General practices in Dubai have no Internal Audit or compliance department to check internal control and supporting documents or proper bills attached with expense vouchers and make sure the company follows policies and procedures. We notice that the company’s purchaser takes money from the accounting department to buy some merchandise for the company or organization, and they promise to submit the bills later. Still, after some time, they forget everyone or sometimes offer duplicate accounts.
We also noticed that the purchaser and Accountant paid some bills in cash, and the same invoice was paid by cheque because there is no internal control or segregation of duties; this is a common practice in companies where one Accountant deals with all financial matters. For example, in an account of the company writing cheques, the same Accountant is preparing payment vouchers, clearing all company bills including telephone/internet and Utilities paying fuel and maintenance, preparing wages and paying salaries, etc.
We found the same thing in every small and medium company and only one Accountant dealing with all financial matters. They kept unprofessional staff to assist them because they would like to commit financial fraud. They knew that if they held a professional and qualified accountant, they would not be able to commit fraud until or unless the other Accountant was involved with them.
Here we would like to share one of our experiences which we found during our Audit; one of my clients appointed our company for an audit of their books of accounts. Before we started the Audit, we met with the owner and asked him why he wanted to do the Audit and the main objective in his mind; he said he has a good business but always has cash flow problems and no cash available to meet daily expenses requirements. As a result, cheques are bounced from the bank due to insufficient funds.
He has a hotel business in Dubai, and they have two 4-star hotels in Dubai; all the time, hotels rooms are occupied, and all restaurants are busy with customers, but still, they have cash flow problems, so the owner of the hotel is very disappointed, and he has no idea what is happing in his surrounding and what he has to do to control the financial matters. So, according to the owner, we plan and perform our Audit.
We decide to start the vouch the vouchers. Vouching for the voucher means we take them one by one payment vouchers and start certifying, like a sequence of payment vouchers followed by supplier invoice/bills, whether or not LPO is attached, requisition approved by the management, or if goods are received in-store or not. If goods are received, GRN should be connected with payment vouchers, so we expend much time on vouching vouchers, and we found that much payment of vouchers is not completed with all required documents. Most things happen with a cash payment or cash purchases, so we separate all these types of coupons which is not met the necessary payment procedure.
Then we start tracing actual expenditure from the bottom to the end of the voucher. So first, we checked requisition, then we checked approval from authorized signatories, and then we checked quotation followed by LPO to the supplier. Delivery notes from the supplier and GRN are attached, as goods are entered in inventory and payment vouchers. During our examination, we found so much missing information, but mostly we found payment vouchers and invoices and physical goods not found in the hotel; for example, the hotel bought a digital camera that we entered in current assets, but the physical camera was not found in the hotel, and no one has proper answer where the camera has gone. One more thing, we found a sound system for the club. We noticed that the excellent system had been changed and hotel management bought a new sound system, so we traced the old sound system and found that the old sound system was missing without knowledge of any control.
Cash Payment Vs. Cheque Payment
During our vouching and tracing process, we found many transactions for the same items that were being paid in cash. Cheques also produce the same thing because duplicate copies are attached, and approvals and requirements documents are missing; this happened because only one Accountant and his assistants controlled the accounting department are not qualified, nor do they hold any professional experience.
Due to all this misconduct and misappropriation, the company lost 10 million Dirhams in two years.
Importance of Internal Audit
In the example mentioned above, we show you the emphasis and importance of internal audit control. If the company has established an internal audit team, that team is responsible for independent testing to determine if audit objectives have been met. The audit function evaluates how effectively the organization has completed its internal control requirements. That includes reviewing policies and procedures and controls testing to conclude the effectiveness of controls. So, you can say that the internal audit function assures the organization meets risk and control objectives.
Finally, we conclude that if a company spends little to establish an internal audit team, it can save future financial risk and losses due to the lack of internal control and policies. The scope of an internal audit can be broad to cover internal controls over financial reporting, fraud investigation, and compliance with other laws and regulations.