Question

(c) Outline controls that should be incorporated into the trade payables system(ii) For recorded trade payables at the year-end

Answer 1

Accounts payable controls are used to mitigate the risk of losses in the payable  function. These  controls are segregated  into three general categories 1)Verifying the obligation of the business to pay, 2. entering the payable data into the computer system, 3) paying suppliers

1) The verification of obligation to pay can be accomplished through one of several possible controls. They are:

Invoice approval. The person in a position to authorize payment signifies his or her approval of a supplier invoice. The approver should verify the supplier invoice, authorizing purchase order, and receiving documentation into a packet, and then stamp the invoice with a signature block that includes the account number to be charged, before  approving   it.

Purchase order approval. The purchasing department issues a purchase order for every purchase made. By doing so, the purchasing staff is, in essence, approving all expenditures before they have been made, which may prevent some expenditures from ever occurring.

2) There are several ways to ensure that all supplier invoices have been entered in the accounts payable system, though these controls have varying degrees of success. The controls are:-

Record after approval. This control forces the accounts payable staff to verify the approval of every invoice before entering it into the system.

Adopt an invoice numbering guideline. Perhaps the largest problem in the area of payables data entry is duplicate payments. But if the companies use the accounting software that uses proper numbering guidelines will detect the duplicated invoices and this problem can be resolved

Match to budget in financial statements. If a supplier invoice was incorrectly charged to the wrong department, it is possible that a department manager perusing the financial statements would detect a disparity between the amount charged and the budget, and so would bring the issue to the attention of the accounting department.

3) he bulk of the controls noted below pertain to payment by check, since that is still the predominant form of payment. The controls are:

Split check printing and signing. One person should prepare checks, and a different person should sign them. By doing so, there is a cross-check on the issuance of cash.

Store all checks in a locked location. Unused check stock should always be stored in a locked location. Otherwise, checks can be stolen and fraudulently filled out and cashed. This means that any signature plates or stamps should also be stored in a locked location.

Track the sequence of check numbers used. Maintain a log in which are listed the range of check numbers used during a check run. This is useful for determining if any checks in storage might be missing. This log should not be kept with the stored checks, since someone could steal the log at the same time they steal checks.

Require an additional check signer. If the amount of a check exceeds a certain amount, require a second check signer. This control supposedly gives multiple senior-level people the chance to stop making a payment. In reality, it is more likely to only introduce another step into the payment process without really strengthening the control environment.

Control over the recorded AP at the year end:-

1. Periodical reconciliation :- Get the suppliers Statement of Accounts and it should be reconciled with the closing balances of their respective ledgers in company's books. Any mismatch need to be sorted out immediately

2. scrutiny of Debit balances in the Supplier ledger. - Special care should be taken for the debit balances in the suppliers ledgers as the same may be due to missing the invoices to be booked in the system. If the same is found to be advance payment, should transfer to advance payment account