Sandwich Master Ltd

This report analyses the Internal Controls in place and presents a review of the Accounting
Systems.

Diego Pita

AAT Registration Number: 10343112

I testify that the following report is my own unaided work and a true reflection of the
organisation.

Signed: Dated: 07/05/13

Diego Pita
Contents:
1. Terms of Reference
2. Executive Summary
3. Methodology
4. Introduction to the Organisation
5. The Accounts Department
6. Review of the Accounting System
7. Internal Controls and Analysis of Fraud
8. Recommendation to improve

Appendices:
1. Organisation Chart
2. SWOT Analysis
3. Fraud Matrix
4. Mapping Sheet
1. Terms of Reference

1.1. This report has been produced with a view to investigating SML’s accounting system, paying particular
attention to the effectiveness of its internal controls. The report will then provide recommendations on
where improvements can be made.

1.2. As part of the investigation, the report will look at the company's anti-fraud measures to see if they are
of a suitable standard and again provide recommendations for improvements where necessary.

1.3. Where recommendations for improvements have been made, the report will then provide a cost
benefit analysis (they are not included in this first draft)

1.4. This report is also designed to meet the requirements of the Internal Controls and Evaluating
Accounting Systems paper that is part of the AAT Level 4 Diploma in Accounting.
2. Executive Summary

2.1. This report reviews the accounting system of SML as a whole and outlines weaknesses found. Even
though there are already controls in place there is room for improvement.

2.2. This report highlights several weaknesses within the accounting system and provides recommendations
to improve these. This report also looks at training and how this could improve efficiency of the accounts
department.

3. Methodology

3.1. This report was created with the aid of professional literature as well as online resources.

3.2. A review of the accounting system was based on a structured planning method used to evaluate the
strengths, weaknesses, opportunities and threats (SWOT analysis).

3.3. A Fraud Matrix has been produced to help minimise the risk of (potential) fraud within the accounting
system.
4. Introduction to the Organisation

4.1. Sandwich Master Ltd is a large private company that makes and sells sandwiches and savouries (such as
pasties, sausage rolls and pies) to the general public. Most of its trade comes from people buying these
products for their lunch. It was established seventy years ago by the Graham family in the Midlands area
and operated as a medium sized local bakery chain for many years until David Graham finally retired in
2006.

4.2. SML is a limited company, bought five years ago by a new management team when the previous owner
retired. It employs around 360 full-time employees. The company’s head office is based in Nottingham,
where its management team and accounts department are both based. It also has a central savoury
production centre a few miles away in Leicester. It sells its products through a nationwide chain of over
eighty high street shops, and has six regional bakeries.

4.3. The new management team who bought the company were: Courtney Candler, Managing Director;
George Bartlett, Finance Director; Jane Chung, Operations Director; and Emma Pearson, Sales Director. The
purchase was financed almost entirely by bank borrowings.

4.4. The company has a relatively flat structure and is managed by the Managing Director, one of the four
shareholders. The organisation's Head Office consists of two departments: Sales and Finance, and control is
centralised by the Head Office (senior level of management). An organisation chart will be included in the
Appendix.
4.5. External regulations affecting the organisation:

4.5.1. The Companies Act 2006 – this sets out the guidelines to which companies must adhere when
producing the financial statements. Private firms filing less than a month past their due date will attract a
£150 penalty; those submitting before three months overdue will be liable for a £375 fine; while any
submission up to six months overdue will be subject to a £750 fine. Businesses that neglect to file their
accounts with Companies House for more than six months after the due date will be given a £1,500 penalty.

4.5.2. UK Accounting standards: These further define the policies and approaches to the preparation of
accounting statements that the organisation must take. They are either known as Statements of Standard
Accounting Practices (SSAPs) of Financial Reporting Standards (FRSs) depending on when they were issued.

4.5.3. Data Protection Act – places obligations on those who use personal data. SML must be open about
this data through registering with Data Protection Register and they must follow a code of good practice. If
the organisation is found to be in breach of the Data Protection Act, not only will incur possible loss of
business and brand damage but could be subject to a penalty from The UK Information Commissioner's
Office (ICO). Amongst its powers, The ICO can issue fines of up to £500,000 and prison sentences for
breaches of the Data Protection Act.

4.5.4. Health & Safety at Work Act 2008 – provides the legal framework to provide high standards of
health and safety at work. It protects SML employees and the public from work activities. The maximum
penalty that can be imposed for breaching health and safety regulations in the lower courts is £20,000.

