Question

The customer billing and collection functions of the ThanksMe Company, a small paint manufacturer, are attended to by a receptionist, an accounts receivable clerk, and a cashier who also serves as a secretary. The company’s paint products are sold to wholesalers and retail stores.

The following describes all the procedures performed by the employees of the ThanksMe Company regarding customer billings and collections:

1. The mail is opened by the receptionist, who gives the customers’ purchase orders to the accounts receivable clerk. Fifteen to twenty orders are received each day. Under instructions to expedite the shipment of orders, the accounts receivable clerk at once prepares a five-copy sales invoice form, which is distributed as follows:

a) Copy 1 is the customer billing copy and is held by the accounts receivable clerk until notice of shipment is received.

b) Copy 2 is the accounts receivable department copy and is held for the ultimate posting of the accounts receivable records.

c) Copies 3 and 4 are sent to the shipping department.

d) Copy 5 is sent to the storeroom as authority for release of the goods to the shipping department.

2. After the paint order has been moved from the storeroom to the shipping department, the shipping department prepares the bill of lading and labels the cartons. Sales Invoice Copy 4 is inserted in the carton as a packing slip. After the trucker has picked up the shipment, the customer’s copy of the bill of lading and Copy 3, on which any undershipments are noted, are returned to the accounts receivable clerk. The company does not back order in the event of undershipments; customers are expected to reorder the merchandise. The company’s copy of the bill of lading is filed by the shipping department.

3. When Copy 3 and the customer’s copy of the bill of lading are received by the accounts receivable clerk, Copies 1 and 2 are completed by numbering them and inserting quantities shipped unit prices, extensions, discounts, and totals. The accounts receivable clerk then mails Copy 1 and the copy of the bill of lading to the customer. Copies 2 and 3 are stapled together.

4. The individual accounts receivable ledger cards are posted by the accounts receivable clerk using a one-write system, whereby the sales register is prepared as a carbon copy of the postings. Postings are made from Copy 2, which is then filed, along with staple-attached Copy 3, in numerical order. Monthly, the general ledger clerk summarizes the sales register for posting to the general ledger accounts.

5. Since the ThanksMe Company is short of cash, the deposit of receipts is also expedited. The receptionist turns over all mail receipts and related correspondence to the accounts receivable clerk, who examines the checks and determines that the accompanying vouchers or correspondence contain enough detail to permit the posting of the accounts. The accounts receivable clerk then endorses the checks and gives them to the cashier, who prepares the daily deposit. No currency is received in the mail, and no paint is sold over the counter at the factory.

6. The accounts receivable clerk uses the vouchers or correspondence that accompanied the checks to post the accounts receivable ledger cards. The one-write system prepares the cash receipts register as a carbon copy of the postings. Monthly, the general ledger clerk summarizes the cash receipts register for posting to the general ledger accounts. The accounts receivable clerk also corresponds with customers about unauthorized deductions for discounts, freight or advertising allowances, returns, and so on and prepares the appropriate credit memos. Disputed items of large amounts are turned over to the sales manager for settlement. Each month the accounts receivable clerk prepares a trial balance of the open accounts receivable and compares the resulting total with the general ledger control account for accounts receivable.

Required:

I) Identify four (4) internal control weaknesses in the ThanksMe Company’s procedures related to customer billings and remittances and the accounting for these transactions.

II) For each weakness, identify one (1) error or irregularity that could result.

III) For each weakness, list one (1) substantive audit procedure for testing the significance of the potential error.

Answer 1

(I)

1. Improper duty segregation

- Accounts receivable clerk is assigned a variety of tasks.

2. The lack of supervision (Monitoring control)

- No double checks from a supervisor before proceeding with the next procedure.

3. Lack of authorization control

- The account receivable clerk controls the unauthorized deduction and no authorization process from individuals beyond accounts receivable department.

4. Non-independence in reconciliation process (Reconciliation)

- Bill of lading is filed by the shipping department. Therefore, the sale invoices and bill of lading are not reconciled independently by someone outside of the shipping department.

 

(II)

1. Goods released by unauthorized individuals

2. Accounting errors would not be detected

3. Error in providing allowances

4. Incorrect shipment to customers

 

(III)

1. The audit team should perform inquiry with employees of the department to understand what they are responsible for

2. The audit team can check the balance of books of accounts

3. The audit team can contact customers to confirm that accounts receivable balances are correct

4. The audit team can trace the customers' invoices to master file for names and amounts

Highlight the weaknesses that comes from the internal control and predict the possible error that could happen from the weaknesses and plan the substantive procedure to overcome it.