Question

You are the senior on the audit of Smartpart (Pty) Ltd, a company which wholesales a large range of motor vehicle accessories to garages, panel beating businesses and
   
specialist accessory shops. The company sells only on credit to account holders.
Smartpart (Pty) Ltd has expanded quickly over the past few years and the accounting system related internal controls are proving to be inadequate. You have therefore requested various members of the audit team to document the company's systems to enable to enable you to evaluate them. One of your best trainees, Anton Goosen, has presented you with the following narrative pertaining to certain functions in the revenue and receipts cycle.

Order receiving/sales authorisation

No aspect of the order receiving function is computerized. Orders are received by phone, or mail. Customers sometimes place an order by phone and within two or three days send a written order to confirm the phone order. When a customer phones, the call is put through to Eddie Mercs, the sales order clerk. On taking the call, if he does not recognize the voice of the caller, he asks name and confirms that the customer has an account referring to an up-to- customers. This list reflects details. (He also has up to date product price lists so that he is able to answer price queries.) lf Eddie Mercs is satisfied that the caller is an account holder, he fills out a single part (original only, no copies) preprinted, prenumbered internal sales order (ISO) by inserting the custom number (which he obtains from the customer list) and recording the description and quantity of the goods ordered on the ISO. At this point the telephone conversation is terminated. Eddie Mercs then completes the ISO by filling in the customer's name and delivery address and signing it.

If the caller does not appear on the list of customers, (i.e. is not an account holder) Eddi Mercs fills in a preprinted new customer form (NCF) by obtaining ( over the phone) the postal/delivery address and contact details as well as the names of the business's bankers and two trade references. Eddie Mercs then completes the ISO in the normal manner with the exception of inserting the customer;s account number.

All incoming mail is received by Pearl Pillay the receptionist who, assisted by one of the clerks from accounting, enters details of all letters, customer orders etc in a mail register. She and the accounts clerk both sign the mail register. she and the accounts clerck both sign the mail register. Whatever has been received is then distributed. All customer orders go to Eddie Mercs, who makes out an ISO for each order, taking the details from the customer order.
    
before he goes home at 4:30pm, Eddie Mercs places the day's ISO on the stores controller, Kobus Marais' desk, and if there are any NCF's, gives them to Precious Gumede, the senior debtors administrator. (She allocates an account number to the new customer, files the NCF and updates the customer list.)

Warehouse and Despatch   
Again no aspect of these functions is computerized. Each morning Kobus Marais splits the between his two assistant storemen who pick the goods ordered from the shelves. The goods picked are placed in cardboard boxes with the ISO but the box is not sealed. As the items are picked, the assistant storeman ticks them off on the ISO. If the quantity ordered is greater than the quantity on hand, the storeman changes the quantity ordered on the ISO to the quantity actually picked. If the item ordered is completely out of stock, the ISO will be changed to 0 for that item. The assistant storemen sign the ISOs once they have picked the items ordered. Once the goods have been picked, they are moved to the despatch area. Hawke Mathebula, the despatch clerk, extracts the ISO from the box and makes out a preprinted, sequenced four part Delivery Note (DN), copying all details from the ISO onto the DN. He places the top copy in the box, and addresses and seals the box. The 2nd copies, along with a delivery list, are ha boxes to be delivered against the copies of the despatch notes and delivery list as the boxes are loaded onto the truck. Hawke Mathebula attaches the ISO to the 3rd copy of the DN and sends them (in well controlled batches) to the accounting section for invoicing at a later stage. The 4th copy of the DN remains as a fast office in despatch.

YOU ARE REQUIRED TO identify and explain the weaknesses in the order receiving/sales authorization and warehouse/despatch functions as described above.
Notes:
1. Your explanation should convey the reason why you believe the weaknesses identified are, in fact, weaknesses. 2. You are not required to make recommendations to address the weaknesses.

Subject: Auditing 2A

Answer 1

Weakness in order receiving/ sales department:

1.Eddie Mercs - Considering that the company deals in wholesale, there'd be quite a large number of customers to deal with. Recognizing a customer by voice is not only inefficient as the number of customers grow but also possesses a significant weakness. Eddie merely verifies them by name if their voice isn't familiar to him. Anybody who works in the same department/ company of the customer can get that information and use it to place orders. Further, a written order goes through after a minimum or 2 - 3 days after the phone order. In the meantime, Eddie prepares the ISO and processes the transaction without waiting for the written order.

2. Since Eddie is in control of order receiving and preparing ISO, he could easily draw up fraudulent ISO without any orders in to get a commission on sales that were not made.

3. Eddie has control over delivery addresses too. There's a chance he could collude with a customer for a nominal fee unless the despatch department has a mechanism to verify the address.

4. kobus marai's desk has all the iso's and NCF's. Pearl pillay or even eddie could create fictitious NCF and create fictitious persons so that fraudulent deliveries can be made at a later point in time by either eddie or pearl or a co-conspirator.

Warehouse and despatch function

1. Boxes are unsealed when moving from warehouse to despatch - possibility that the boxes could be tampered and make corresponding changes to iso by the person the despatch department.

2. since one copy of the delivery note is sent to the accounts department for billing, there's a possibility that the accounting guy who places the order received in mail can place fictitious order and deliver the goods to a co-conspirator.