Question

A new audit client of your processes its sales and cash receipts and cash receipts documents in the following manner:

Cash Receipts

The mail is opened each morning by a mail clerk in the sales department. The mail clerk prepares a remittance advice (showing customer and amount paid) if one is not received. The cheque and remittance advices are then forwarded to the sales department supervisor, who reviews each cheque and forwards the cheque and remittance advices to the accounting department supervisor. The accounting department supervisor, who also functions as the credit manager, review all cheques for payments of past due accounts and then forwards the cheque and remittance advices to account receivable clerk, who arranges the advices in alphabetical order. The remittance advices are posted directly to account receivable ledger. The cheques are endorsed by stamp and totaled. The total is posted to the cash receipts journal. The remittance advices are filed chronologically.

Sales

Salesclerks prepare the sale invoices in triplicate. The original and the second copy are presented to the cashier. The third copy is retained by the salesclerk in the sale book. When the sale is for cash, the customer pays the salesclerk, who presents the money to the cashier with invoice copies.

A credit sale is approved by the cashier from am approved credit list after the salesclerk prepares the three-part invoice. After receiving the cash or approved invoice, the cashier validates the original copy of the sales invoice and gives it to the customer. At the end of each day, the cashier recaps the sales and cash received and forwards the cash the second copy of all sales invoices to the account receivable clerk. The account receivable clerk balances the cash received with cash sale invoices and prepare a daily sales summary. The credit sales invoices are posted to the account receivable ledger, and then all invoices are sent to the inventory control clerk in the sales department for posting to the inventory control ledger.

The cash from cash sales is combined with the cash received on account, and this constitutes the daily bank deposit.

Bank Deposit

The bank validates the deposit slip and returns the second copy to the accounting department, where it is filed by date by the accounts receivable clerk. Monthly bank statements are reconciled promptly by the accounting department supervisor and filed by date.

Required:

i. Prepare a flowchart for the sales and cash receipts application of your client above.

(CLO2:PLO2:C3)

ii. Explain FIVE (5) potential internal control weaknesses and corrective actions should be taken in the client procedures above.

(CLO2:PLO2:C2)

iii. What is remittance advice? Explain the functions of remittance advice in a cash receipts business process above.

(CLO2:PLO2:C2)

Answer 1

Answer:-

(i)        Flowchart ( see below part of the answer ):

(ii)

Weaknesses	Corrective Action
No control over opening of mail to prevent abstraction of receipts at that point.	The employee opening mail receipts should be supervised. An alternative procedure would be to utilize a bank "lock box" system.
Checks and remittance advices are not separated.	Remittance advice should not stay with remittances after preparation. Cash should go directly to a cashier and then to the bank.
The credit function (review for past-due accounts) should not be in the accounting department.	This function should be coupled with the credit-granting function, which is usually placed under the treasurer.
Customer remittances should not come to the accounting department.	This violates a necessary separation of functions.
Accounts receivable clerk is overworked and has incompatible duties.	Aside from handling cash, this employee maintains the accounts receivable ledger, the cash receipts journal, and the sales journal. Some of these duties should, if possible, be given to other employees.
There are two separate cash receipts flows.	Counter receipts and mail receipts should be coordinated and sent directly to the cashier.
The "cashier" is in the sales department and performs a credit granting rather than a cashier's function.	The cashier's function should be transferred to a position under the treasurer and handle all cash. Credit should not be approved in the sales department if it appears there could be a conflict of interest.