Question

Florist Blossom Sdn Bhd (FB) has been in the flower and gift business for several years. The recent Covid-19 pandemic has affected the business quite severely in the year 2020. In December 2020, the company changed its full operation to online deliveries of fresh and artificial flowers, and gifts and started a membership program for its customers. Since then, the business performance improves gradually as many customers turn to online orderings and they get 20% discounted prices for their chosen special celebrations when customers signed up for the membership which costs around RM20. The membership lasts every two years, for which they can renew for the same cost.

FB sells flowers and gifts by cash through online transfer. The company has planned to allow the use of debit and credit cards but it will be implemented when sales reached RM2,000,000 per year. As of now, the company’s revenue stands at around RM100,000 to RM150,000 per month where RM30,000 to RM50,000 are coming from the sales of membership.

Once products are ordered and paid online by customers, the company immediately recognises the sales although the orders have not been delivered. The sales recognition includes the full price paid for the 2-year membership. FB’s auditor, Mr Insta, has discovered the following when discussing with the Chief Executive Officer (CEO) of FB, Miss Tweety:

• It is the company’s policy to deliver the orders within 5 working days. Sales orders of fresh flowers cannot be refunded. Only sales orders of artificial flowers and gifts can be returned subject to a 5% penalty within 5 days, and a 15% penalty within 10 days. After 10 days, customers are not allowed to make sales returns.

• The customer orders are managed by Mrs Famy who receives the orders, records the sales and cash receipts and delivers the goods. No staff is specially allocated to handle sales returns.

• Since January 2021, the company has increased its membership tremendously. Membership of customers can be revoked on a yearly basis, but none during the first year. Based on estimation, only 10% of customers revoke their membership after one year.

Required:

I) Identify three (3) risky areas or accounts in the above case and state one (1) related management assertion for each area.

II) For each of the risky areas in (i) above, describe one (1) internal control activity that must be performed to overcome the weakness.

III) For each of the risky areas in (i) above, suggest one (1) test of controls and one (1) substantive test of transactions or details to be done on the accounts related to the sales and cash receipts system of FB Sdn Bhd.

IV) For any two (2) of the risky areas in (i) above, suggest one (1) substantive analytical procedure to be done on the accounts related to the sales and cash receipts system of FB Sdn Bhd.

Answer 1

(I) Refer to the tables below:

NO	I) RISKY ACCOUNTS	I) MANAGEMENT ASSERTIONS
1	Account Receivable	Occurrence
2	Sales	Valuation and allocation
3	Sales return and allowances	Completeness

 

(II) Refer to the tables below:

NO	I) RISKY AREAS	I) MANAGEMENT ASSERTIONS	II) INTERNAL CONTROL ACTIVITY
1	Account Receivable	Occurrence	Management has to ensure that it has delivery records in place to track and monitor the delivery of orders that have been made or not before recognized as sales to put under account receivable
2	Sales	Valuation and allocation	Management must have a computer software in place to track, monitor and allocate  the return of sales orders.
3	Sales return and allowances	Completeness	Management of FB needs to select staff to manage sales return, record the sales return in credit memo with the accurate amount.

 

(III) Refer to the tables below:

 

NO	I) RISKY AREAS	III) TESTS OF CONTROL	III) SUBSTANTIVE TESTS OF DETAILS
1	Account Receivable	the delivery records in place to track and monitor the delivery of orders that have been made or not before recognized as sales to put under account receivable.	Review the delivery records to ensure that the orders were delivered within 5 working days or not. Compare the details on the invoices with the shipments records for description, quantity and customer identification and the items had been delivered to the customer.
2	Sales	to examine the return records in computer software in place to track and monitor the return of sales orders.	Review the return records to ensure that the sales orders were returned within 5 days and 10 days, respectively.
3	Sales return and allowances	Examine the return slip of the returned flowers (goods) before issuing the credit memo.	Vouch sales return journal entry to supporting document including return slip for the sales return and credit memo.

 

(IV) Refer to the tables below:

 

NO	I) RISKY AREAS	IV) SUBSTANTIVE ANALYTICAL TEST
1	Account Receivable	Reviewing the current ratio over several reporting periods. This comparison of current assets to current liabilities should be about the same over time, unless FB has altered its policies related to accounts receivable, inventory, or accounts payable.
3	Sales	Comparing the days sales outstanding to the amount for prior years.  The relationship that exists between receivables and sales of FB should remain about the same over time.

Analyze the situation by assessing the risky areas with related management assertions and the internal control