Chic Paints Ltd: Internal Control and Accounting Systems Report

This report provides a comprehensive analysis of the internal control and accounting systems at Chic Paints Ltd. It begins with an overview of the company's structure, stakeholders, and the roles within the accounts department, including the financial statements prepared. The report then delves into a review of the current accounting system, highlighting weaknesses in credit control, debt recovery, and potential fraud risks. The analysis includes specific issues such as the Rymore Boats case and the lack of established credit limits. The report further examines customer relations, the use of accounting software, and the maintenance of financial records. Based on these findings, the report offers detailed recommendations for improvement, including staff training, adjustments to credit limits, and enhancements to fraud prevention measures. The report concludes with a focus on the company's sustainability and ethical considerations.

Running head: INTERNAL CONTROL AND ACCOUNTING SYSTEMS
Internal control and Accounting Systems
Student’s Name:
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Author Note

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Table of Contents
1 Terms of Reference.................................................................................................................2
2 Methodology.......................................................................................................................3
3 Executive Summary............................................................................................................4
4 Introduction.........................................................................................................................7
5 Review of Current System................................................................................................11
6 Recommendations.............................................................................................................16
7 References.............................................................................................................................21
8 Appendix...........................................................................................................................22

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1 Terms of Reference
1.1 This report has been constructed in order to ensure that the terms or criteria set out in
Level 4 AAT unit ISYS is met.
1.2 This particular study also identifies the issues in the Credit Control or the Accounts
Receivable account at the Chic Paints Ltd and even recommendations are given in order
to elevate the company from the particular situation.
1.3 The report also throws some light into the sustainability and ethical issues faced by the
company.

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2 Methodology
2.1 Observations and evaluations were carried out in the accounts department of the company
so as to accurately identify the area with most of the issues or the major issues cultivating
within the company.
2.2 Surveys and interviews were also conducted within the company in which the staff
responsible in handling the accounts receivable or credit department was interviewed in
order to get a brief idea about the issues and problems faced by them in executing the
daily operations of business.
2.3 Meetings with the management and the directors were also conducted in order to know
the future planning and objectives of business and also to plan the implementation of
recommendations as advised.
2.4 The online database was also searched for further reference.

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3 Executive Summary
3.1 This report essentially looks into the issues pertaining to the accounts receivable or the
credit department of Chic Paints Limited. It looks into the record keeping systems
installed by the company, the internal systems of control, frauds committed if any and the
potential areas of fraud in the company, the culture in which the particular company
operate and the internal techniques or methods used by the particular company in order to
carry out the day to day operations of business.
3.2 The accounting system is also evaluated and the loopholes identified.
3.3 The sustainability of the accounting system is also evaluated and steps to improve it have
also been recommended.
3.4 The weaknesses have also been identified and recommendation for improvement has been
done.
3.5 After a detailed analysis and evaluation of the accounts department at the CPL Limited a
number of areas of concern were discovered within the credit department.
3.6 Debt Recovery
3.6.1 Xu, the credit controller and the accounts receivable clerk of CPL in case of any
outstanding or overdue debtors chases up late payments with the help of e-mails,
letters and phone calls. But the condition that summed up to be a huge issue for
the company is that one of the trade customers, Rymore Boats went into
administration. Rymore Boats owed an outstanding debt to the company of £
40,000.
3.6.2 The particular recommendation for this issue is that the particular employee
should be trained and also a raise for recognizing the huge amount of work that
she alone is executing should be given.

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3.7 Credit Limits
3.7.1 The absence of internal control or fixation of a particular credit limit has led to
calamities such as in the case of Rymore Boats.
3.7.2 A particular recommendation in this case is that an accounts receivable clerk may
be promoted to the level of a manager in order to solve the problems that the
company is facing right now.
3.7.3 Another recommendation in this case would be to increase the salary of the
accounts receivable clerk which would result in a cost of £1500 and when the
cost of recommendation is subtracted from it, would result in a net benefit of
£975.
3.8 Customer Relations
3.8.1 The issue that is reported is that when there has been a dispute with a supplier
regarding the number of paint pigment containers supplied, it was found out that
the staff of the store were not aware of the basic rules of business. Even the
Stores manager had no information as to how to maintain the records concerned
with business.
3.8.2 The particular recommendation in this case is that that the Stores manager should
be given access to the company’s payroll system named Sage.
3.8.3 The implementation of this particular recommendation requires may initially cost
the business of approx £800 but will definitely save a handsome amount for
retaining the suppliers as such.
3.9 Fraud
3.9.1 There had been a security breach regarding the general ledger which is the central
information point of CPL and contains all the crucial data regarding the financial
operations of business.

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3.9.2 The particular recommendation in this case is that the access list of the general
ledger software should be updated.