4.5.5. Late payment law: as set out in the Late Payment of Commercial Debt (Interest) Act 1998 the
organisation will need to ensure that it does not delay payments to suppliers beyond acceptable periods.

4.5.6. Food safety regulations: SML supplies sandwiches and savouries to customers and these will be
affected by a variety of food hygiene regulations regulated by the Food Standards Agency.
4.6. SML: External stakeholders

4.6.1 Customers: Eighty per cent of customers buy their sandwiches or savouries in the shop. These
customers are the general public buying their lunchtime sandwiches and savouries. There are also a number
of large contract customers that make up the remaining 20% of the company’s sales. These are typically
local businesses, which often have a large regular order every day (as they provide their employees’
lunches) and also have occasional one-off orders when they are buying sandwiches and savouries for
visitors.

4.6.2. Bank: the purchase of the company by the current owners was financed almost entirely by bank
borrowings. In the pre-recession days the management team could easily persuade the banks to fund the
purchase of the business and also borrow the money to expand it. But now the banks have been tightening
their lending criteria and the company is finding harder to borrow money. George Bartlett, the Finance
Director, spends a large part of his working week producing projections for the banks and trying to ensure
that the company’s credit ratings at least appear strong.

4.6.3. Suppliers: SML’s main suppliers are the providers of bread, sandwich fillings and savouries. Their main
concern is the quick payment of the goods supplied. Financial information required will include information
to enable them to decide whether to provide credit to SML.
5. The accounts department

5.1 SML’s accounts department is based in the Head Office in Nottingham and is run by Alison Jackson, the
company’s Accountant. The other twelve members of the department report to her and all work full time,
37.5 hours a week. An organisation chart is included in appendix 1.

5.2. Each member of the accounts department has their own computer. These all run on an integrated basis
and are all linked to the same printer. SML’s main financial accounting systems are integrate General
Accounts Payable (Purchases) and Accounts Receivables (Sales) set of Ledgers and a costing packing,
which runs on Vista environment and holds data in a non-relational database.

5.3. The accounts department provides accounting services and financial support to SML. The department
records accounts payable and receivable, inventory, payroll and all other financial elements (costing system,
payroll system).

5.4. The accounts department: key internal stakeholders

5.4.1. Board/Shareholders
 Courtney Candler Managing Director Owns 45% of shares
 George Bartlett Finance Director Owns 45% of shares
 Jane Chung Operations Director Owns 5% of shares
 Emma Pearson Sales Director Owns 5% of shares

They all have vested interest in the performance of the company

5.4.2. George Bartlett (FD) has overall responsibility for all financial, legal and accounting procedures and
systems at SML. He currently oversees the annual company report and statutory accounts and deals with
all banking and finance issues. Beyond this he rarely gets involved in the detailed running of the accounts
department; that is delegated to the company accountant.

5.4.3 Company Accountant (ACMA): As well as managing the other members of the department, Alison
produces the monthly management accounts, and personally approves all payments to suppliers and
wages/salaries to employees. Her main role now is to manage the work of the clerks running the
transaction accounting systems.

5.4.4. Accounting Technician: his main duty is to review the company’s systems and procedures and to
identify and recommend changes where needed. He is currently studying for AAT qualifications.

5.4.5. General Ledger and Inventory Clerk: his role includes to enter all data requiring input directly into the
general ledger and to produce the end of month trial balance; to maintain the company’s cash book and its
petty cash system and to maintain financial control over the company’s inventories. He has foundation level
2 AAT qualifications and has expressed an interest in studying for his intermediate level 3 exams.

5.4.6. Accounts Payable supervisor: he is responsible for the small team of accounts payable clerks who
enter all suppliers’ invoices and credit notes into the accounts payable ledger, and for arranging the
payments to suppliers. Fully AAT qualified.

5.4.7. Accounts Receivable Clerk: she is responsible for inputting all data into the accounts receivable ledger,
sending out monthly statements to trade customers and for the company’s credit control. She has no
accounting or credit control qualifications but has expressed interest in undertaking accounting studies.

5.4.8. Payroll Clerk: apart from operating SML’s two payrolls (management and salaried staff, and the hourly
paid staff) is also responsible for issuing all the statutory forms required by HMRC. She has the equivalent
of the existing AAT level two qualification.
6. Review of the accounting system

6.1. This report offers a review of the accounting system within SML and identifies weaknesses which have
been identified and expressed within a SWOT analysis as per Appendix 2.

6.2. Working methods and practices

6.2.1. Each member of the accounts department has their own computer. These all run on an integrated
basis and are all linked to the same printer. SML’s main financial accounting systems are integrated General
Accounts Payable (Purchases) and Accounts Receivables (Sales) set of Ledgers and a costing packing, which
runs on Vista environment and holds data in a non-relational database.

