Internal control is the process of creating credibility within all the financial statements and all accounting records,

to make sure they are in line with the Generally Accepted Accounting Principles (GAAP) and making sure financial reporting is in compliance with all the other laws and regulations. (Needles et al, 2008). Firstly, the business has a large amount of money held as petty cash. A balance of 50,000 is a high risk material balance considering the fact that the average monthly expenditure is only 10,538. Steven Bragg suggested that the petty cash fund should be small enough to require replenishment about twice per month (Bragg, 2007). As Linstead Parva Plc runs an imprest petty cash system, it will always have this large amount of cash held at its premises, making it susceptible to fraud that will have a material effect on the end financial statements. A control to rectify this is to have a weekly counting of petty cash ensuring that the balance is not in excess of 20,000, (i.e twice able to replenish expenditure). Another weakness is that a lockable box for petty cash is not robust enough. This is high risk as there is only one physical locking mechanism on the box itself which makes it vulnerable to fraud. According to Steven Bragg, petty cash should be kept within a locked box within a locked drawer in the absence of a custodian, furthermore a petty cash box should come with a contact alarm underneath (Bragg, 2007). Also, the accounts office will be accessible by various personnel other than the custodian. A control would be to retain the petty cash box in a highly secure safe and the code to the safe must only be disclosed to a senior member of staff, for example the chief accountant, and any movements of money should be verified by s/he and this passcode must not be disclosed by the person in charge. Expenditure signed by the person incurring the expense creates additional risk of fraud. It is evident that there are no current controls over petty cash making control risk very high for the auditor in terms of this cash balance. There seems to be no authorisation and this is highly risky especially because transactions can be self-certified up to a material balance of 5,000 without its validity being checked. An immediate control over this would be for all transactions to be authorised by a senior member of staff, this being the accountant, not the cashier, whose sole responsibility should be for cashing, not authorising the payment. Furthermore, larger expenses must be referred further to the senior accountants and traced back to their original receipts to verify their occurrence and whether they can actually be regarded as a genuine expense throughout the course of business. The amount and nature can be crosschecked against the invoice to again confirm its validity. Another control weakness is that the accounts clerk is responsible for recording the transaction as well dispensing the cash to the employee. There is a dual responsibility here for the accounts clerk and s/he can self certify expenses and distribute the funds easily without the need of second party authorisation, making it easier for him/her to carry out fraud. A control to prevent such

possibilities of fraud would be for the role of recording and distributing to be firstly carried out by two different persons, but also for all transactions recorded by the accounts clerk to be signed by a second member of staff independent of the accounts department, for example by the individuals line manager. A request could be made to the line manager first, then s/he could then pass on the expenses claim to the accounts team once they are satisfied that the expense is genuine. This control is required immediately, as role differentiation is vital in preventing single personnel from obtaining the power to authorise false or inaccurate transactions without being stooped somewhere along the process. Cash book reconciliation should be carried out by a different employee, again highlighting any discrepancies before fraud can develop. Payments made to employees being checked against the cash book register, the recorded transaction, and ultimately to the original invoice. Any differences should be reported immediately to the accountant in charge. Another weakness is that the accountant at the same site merely signs the cheque without any review of the nature of the expenditure, or of original documents. Again, the site itself is approving expenses without obtaining any authorisation from the wider company, meaning that one site could defraud the company if internal controls within it are very weak. A control to prevent this would be for expenses to be authorised by a central accounts team independent of individual sites. This would mean that even if the individual site has poor controls, any fraud will be detected by a robust control system elsewhere in the company. Finally, the raising of an entry immediately to the general ledger means that if the transaction is fraudulent it has been recorded and thus will impact the end financial statements true and fair nautre. CIMA define true and fair as ensuring the financial statements being prepared for external publication should mirror fairly on the companys financial position (CIMA Lunt, 2007). This will lead to a qualified auditors report, which can have a detrimental affect on the company being able to continue to trade, obtain custom or credit. A control to counter this would be for transactions only to be recorded once they have been authorised from the independent department. For all the above weaknesses to be improved, the company could set up an internal audit function to undertake the task of ensuring that all controls are adhered to across all branches. Again this will prevent single sites divulging in fraud, as internal audit will not only act as a deterrent, but will also verify the authenticity of all expense claims. These controls need to be implemented by Linstead as they will safeguard the companys assets, help to prevent and detect fraud, and therefore safeguard the shareholders investment.

References: Bragg, S (2007). Accounting policies and procedures manual. 5th ed. Canada: John Wiley & Sons. p141. Tulsian (2008). Fundamentals of Accounting. Delhi: Tata McGraw. p8 Needles, B et al (2008). Principles of Accounting. USA: George Hoffman. p474 Lunt, H (2007). CIMA - Fundamentals of Financial Accounting. Oxford: p357