In: Accounting
Revenue, collection and recording cycle (the process_
· Receipt of orders to ensure correctness
· Check if stock is available on hand
· Generation of sales orders based on stock availablility
· Credit is approved for each sales order
· Sales order is sent to the sales department
· Sales clerk prepares sales invoices which are not pre numbered
· 1 copy each of the invoice sent to customer,accountant,supervisor and sales clerk
· Sales clerk retains his invoice in the sales book
· Daily sales summary is made by each sales clerk which is used to calculate and record sales commission
· Accountant receives payments and records in the accounting system
· Accountant summarizes all the transactions. sales by sales clerk and total sales
· Accountant compares this summary with supervisor’s and sales clerk summary
· Computer updtes daily AR status.
a
Strength of Internal Control over sales and collection cycle
Acceptance of orders based on stock availability – Baby shop’s system of identifying stock availability is critical since the sku’s may be very high. It is very critical that the inventory is seamlessly updated and maintained. For any retail store stock is most valuable. If the inventory control mechanism is fool proof there is definitely no possibility of any pilferage. So the process of checking inventory before preparing a sales order is critical and important.
Credit Approval – Baby shop seems to be following a good credit approval system. Credit policy is strictly adhered to determine and amount of credit that can be approved to a customer. This is critical because excessive credit limits may result in defaults and bad debts. A conservative credit policy is very important for Baby shop to efficiently manage its working capital needs . Since each sales order is scanned completely before credit is approved the customer evaluation process is robust.
Receipt of money from customers – The accountant receives all the money collected from the customers. This is very important since he is the actual custodian of all receipts and payments. Unless he receives the collections it may be operationally difficult for him to record the transactions in customer accounts , prepare ageing reports and identify the AR at any given point in time.
b
Financial Report Assertion For The Above Internal Controls
Financial report assertions are generally official statements that show assertions of existence, completeness, rights and obligations, accuracy, presentation, valuation and disclosure. With respect to the 3 internal control listed above
Order acceptance is complete based on the availability of stocks. This also asserts that the inventory control processes are complete and accurate. Based on the reliability and correctness in the process of inventory records valuation of inventory at the end of the period/year is accurate.
Credit approval system is directly related to AR and working capital. Efficiency of any organisation’s working capital management would depend on the collection policy. Credit given based on a conservative credit policy will help Baby shop to mitigate the risk of bad debts. A good debtors turnover ratio and receivable collection days helps manage the working capital cycle prudently.
Accuracy with respect to the AR depends on the recording of transactions in the right manner. In order to achieve this it is important that the collections are directed to the accountant. Baby shop has adopted this system and hence AR management is efficient. Correct recording of transactions in respective customer accounts helps determining not only future credit limits but also the AR balance at any given date. Reports generated on ageing of AR helps in addressing issues related to customers. This process asserts a more accurate AR recording and reporting process.
c
Weakness in the System AT Baby Shop ( 1 weakness)
Invoice Generation, Recording And Reporting Process
Subsequent to order generation , the sales clerks prepare the respective invoices and dispatch the copies to all concerned. The weakeness identifiable at this point is that the invoices are not pre numbered. A good practice is to have an auto numbering sequence of invoicing to avoid tampering and frauds. This auto number will also act as a good reference point for all departments to resolve customer disputes that may arise. It also helps in inter department reconciliation easier and track customer shipments.
The sales clerk retaining invoices in the sales book is also a weakness and not a good practice and it should be documented in the order of date of dispatch. They act as good reference points later to reconcile customer accounts or reconcile monthly sales or in performing inter department reconciliation.