6.2.2. All personal computers must only be loaded with licensed software owned by the company. Each
computer must be individually password protected. All IT systems must be fully backed up twice each day.

6.3. Record keeping practices

6.3.1. A weekly manual return from each of the shops is used to update the accounts receivable ledger
with the credit sales of the week. The return is filled in by the shop manager and posted to the head office.
This is used to produce the sales invoices that are sent out to the customers weekly.

6.3.2. The supplies re-order information is updated each evening by the Operations Management team
when the shop managers email the details of their sales for the day. They use an online ordering system to
send an electronic purchase order to each supplier every day. A copy of this is sent to the accounts payable
supervisor.
6.3.3. All payments by BACS and cheques issued to suppliers are required to be signed by any two of the
company’s authorised signatures (the four directors and the company accountant).
6.3.4 At the end of each business day each shop manager is required to bank all cash and cheques received.
A daily email should be sent to the head office detailing the previous day’s takings.

6.3.5 All credit customers are meant to settle their accounts each month directly with the head office, and
the individual shops are instructed not to accept payments from such account holders.

6.3.6. Each shop has a £50 for use as petty cash. The shop manager is responsible for issuing this when it
is needed, and these petty cash floats are controlled using an imprest system. Also, each shop should keep
a daily float of £150 cash in coins and small notes as change ready for the start of the next day’s trading.

6.3.7. The General Ledger Clerk produces a monthly bank reconciliation statement to reconcile the
cashbook to the bank statements, and the paying in book to the bank statements. The company accountant
then checks the reconciliation and formally signs it off.

6.3.8. All staff is paid using BACS. The salaried staff is paid monthly on the last day of the working month
and the employees who work in the network of shops are paid weekly. The directors are paid separately, for
confidentiality reasons, by an outside payroll agency. The BACS information is prepared by the payroll clerk
and then signed off by the company’s accountant.

6.4 Training

6.4.1. While most of the staff at the accounts department has qualifications, they would be benefit from
further training. Those with no qualifications have expressed interest in undertaking accounting studies. It
has been agreed that they will be given day release to study.

6.4.2. Shop managers have little or no IT skills.

6.5. Weakness in the accounting system (Appendix 2)

6.5.1 The Finance Director not spending enough time at the office. He does not have the time to review
outstanding debts.

6.5.2. Credit limits to credit customers set at £4,000 by default to avoid exception reports.

6.5.3. The weekly manual return from each of the shops is used to update the accounts receivable ledger
with the credit sales of the week. The return is filled in by the shop manager and posted to the head office
often by second-class post. The shop managers lack the necessary IT skills to send this by email.

6.5.4. The company does not operate a BACS payment system with its customers.

6.5.5. Outstanding accounts more than one month overdue are not being reviewed by the FD as he in only
in the business for one or two days a week. Also, the policy of passing the details of outstanding debts to
the debt collection agency is rarely followed because of the same reason.

6.5.6. Purchase ledger: The Company has not bought a processing package that allows automated full
invoice matching against its purchase order.

6.5.7. Out of the four directors only the FD is willing to sign the cheques and BACS payments to suppliers;
the others directors complained that they were too busy to undertake this role.

6.5.8.Stores treating the two floats of cash as one single fund and making no distinction between monies
used for providing customers with change and those for funding the incidental costs of the shop.

6.5.9. There is often a reconciliation difference at the end of the month due to the shop managers having
declared their takings in their daily email to the office, but not their banking.

6.5.10. The company has no formal system in place for hourly paid employees to sing in or out when they
arrive or leave work.

7. Internal controls and analysis of fraud

7.1. Internal systems of control

7.1.1. While in theory SML has established formal internal controls to support the accounting system, they
are often not met due to lack of time or proper training.

7.1.2. Weaknesses in the internal control system are reviewed in the SWOT Analysis as per Appendix 2

- Petty cash: The stores fail to have proper supporting vouchers for the petty cash spent and instead rely on
the staff writing down what they have spent and drawing the total of this amount from the bank each week.

- IT systems and personal computers: staff has uploaded software onto some of the computers. The
computers must be only loaded with licensed software owned by the company and no member of staff is
allowed to load any software without prior written permission from a member of the senior management
team. Only the managers must know the password.

