Question

In: Finance

What are the internal control weaknesses in the following company's revenue cycle? And what are the...

What are the internal control weaknesses in the following company's revenue cycle? And what are the potential impacts of these weaknesses on the organization? And give some suggested specific internal controls?

Customers place orders on the company’s website, via email, or by telephone. Due to a renewed interest in music, this year sales have increased significantly. All sales are on credit, with 17% of credit sales in the last 12 months needing to be written off as uncollectible. This included several large online orders to first-time customers who denied ordering or receiving the merchandise.

Customer orders are picked and sent to the warehouse, where they are placed near the loading dock in alphabetical sequence by customer name. The loading dock is used both for outgoing shipments to customers as well as receiving incoming deliveries. There are ten to twenty incoming deliveries every day, from a large number of sources.

The increased volume of sales orders has resulted in a large number of errors where customers have been sent the wrong items. There have also been delays in shipping as items that supposedly were in stock could not be found in the warehouse. Although a perpetual inventory is maintained, there has been no physical count of inventory for over two years. When an item is missing, the warehouse staff notes the information down in a log book. At the end of the week, the warehouse staff uses the log book to update the inventory records.

The system is configured to prepare the sales invoice only after shipping employees enter the actual quantities sent to a customer, thereby ensuring that customers are billed only for items actually sent and not for anything on back order. Terms of trade are payment within 21 days of invoicing, with a 2% discount offered for payments made within 5 days. Approximately 50% of Strings long standing repeat customers pay within the 5 days.

Solutions

Expert Solution

1. The ballooning 17% credit write off is the alarming situation and must be rectified using the mechanisms such as insurance, advance payments or credit sales.

2. To better manage the inventory, IT infrastructure must be made robust by investing in the latest software so as to reduce the lost inventory and reduce the inventory holding period.

3. Credit can be extended to the customers with better repayment history and for new customers, credit period must be reduced and a certain down payment must be taken

4. Remote monitoring through CCTV cameras and personal intervention must be used to ensure that the staff is not stealing.

Potential Impact:

1. It impacts the top line of the business, thus reducing the profitability of the business and shareholder's wealth.

2. Weak internal controls may lead to weakening credit rating thus increasing the cost of borrowings.

3. It hinders the growth of the business and acts as hurdle for the new business opportunnities.


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