Question

Following describes the credit sales procedures for clothing wholesaler that sells name-brand clothing to department stores and boutique dress shops. The company sells to both one-time and recurring customers. A flowchart of the system is provided in the figure labeled Problem 5: Internal Control. Customer orders are received by fax and e-mail in the sales department. The sales clerk, who works on commission, approves the credit sale, calculates commissions and discounts, and records the sale in the sales journal from the PC in the sales department. The clerk then prepares a sales order, a customer invoice, and a packing slip, which are sent to the accounting department for processing. The accounting clerk updates the AR Subsidiary ledger and sends an invoice to the customer. The clerk then forwards the sales order and packing slip to the Warehouse-Shipping Department. The warehouse-shipping clerk picks the items from inventory and sends them and the packing slip to the carrier for shipment to the customer. Finally the clerk updates the inventory subsidiary ledger and files the sales order in the department. Cash receipts from customers go to the mailroom, which has one supervisor overseeing 32 employees performing similar tasks: a clerk opens the envelope containing the customer check and remittance advice, inspects the check for completeness, reconciles it with the remittance advice, and sends the remittance advice and check to the accounting department. The accounting department clerk reviews the remittance advice and the checks, updates the AR subsidiary ledger and records the cash receipt in the cash receipts journal. At the end of the day, the clerk updates the AR Control, Cash, and Sales accounts in the general ledger to reflect the day’s sales and cash receipts.

Required

a. Describe the uncontrolled risks associated with this system as it is currently designed.

b. For each risk describe the specific internal control weakness(s) in the system that causes or contributes to the risk

Answer 1

a)There are multiple uncontrolled risks that can contribute to this system as it is designed. Some examples of the risks using the current system are: lending credit to customers with poor credit, cash fraud, mailroom supervision, shipping the wrong items to customers or sending too much or too little, and inventory fraud.

b)

• Lending credit to customer with poor credit – with each sales clerk in control of approves the credit sale, calculates commission, approves the credit sale, calculates commissions and discounts, and records the sale in the sales journal and works off commissions, should not be in control of approving credit. This should be handled by a separate department. The sales clerk may put their own personal gains in the way of what is best for the company.
• Cash fraud – the accounting department clerk controls too much. The clerk updates the AR Control, Cash, and Sales accounts in the general ledger to reflect the day’s sales and cash receipts. They could easily alter books. This needs to be split between different people in different departments.
• Mailroom supervision – with only one supervisor and 32 employees, it would be rather difficult to closely monitor everyone. Adding addition supervisors that can cover more employees and even another one above them, mistakes would be kept to a minimum.
• Shipping the wrong items to customers or sending too much or too little – there should be a control in place to double check the number on every order that comes in and ships out.the company should try to be spot on with each customer order
• Inventory fraud – the warehouse/shipping department control picking up goods, updating inventory, and sending goods to carrier. This leaves room for someone to falsify inventory and take inventory for themselves. These jobs should be split into separate departments: the warehouse and shipping/receiving.