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4 Introduction
4.1 Business Overview
4.1.1 Chic Paints Ltd (CPL) was initially a subsidiary of a company named Ashstead
Pcl. The company was a result of the management buyout and consisted of five
directors since the beginning. These directors are Greg Pearce, Jane Yip, Ruth
Jones, Ahmed Khan and Susan Mather. Recently Jane Yip had been replaced by
Dave Whistler as a Finance Director.
4.1.2 In the year of 2005 Ashstead had taken up the decision to change the current
model of business from being a seller of all household items to specialize in
certain goods. Therefore CPL was sold and it was bought by its faithful directors
and CPL started working in the paint industry specializing in the paints used by
cars, boats and industrial machinery.
4.1.3 The company is dependent upon a number of stakeholders who essentially are the
pillars of business. Internally they are the employees of the organization, unions
and shareholders. Externally the shareholders are the suppliers, customers and the
banks.
4.1.4 The stakeholders are the ones who hold and execute the business in a proper way.
Each and every stakeholder is related to business in such a way that they have the
power to affect business and vice versa.
4.1.5 The company consists of 350 employees and has an annual turnover of $120
million with a profit margin of 30% and net assets over £25 million.
4.2 The Accounts Function
4.2.1 The accounts department consists of eight major members. The members hold
the following positions Finance Director, Chief Accountant, Accounts Payable

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Clerk, Accounts Receivable Clerk, General Ledger Clerk, Costing Technician,
Payroll Clerk and Accounting Systems Technician.
4.2.2 The accounts receivable clerk, Xu Hin is also responsible for monitoring the
credit control process of business. She also is responsible for chasing the debtors
whose payments are due.
4.2.3 The accounts department on a whole is not only in charge of managing the books
of accounts but also planning the financial strategy of business, authorizing the
payments to suppliers via BACS and cheques, making the payroll taxes and also
keeps on updating the company about the accounting forecasts and proceedings.
4.2.4 The basic function of the department revolves around issuing debit and credit
notes and also serves the responsibility of taking care of the payroll of the wages
and salaries of staff.
4.2.5 The accounts department communicates or relates with the different departments
of the organization with the help of the general ledger accounting system in
which all the transactions that the company enters into is recorded. It is the
central financial hub of the company and is referred to in the preparation of any
kind of financial statements.
4.2.6 A certain software named Sage 50 is used for the payroll system and is only
authorized to be accessed by the officials of the accounting department
depending on the responsibilities of the job that they execute. The major financial
accounting system utilizes the Microsoft Office 2010 Excel spreadsheet in order
to record the transactions.
4.3 Financial Statements

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4.3.1 The financial statements prepared by the company are prepared in such a way
that they represent a true and fair view of the liquidity position and the financial
condition of the company.
4.3.2 Dave Whistler the Finance Director is in charge of preparing the annual
company report including all the statutory accounts.
4.3.3 The Statement of Profit or Loss of the CPL displays the total revenue and the
expense or loss incurred by the company in a particular financial year. It
essentially reflects the profitability of the organization and is accessed by the
officials sitting at the top of the accounts department and the directors of the
company.
4.3.4 The statement of financial position reflects the current value of the liabilities and
assets utilized by business. It indicates the financial condition of business as well
as the liquidity position of the company that is how well is the company being
able to manage its debts. This particular statement is very useful for the
management of the company and the Board of Directors for assessing the growth
of the company. Even financial institutions before forwarding loans to CPL may
go through the statement of financial position.
4.3.5 The statement of cash flow reflects the inflow of cash in business at a certain
time period. The cash flow can be broken down into investing, operating and
financing activities.
4.4 Regulations
4.4.1 It is the primary duty of every business to comply with the laid down regulations
by the management of the organization.
4.4.2 The accounting regulations that pertain to United Kingdom is the UKGAAP
(Generally Accepted Accounting Principles).

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4.4.3 Other two major bodies that cover the standards for preparing the statement of
accounts are the Companies Act, 2006 and the International Financial Reporting
Standards.
4.4.4 The company should also mandatorily comply with the data protection act and
maintain the privacy of information obtained from its customers, suppliers or
stakeholders of business.
4.4.5 The company also needs to follow the regulations as established by HMRC in
relation to collection of tax from its employees and payments to HMRC.
4.4.6 The company has to work with money-laundering regulations as established by
the UK Government. They mandatorily need to be registered under the Financial
Conduct Authority.
4.4.7 The international customers of the company if not hailing from UK does not fall
under the Sarbanes-Oxley Act,2002.

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5 Review of Current System
5.1 Accounts Department
5.1.1 The Accounts department has certain flaws in it. The credit control procedures
are not implemented in the organization
5.1.2 The staff employed is not qualified enough and does not have required
experience to properly execute the job role. Even there is lack of proper training
on the part of the staff of the accounts department as there is a continuous
demand for stated guidelines and procedures regarding credit control.
5.1.3 The chasing of debtors is also done without following any proper guideline or
manual.
5.1.4 The accounts receivable system should also develop a way to include the
purchase order numbers from the customers for lesser happenings of
misplacement in regards to invoicing and queries of customer1.
5.1.5 The accounts receivable ledger is matched and the entries are recorded in the
general ledger at the end of the month leading to errors of double entry and
journal duplication.
5.1.6 A single person handling the ledger and entering transactions into it removes the
chances of cross checking, therefore the early errors cannot be spotted2.
5.1.7 The software used for maintaining the payroll and other accounting purposes is
Sage and has limited access to it.
1 Michalski, G., 2013. Portfolio management approach in trade credit decision making. arXiv
preprint arXiv:1301.3823.
2 Michalski, G., 2014. Factoring and the firm value.