasing, disposal and depreciation Internal check/verification Chart of accounts Set procedures for recording Reconciliation between asset register and control account

Summary of Internal Controls in the NCA subsystem Control Objective Details Specific Internal Control Safeguards NCA housed safely with restricted access Adequate insurance cover Physical security maintained Access to authorised personnel Inspection of asset Standard insurance cover Accountability Subsidiary balances should agree with control account balances Register kept in a safe area Check and inspection on balances and assets Valuation NCA values should reflect the worth of the assets to the business Procedures to record all assets Periodic review of assets condition Authorisation for revaluations and devaluations Review accumulated depreciation and useful life