- Credit control/accounts receivable:

 one of the customers who went into administration had been recommended by Experian for a £2,000
credit limit but it was set at the default maximum of £4,000. The procedures are clearly not being
followed.
 the accounts receivable clerk does not always have the time to follow the credit control procedure
regarding outstanding invoices (phone the customer, write to them, pass them to the FD to be
reviewed).
 if the accounts receivable clerk is away for a long period of time sales invoices are not being raised and
this has the effect of worsening the trade receivables account balance further.

- Bank reconciliation: many of the shops are not sited conveniently near to a branch of the bank the
company banks with; some of the managers tend to leave cash and cheques in the tills until they bank
them, which is usually two or three times a week rather than daily as it should be. As well as the physical
security risk this practice often accounts for reconciliation differences.

7.2. Analysis of fraud

7.2.1. There has been evidence of fraud due to procedures already in place at SML were not followed.

7.2.2. The weaknesses are analysed in the Appendix 3 and presented as follows

- Payments from credit customers taken by store staff when they should have been paid directly to the head
office. In one occasion the customer had paid in cash directly to the local shop. The employee had since left
the company and as it was difficult to trace, the trade receivables had to be credited.

- Cash not banked on a daily basis increasing risk of loss from theft: a shop was broken in and the thieves
got away with what was in the safe.

- Employees lying about hours worked at the shop: at the moment the company has no formal system in
place for hourly paid employees to sing in or out when they arrive or leave work.

7.2.3. The risk of fraud has been analysed and recommendations provided within a Fraud Matrix in
Appendix 3.

8. Recommendations to improve
8.1. The following section details the recommendations that should be implemented in order to combat the
weaknesses as identified in Appendix 2.

8.1.1. Purchase ledger: the company should buy a processing package that allows automated full invoice
matching against its purchase order. This would avoid overpayment of supplier invoices.

8.1.2. Staff should be fully trained to use the system.

8.1.3. The company should provide its credits customers the option of paying by BACS so that the money is
paid directly into the bank account and the use of cheques reduced.

8.1.4. Shop staff and particularly managers could receive IT training. If they received proper training they
could email the weekly returns instead of sending it by post.

8.1.5. Cash from customers should be removed from the tills and banked daily instead of twice or three
times a week.

8.1.6. A system for the staff to sign in when they arrive at work and sign out when they leave should be put
in place so that the hours worked can be monitored. This will help ensure that correct payments are made
for hours worked by staff.

8.1.7. It is recommended that staff is trained in multiple disciplines in case cover is required due to absence
(holiday, sick). This will help prevent work being left uncompleted due to staff shortages.

Appendix 1 - Organisation chart

George Bartlett Courtney Candler Jane Chug Emma Pearson
Finance Director Managing Director Operations Director Sales Director

Accountant

Accounting General Ledger/ Accounts Payable Accounts Receivable

Payroll Clerk
Technician Inventory Clerk Supervisor Clerk

Appendix 2: SWOT Analysis

Strengths
 All the accounts department staff are full time:
there are few occasions where no one is at the
office.
 The staff with no formal qualifications in
accounting and are willing to study further.
 Despite the high volume of transactions in the
payable section, the accounts package is capable of
handling all of the company’s accounts payable
requirements.
 Payments by BACS and cheques issued to suppliers
have to be countersigned by one of the directors.
 Most of the shops’ employees are willing to work
overtime.
 
Weaknesses
 The Finance Director not spending
enough time at the office.
 Credit limits to credit customers set at
£4,000 by default to avoid exception
reports.
 The weekly manual return from each of
the shops is used to update the accounts
receivable ledger with the credit sales of
the week. The return is filled in by the
shop manager and posted to the head
office often by second-class post. The
shop managers lack the necessary IT
skills to send this by email.
The company does not operate a BACS
payment system with its customers.
 Outstanding accounts more than one
month overdue are not being reviewed
by the FD as he in only in the business
for one or two days a week. Also, the
policy of passing the details of
outstanding debts to the debt collection
agency is rarely followed because of the
same reason.
 Purchase ledger: The company has not
bought a processing package that allows
automated full invoice matching against
its purchase order
 Out of the four directors only the FD is
willing to sign the cheques and BACS
payments to suppliers; the others
directors complained that they were too
busy to undertake this role.
 Stores treating the two floats of cash as
one single fund and making no
distinction between monies used for
providing customers with change and
those for funding the incidental costs of
the shop.
 There is often a reconciliation difference
at the end of the month due to the shop
managers having declared their takings
 Opportunities Threats

 Shop staff to be trained: the company would  Effects of the recession/economic

benefit from advanced IT skills. downturn: harder to borrow money
 Improving sales by lowering prices from the banks and they may have to
 Accounts staff to receive further training. downsize the business
 Fewer people buying ready-made
sandwiches.
 Redundancies as an effect of the
recession.
 Staff not backing up the system regularly.
 Competitors lowering the prices.

