INTERNAL CONTROL SYSTEM (ACC5AAS)

1.0 INTRODUCTION:

Internal control has become one of the vital components in small or large organizations in
fighting fraud and minimising risks.

The Committee of Sponsoring Organisations (COSO) of the Treadway Commission defines

internal control as – a process, effected by an entity’s board of directors, management and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives
mainly in:

 Effectiveness and efficiency of operations

 Reliability of financial reporting
 Compliance with applicable laws and regulations (Leung et al. 2015).

These control procedures helps managers to achieve their business objectives and helps
auditors to identify and assess the risk of material misstatement, whether due to fraud and error,
at the financial report and assertion levels, through understanding the entity and its
environment, thereby providing a basis for designing and implementing responses to the
assessed risks of material misstatement (ASA 315, p.8)

2.0 IMPORTANCE OF INTERNAL CONTROL:

Small businesses are most vulnerable to fraud because of weak internal controls. Managers
need to evaluate the importance of some key aspects of their internal business processes to
manage their resources and to help move their business operations in an effective and efficient
way. Some important aspects of internal control are:

 Help align objectives of the business – ensures thorough reporting procedures and that
the activities carried out by the business are in line with the business’s objectives.
 Safeguard assets - ensuring the business’s physical and monetary assets are protected
from fraud, theft and errors.
 Prevent and detect fraud and error - ensuring the systems quickly identify errors and
fraud if and when they occur.
 Encourage good management - allowing the manager to receive timely and relevant
information on performance against targets, as well as key figures that can indicate
variances from target.
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 Allow action to be taken against undesirable performance - authorising a formal method

of dealing with fraud, dishonesty or incompetence when detected.
 Reduce exposure to risks – minimising the chance of unexpected events.
 Ensuring proper financial reporting – maintaining accurate and complete reports
required by legislation and management, and minimising time lost correcting errors and
ensuring resources are correctly and efficiently allocated (Internal Control For Small
Businesses 2008, p.8).

Internal control thus helps in maintaining the financial consequences in the business. Proper
presentation and disclosure methods are maintained to help detecting discrepancies inside the
business. It helps to create a good understanding how processes have to be followed, how errors
can be reduced and creates value for the business.

3.0 7-ELEVEN – COMPANY OVERVIEW:

7-Eleven is the largest petrol and convenience retailer in Australia. The company is privately
owned by the Withers and Barlow families. 7-Eleven is one of the largest private companies in
Australia. The company has a license to operate and franchise 7-Eleven stores in Australia from
the US based 7-Eleven Inc. Through its store network, 7-Eleven Stores Pty Ltd. conducts more
than 180 million transactions a year, serving an average six customers per second, generating
sales of approximately $3.6 billion (7-Eleven About Us, 2015).

4.0 INTERNAL CONTROL SYSTEM IN 7-ELEVEN:

7-Eleven follows some key internal control procedures which are:

 Cash Receipts and Management

 Purchasing and receiving items
 Accounts Payable
 Inventory Management

4.1 Cash Receipts and Cash Management:

The area of cash receipts is a common target for the employee to commit fraud. This is because
of the ready and available nature of this method of payment, as well as the difficulty of
matching the cash with a particular transaction (Internal Control For Small Businesses 2008,
pp. 14-16).
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7-Eleven maintains the following process:

 All EFTPOS transactions are adjusted right after every transaction with the help of
Point-Of-Sale System (POS).
 Excessive cash is dropped immediately into the safe drop. Only manager has access to
it.
 Cash register balance is reconciled and maintained properly i.e. AUD $200.
 Every day cash from the safe drop is counted and deposited in the bank by the manager.

4.2 Purchasing and Receiving Stock:

Controls in the area of purchasing are important so that the physical assets of the business are
protected (e.g. stock) and that goods properly purchased and received are properly paid and
accounted for. Receiving the goods is also an important factor in the purchasing function. Lack
of controls can lead to a significant financial loss (Internal Control For Small Businesses 2008,
pp. 15).
7-eleven has effective controls in following aspects:

 Supplier invoices match with the purchasing order.

 Once the invoices have been matched, they are signed and stamped by the employee as
evidence of the quantity received for correctness.
 Left out items, if any, are received next day or are not charged for.
 Received goods are inspected for condition and are independently counted.

4.3 Accounts Payable:

Many businesses have found that mistakes made in their purchasing and accounts payable can
be very costly to the business. This is an area that deserves careful attention and there should
be many internal controls within the payments systems. Companies should make sure that it
has a clear and simple list of written procedures for purchases and accounts payable to ensure
all staff knows the processes they are expected to follow (Internal Control For Small Businesses
2008, pp. 15).

7-Eleven has an effective internal control in place for its accounts payable. It has a written
procedure that every staff member has to follow to record the accounts payable and purchase.
At 7-Eleven, payments on accounts payable are made each month to its suppliers, and such
payments are only made on the original invoices. Only original invoices are accepted to
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minimize the risk of over payment or wrongful payment to supplier. After the original invoices
are checked and payment is made, invoices are then stamped and signed by manager to avoid
its re-use. All the payments made to suppliers are then recorded into the system to keep a
backup and to ensure accountability.

4.4 Inventory Management:

Area of inventory management is of utmost importance to 7-Eleven, and internal control

systems are in place to make it effective. At 7-Eleven, First-in-First-Out inventory system is
used, which ensures that stocks received first are sold first, and stock received later is sold after
the earlier stock is sold. At 7-Eleven, staff is responsible to conduct inventory count every time
the stock is delivered to the store. Inventory audits are conducted after every three months
(Quarterly Audits) to keep track of inventory kept by 7-Eleven. Stock count conducted by staff
are then closely monitored and evaluated by audit team during audit phase to check any
discrepancies, such as, overstock or shortfalls. Point of Sale System (POS) is used to record
and update inventory levels every time an item or product is purchased from supplier, sold to
customers, bad merchandized on product expiry, and on sales returns by customers.

5.0 CONCLUSION:

Due to this formalization, 7-Eleven has been able to successfully achieve its objectives set for
internal control system. An effective control system at 7-Eleven has helped it minimize risks
of drive offs, stealing, theft, unauthorized use of cash, etc. It has also made business processes
of 7-Eleven more efficient through the use of Point of Sale (POS) System, which ensures
accountability and accuracy. Effective internal control also helped 7-Eleven in complying to
legal laws and regulations, such as, not selling smokes to customers under 18 and only after
checking their ID for proof of age, and not allowing fuel access to customers without or
unregistered license plate on their car.

In a nutshell, internal control systems at 7-Eleven are found to be very effective, and can be
attributed directly to centralized decision making. Headquarter control and ensures uniformity
across all the stores. Procedures followed at 7-Eleven in the areas of purchasing, receiving,
cash management, inventory management, and accounts payables are efficient and ensures
accountability and accuracy.
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6.0 REFERENCES:

 7-Eleven Store, 252 Childs road, Mill Park, Vic 3082

 About Us - 7-Eleven. 2015. About Us - 7-Eleven. [ONLINE] Available at:
http://www.7eleven.com.au/about-us. [Accessed 11 May 2015].
 ASA 315 2013, Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment.
 Internal Control For Small Business 2008, Business Management.
 Leung, P, Coram, P, Cooper, BJ & Richardson, P 2015, Modern Auditing & Assurance
Services, 6th Edn, John Wiley & Sons, Australia, Ltd, Milton, Qld.