Question

C. The following activities describe revenue and cash receipt systems of Kiara Outdoor Berhad.

Kiara Outdoor Berhad is a Sintok based wholesaler of rafting and camping equipment that serves outdoor sports camping retailers throughout the northern area of peninsular Malaysia. You have been hired by Kiara Outdoor Berhad to evaluate their processes, risks and internal controls. Below is the revenue cycle procedures of Kiara Outdoor Berhad.

Sales Order Procedures

Customer orders are mailed or emailed to the sales department. The sales clerk checks the customer’s creditworthiness from a computer terminal by running a validation application. The credit check program determines if the customer’s account is up to date regarding payments and the customer has not exceeded his or her credit limit. Computer controls in the application prevent further processing of any transactions that fails the credit check. The credit manager may override the validation control.

The clerk then records the sales order through his/her computer terminal after the customer’s credit is verified. A digital copy of the order is distributed to the warehouse and shipping department for further processing. The sales clerk records the sales in the sales journal. Finally, the clerk files the hard copy of the customer order in the sales department.
The warehouse manager is prompted by receipt of the digital sales order on the warehouse terminal. The manager prints out two copies of order, the stock release and a shipping notice. A warehouse clerk uses the stock release to pick the selected items from the shelves and sends them to the shipping department along with stock release and the shipping notice. The warehouse manager then updates the inventory subsidiary ledger and the general ledger control account from his/her computer terminal.

The shipping clerk will match the goods, stock release and shipping notice to the corresponding digital sales order displayed on his terminal. The shipping clerk will print out three copies of the bill of lading and a packing slip if goods and all documents are match. Two copies of bill of lading and the packing slip are sent along with the goods to the transporter. The stock release copy and shipping notice are sent to the accounts receivable (AR) department. The third bill of lading copy is filed in the shipping department.

Upon receipt of the stock release and shipping notice, the AR clerk manually creates a hard copy invoice which is immediately mailed to the customer. The clerk then uses information on the stock release to update the AR subsidiary ledger and general ledger (GL) from his computer terminal. The clerk files the stock release and shipping notice in the AR department.

Cash Receipt Procedures

Customer payments come directly to the general mail room along with other mail items. The mail clerk sorts the mail, opens the customer payment envelope, removes the customer’s cheque and remittance advice (RA) and reconciles the two documents. The clerk manually prepares two hard copies of remittance list to control the cheques and RA. One copy will be sent to the AR department along with the corresponding RAs. The other copy of remittance list accompanies the cheques to the cash receipts department.

Once the cheques and remittance list arrive in the cash receipt department, the accounts clerk reconciles the documents, endorses the cheques and manually prepares three hard     copies of deposit slip. The clerk then updates the cash receipts journal and the GL from his computer terminal. Then he sends the cheques and two copies of deposit slip to the bank.
Finally, he files the third copy of the deposit slip and the remittance in the department.

The AR clerk reconciles the remittance list and RAs then updates the AR subsidiary ledger and GL. Finally, the remittance list and RAs are filed in the department.

REQUIRED:

(a) Identify FIVE (5) internal control weaknesses of revenue systems at Kiara Outdoor Berhad.

(b) Identify ONE (1) risk involves for EACH internal control weaknesses identified in (a).

(c) Suggest ONE (1) physical control procedure for EACH internal control weakness identified in (a).

(d) Suggest ONE (1) information technology (IT) control procedure for EACH internal control weakness identified in (a).

Answer 1

(a).

1. Credit manager overriding the validation control for credit worthiness of customers.
2. Sales clerk recording the sales in sales journal after digital copy of the purchase order received from customer is distributed to the warehouse and shipping department after verifying the credit worthiness of the client for further processing
3. Customer payments coming directly to the general mail room along with other mail items.
4. The mail clerk manually preparing two hard copies of remittance list to control the cheques and RA.
5. The accounts clerk manually preparing three hard copies of deposit slip.

(b). Risks involved in :

1. Credit unworthy or customers who have defaulted payment can also be included in the llist of good customers by the credit manager as per his wish.
2. Right after receiving the purchase order, the credit manager himself pass the entry for sale without the actual sale taking place. There arae chances that the goods might not have despatched or there are delays in sale to happen. In that case, bogus sales will be recorded.
3. There are chances that the clerk can miss out the important payment cheques after getting mixed up with others.
4. While doing a manual work, it increase the burden on the mail clerk and thereby increasing the chances for making errors and mistakes.
5. While doing a manual work, it increase the burden on the mail clerk and thereby increasing the chances for making errors and mistakes.

(c).Physical Control Procedures in:

1. Appointing a secondary person to verify that the credit manager allowed only credit worthy customers.
2. Ensure that the sales which is recorded in the books has actually taken place and proper measures has been taken to reverse those sales transactions that are already recorded in the system, but was not completed during the year.
3. Proper monitor need to be introduced such that the cheques are not mixed up with others or a mechanism where-in the company can fix a particular type of letter cover in which such cheques and details are to be sent to the company from the client.
4. The task of preparing two hard copies of remittance list to control the cheques and RA can be given to another employee in the company who is not having high level of works.
5. The task of preparing three hard copies deposit slip can be given to another employee in the company who is not having high amount of work.

(d). IT Control Procedures in:

1. Make the system capable of deciding the credit worthiness with the help of the data and prohibit any access to it from the employees.
2. The company can introduce a system that automatically posts the entries once the goods move out of the premises or the conditions as to sale has been completed such that the sale could be recognized in the books.
3. The company can introduce an effective and secured online payment option wherein the payments are automatically done online and the effect has got captured in the system automatically.
4. A system can be introduced which automatiaclly prepares the required copies of remittance list to control the cheques and RA.
5. A system can be introduced which automatiaclly prepares the required copies deposit slip.