Question

Sandy is an accountant with ABC, Inc. She is newly hired and her first assignment is to review the processes in the REVENUE cycle for internal control weaknesses. Sandy finds the following procedures in the Revenue Cycle at ABC.

1. Sales are made via telephone. Most sales are on credit-with ABC extending the credit.

2. Sales data are entered into the system by a sales clerk in the batch mode at the end of the day.

3. The sales clerk manually enters the price and quantity on an order sheet and totals it.

4. The clerk then sends a copy of the sales order to the shipping department.

5. Upon receipt of the sales order, the shipping department “pulls” the merchandise, assembles it on a pallet, and completes the bill of lading.

6. The merchandise is then loaded on a truck and sent on its way.

7. The shipping department enters “SHIPPED” on the sales order and sends it to the sales accounting department.

8. The sales accounting department invoices customers by manually entering the customer name, part-number, quantity, price, and total from the sales order.

9. A copy of the invoice is sent to the customer and another copy is sent to the credit department for account receivable balance update.

10. Payment is made directly to the A/R department who posts the payment and deposits the checks.

REQUIRED: IN TWO PAGES OR LESS, LIST THE INTERNAL CONTROL WEAKNESSES IN THE ABOVE SCENARIO AND LIST THE INTERNAL CONTROLS THAT SHOULD BE PRESENT. ORGANIZE YOUR ANSWER AS FOLLOWS:

NUMBER WEAKNESS(S) INTERNAL CONTROL(S)

Answer 1

Number	Weakness(S)	Internal control(s)
1	Sales are made via telephone. Most sales are on credit-with ABC extending the credit. The background check of the customer is not done by extending the credit limit.	Sales order should be evaluated to ensure compliance with the approved credit limit.
2	Sales data are entered into the system by a sales clerk in the batch mode at the end of the day. There may be chances where the data is not entered completely and accurately. No approval before entering the data into the system.	The sales data should be entered into the system immediately on a real-time basis to avoid any delay and mismatch. The order should be properly evaluated and approved prior to the entry into the system and fulfillment by the company.
3	The sales clerk manually enters the price and quantity on an order sheet and totals it There are the chances of calculation mistakes and inefficiency of a sales clerk. There may be chances where the wrong price and quantity is entered by the sales clerk.	Only quantity should be entered manually by the sales clerk and the Prices should be automatically calculated by the system. (Item price should be predefined in the system to avoid any mistake)
4	The clerk then sends a copy of the sales order to the shipping department.	The quantity of sales order should be reconciled with the quantity in the system before sending it to the shipping department. The company should summaries the preparation of documents, Paper flow, and responsibility by individual and department from obtaining the sales order from the customer through shipping and billing the customer.
5	Upon receipt of the sales order, the shipping department “pulls” the merchandise, assembles it on a pallet, and completes the bill of lading. The packaging of the goods and safe storage has not taken care of. The product is not matched with the sales order to ensure the right product is delivered.	All the product and services should be delivered in an organized manner to maintain the highest customer services and quality level to ensure compliance with the applicable customs laws and regulation. The company should outline the steps for packing, safe storage, control and delivery of all product and services shipped by the company.
6	The merchandise is then loaded on a truck and sent on its way. Tracking of the product will not be available at the truck number and time of delivery is not entered in the system.	When loading the product to the truck the truck number should be kept in the record and the Time of delivery should be entered in the system.
7	The shipping department enters “SHIPPED” on the sales order and sends it to the sales accounting department.	Accounting is responsible for the timely preparation of the invoice. It should also maintain the accurate record of all accounts receivable. The company should specify the method for the preparation of invoice and accounts receivable record processing.
8	The sales accounting department invoices customers by manually entering the customer name, part number, quantity, price, and total from the sales order. There may be chances where the wrong name and quantity are entered and wrong invoicing is done.	The customer name and records should be taken from the system. Rather than entering it manually. The Quantity and price should be duly verified by the sales order before invoicing. An invoice should be signed by an authorized signatory.
9	A copy of the invoice is sent to the customer and another copy is sent to the credit department for account receivable balance update.	Accounts receivable masters should be updated and reviewed regularly. The company should provide action and method for processing late and duplicate payment.
10	Payment is made directly to the A/R department who posts the payment and deposits the checks.	The payment is received by A/R department but the entry should be done by the Accounting department. There should be proper segregation of duties.