Question

Inner Artist is a retailer of arts and craft supplies in the suburban Chicago area. It operates a single retail store and also has extensive catalog sales on account to area schools, churches, and other community organizations. Retail customers pay for supplies with cash, check, or credit card at the time of the sale. Occasionally, a credit customer may come into the store and purchase supplies on account. In such cases, the sales clerk is required to have the sale approved by the manager. The manager will authorize the sale if he or she recognizes the customer. The sales clerk must complete a charge slip for each sale on account. At the end of each shift, the sales clerk prepares a summary of cash collections. This report is forwarded to the accounting department. The charge slips are forwarded to the accounts receivable department at this time. The supervisor in the accounts receivable department verifies the information on the charge slip. Prices are matched with an approved price list. If errors are found, they are manually noted on the charge slip. A sales invoice is then prepared by the accounts receivable supervisor. The accounts receivable clerk mails the invoice to the customer. The accounts receivable supervisor enters invoices in the computer system each afternoon. At this point, the accounts receivable subsidiary ledger is created and details of the sale are forwarded to the accounting department. At month's end, the accounts receivable supervisor prints a monthly report of the accounts receivable subsidiary ledger and list of past‐due accounts. These reports are filed and referred to in cases of customer complaints or payment problems. A cashier supervises the sales clerks and performs the basic cash collection functions. The cashier opens the mail each day and stamps the check “For Deposit Only,” with the company's endorsement and bank account number. Checks are compared with any supporting remittance advice received with the check, and a daily listing of mail collections is prepared. Two daily deposits are prepared: one for the mail collections and another for cash register collections. A duplicate copy of all deposit slips is maintained by the cashier for use in the preparation of the monthly bank reconciliation. In the accounting department, a staff accountant receives documentation of cash collections from sales clerks and the cashier. The staff accountant uses the information to prepare the journal entry for posting to the general ledger. When all of the collections have been entered, the remittance information is transmitted electronically to the accounts receivable supervisor for purposes of updating the accounts receivable subsidiary ledger for the day's collections. Monthly account statements are prepared by the staff accountant and mailed to all customers. If a customer's account remains unpaid for six months, the staff accountant will notify the accounts receivable supervisor to write off the account as uncollectible. At this time, the credit manager is also notified of the account status so that additional credit will not be granted to this customer.

Required: From the facts of this scenario, describe the internal control risks associated with Inner Artist's internal controls over the revenues and cash collection processes. Prepare a business memo, addressed to Amanda Michelson, the company's owner/operator, describing your recommendations for correcting each of these problems.

Answer 1

There are numerous internal control risks associated with Inner Artist's controls over the revenues and cash collection process as mentioned against each of the highlighted process that is currently being followed:

The sales clerk must complete a charge slip for each sale on account. At the end of each shift, the sales clerk prepares a summary of cash collections. - There could be so many risks while completing charge slips and preparing a summary of cash collections, there should be an IT system on which the entries should be recorded both for charge slips and for recording the cash collection the moment the sale is being made to the customer, this will avoid many problems like data entry errors, mis-identification of the customer against the corresponding invoice, correct representation of all the elements of charge slip like when the sale is made , to whom it is made, amount of credit utilized, by when the payment is expected to be made and the amount of credit still left with the customer. The moment this is done , it should send a trigger to credit department to start ageing the debtors on the company's books . This will not only ensure correct representation of balance sheet movement with respect to debtors on daily basis but also in anticipating in future cash flow crisis that the company may experience.

This report is forwarded to the accounting department. The charge slips are forwarded to the accounts receivable department at this time. The supervisor in the accounts receivable department verifies the information on the charge slip. As mentioned earlier this work is redundant and prone to errors, verification of information on charge slip should be done the moment the customer has bought the goods

Prices are matched with an approved price list. If errors are found, they are manually noted on the charge slip. This process is too risky since the errors are being noted and on the charge slip without the consent of the customer. In this scenario, customer may object later on that the bill shown to him and the bill actually being charged are very different leading to loss of customer trust in the company's way of working though the company may be just correcting the errors recorded on the charge slips. Further , the customer may not agree to pay the amount shown on the charge slip as it was done in his absence and without his consent leading to bad debts on books which will paint a wrong picture of both the customer and the company's balance sheet

A sales invoice is then prepared by the accounts receivable supervisor. The accounts receivable clerk mails the invoice to the customer.  As mentioned earlier the entire process of recording the sales, preparing charge slip & its verification and giving the invoice to the customer should be done the moment the sale is being made by the customer and in presence of the customer. For this to happen, a robust IT system needs to be in place which links customer's past record , customer's existing ledger, customer's credit worthiness/limits to the current day sales being made by the customer instantaneoulsy

Doing this will not only bring the efficiency in the overall process, but will also eliminate the long process between customer sales and its recognition, will remove the umpteen no of redundant steps that are currently being done, improve the overall collection process by taking instant authorization of the customer on the credit sales being made, accurate reporting of the numbers on the company's account, better cash flow management, cost savings due to no requirement of intermediary colleagues between sale being made and the collection process