Appendix 3: Fraud Matrix

 Potential fraud Current control Risk to the organisation Recommendation

Cash not banked on a Cheques and cash 5- Very High Cash to be removed from
daily basis increasing kept in tills overnight tills and banked daily
risk of loss from theft (many of the shops
are not sited near a
bank’s branch)

Payments from credit No control 4-High Payments from credit

customers taken by customers to be paid by
store staff BACS or cheque only

Credit checking and Formal credit 4- High Only directors or senior

control policies: staff checking and control staff should approve new
could set up a dummy policies are not customers
customer and complied with in
purchase goods for it practice
Employees lying about No control 3-Medium To install new system
hours worked at the with ID cards
shop
Appendix 4 - Mapping sheet

Title (and
reference Principles of Internal Control
number) (Knowledge) (PIC)

Level 4
Learning
Assessment Section / Paragraph
outcomes
criteria – number
– learners
learners can:
will:
Appendix 1
Demonstrate 4.2
an Describe the purpose, structure 4.3
understanding and organisation of the 4.4
1 of the role of 1.1 accounting function and its 5.1
accounting relationships with other functions 5.2
within the within the organisation. 5.3
organisation. 5.4

Explain the various business Will include in

purposes for which the following second draft
financial information
is required
 income statement (profit
1.2
and loss account)
 forecast of cash flow
(cash flow statement)
 statement of financial po-
sition (balance sheet)
Give an overview of the 4.6.1 4.6.3
1.3
organisation’s business and its 4.6.2 5.4
critical external relationships with
stakeholders
Explain how the accounting 5.2
systems are affected by the 5.3
1.4 organisational structure, systems,
procedures, and business
transactions.
 Explain the effect on users of 5.4
changes to accounting systems 6.5
caused by
1.5
 external regulations
 Organisational policies
and procedures.
Understand 4.5
the importance
and use of Identify the external regulations
2 2.1
internal that affect accounting practice.
control
systems
2.2 Describe the causes of, and Appendix 3
common types of, fraud and the 7.2
impact of this on the organisation.
Appendix 3
Explain methods that can be 7.1
2.3 used to detect fraud within an 7.2
accounting system.

Appendix 3
Explain the types of controls that 8.1.3
can be put in place to ensure 8.1.5
2.4
compliance with statutory or
8.1.6
organisational requirements.

Be able to Appendix 2
identify and 6.5.1
use the Identify weaknesses in 6.5.10
appropriate accounting systems
3 accounting 3.1  potential for errors
system to  Exposure to possible
meet specific fraud.
organisational
requirements.
Explain how an accounting 8.1.1
3.2 system can support internal 8.1.3
control.
Identify ways of supporting 6.4
individuals who operate 8.1.2
accounting systems using 8.1.4
3.3  training
8.1.7
 manuals
 written information
 help menus.
 Explain the value and benefit to a 8.1.1
specific organisation of different 8.1.3
3.4
types of accounting systems and 8.1.6
software packages.

Title (and Evaluating Accounting Systems

reference (Skills)
number)

Level 4
Learning
Assessment
outcomes Section /
criteria –
– learners Paragraph number
learners can:
will:

Evaluate the 5.2

accounting 5.3
system and Identify an organisation’s accounting
1 1.1
identify areas system requirements.
for
improvement.
Review record keeping systems to 6.3
confirm whether they meet the
1.2
organisation’s requirements for
financial information.
Identify weaknesses in and the Appendix 2
potential for improvements to, the 6.5
1.3 accounting system and consider
their impact on the operation of the
organisation.
Identify potential areas of fraud Appendix 3
1.4
arising from lack of control within the 7.2
accounting system and grade the
risk.
6.3.1
Review methods of operating for 6.5.3
1.5 cost effectiveness, reliability and 6.5.5
speed. 6.5.6

Make 8.1
Make recommendations for changes
recommendati
2.1 to the accounting system in an
ons to
2 easily understood format, with a
improve the
clear rationale and an explanation of
accounting
any assumptions made.
system.
8.1.1
8.1.3
Identify the effects that any 8.1.4
2.2 recommended changes would have 8.1.6
on the users of the system.
8.1.7
8.1.7
 Enable individuals who operate 8.1.2
accounting systems to understand 8.1.7
2.3
how to use the system to fulfil their
responsibilities.
Identify the implications of Will include in
recommended changes in terms of second draft
2.4
time, financial costs, benefits, and
operating procedures.