Question

Billing

When Mr. Harris receives a delivery advice he matches them with the open sales orders and reviews them for agreement in products and quantities ordered and delivered. If they match, Mr. Harris initials the delivery advice and enters the date of delivery into the open sales order file on the PC. The computer automatically prices the products, calculates product amounts, totals the invoice, and calculates the cash discount, which is 2/10 net 30. The computer then prints a sequentially numbered, four-part sales invoice and writes the specifics of the sale to a daily-computerized sales file. The bookkeeper records gross sales, not net. Copies one and two of the invoice are mailed to the customer. Copy three is filed by the customer and copy four, along with the delivery advice, sales order, and approved sales requisition, are filed by invoice number.

In the afternoon, Mr. Harris uses the sales recording software to access the daily sales record, the accounts receivable subsidiary ledger file, and the sales journal file. Sales for the day are posted at their gross amounts to the individual customer's subsidiary accounts receivable and to the sales journal file. The latter file is accessed monthly by the software to summarize sales by product and to make monthly postings to the general ledger. The subsidiary ledger is used to review customer credit worthiness, to manage collections, and to determine write-offs.

Collections Management and Write-offs

The controller, Ms. Jones, whose secretary runs the software to produce an aged account receivable trial balance by customer, manages collections. A working trial balance is generated at least once a week and more frequently if collections lag. Ms. Jones decides what to do about specific accounts. Menu-driven software permits the Secretary to look up individual customer accounts, to write off invoices or whole accounts, and to generate customer statements for invoices past due by any specified number of days. The software also permits the printing of pre-drafted letters to the customers to accompany any of these actions. It is normal practice for Ms. Jones to consider write-offs only once at the end of the month. Southwest's general policy is to write off any invoice exceeding six months from the time of sale. However, Ms. Jones is authorized to make all final write-off decisions. The bookkeeper credits the allowance account if write-offs are subsequently collected. The accounts receivable subsidiary ledger is reconciled to the general ledger monthly.

Once each month, another software routine is used to add interest to customers' accounts equal to 1% of all invoices past due by 30 or more days. This routine also lists the interest charges by invoice by account in an interest journal, summarizes transactions for the month, and posts the total to the interest revenue and accounts receivable accounts in the general ledger.

Sales Returns

If customers receive incorrect or damaged items, they typically call and indicate they want to return the goods. One of the officers approves the return and notifies the warehouse to accept the returned goods. When the customer returns the goods, a warehouse clerk completes a receiving report. The warehouse retains one copy, the customer's representative receives a copy, and the bookkeeper receives a copy. Mr. Harris enters the data for the return and the original sale into his PC. The computer records the return in an open credit memorandum file and prints a two-copy credit memorandum. Mr. Harris sends the credit memorandum to the controller, Ms. Jones for approval; she then returns it to Mr. Harris. Upon receipt of the signed credit memorandum, Mr. Harris enters Ms. Jones initials into the credit memorandum record on his PC. The computer then posts the credit to the customers' accounts receivable and transfers the credit memorandum information to the sales return file, from which the entries in the Sales Returns Journal are made by the computer system monthly. Southwest exchanges defective goods the the good's supplier for undamaged goods or, if the supplier prefers, the damaged units are disposed of and an allowance is received on the next purchase.

Cash Receipts

The receptionist opens the mail daily, restrictively endorses all checks received, and routes the other mail to appropriate personnel. She separates the checks from the remittance advice (copy two of Southwest's sales invoice) and sends the checks to the Secretary-treasurer, Cecilia Cheng, who prepares the bank deposit slip and takes the deposit to the bank. The bank deposit form is a three-copy form. The first and second copies go to the bank with the checks, and Mr. Smith, the accountant receives the third copy.

The receptionist forwards the remittance advices to Mr. Smith, who first reviews them for appropriateness of any discounts taken and enters them into a daily cash receipts file on his PC. After printing a listing of the remittance file and reconciling it to the deposit slip copy provided by Ms. Cheng, Mr. Smith runs software that posts the individual receipts, to include the amount of any cash discounts, to the customers' accounts receivable and the total to the cash receipts journal file. The day's remittance advices are filed by customer number and the copy of the deposit slip is filed by date.

- Identify four transaction processing control weaknesses somewhere within the four steps identified above.

1. describe the control weakness;
2. describe how the weakness could create a material error in the financial statements including which accounts and assertions (i.e., completeness, validity, accuracy, security) might be affected; and
3. make a recommendation on how their controls could be improved to mitigate this weakness.

Answer 1

Area	Control weakness	Accounts and assertions, How it effects	Recommendation
Billing	Absence of matching delivery advice against the sales order automatically	Accounts affected: Accounts receivable, Discounts allowed Assertions: Accuracy In the given situation, the process of matching the delivery advice with open sales orders is haphazard. There is a high probability of mismatching the same, which results in incorrect records of Open sales orders, incorrect deliveries, incorrect customer accounts being debited, incorrect calculations of discounts. In short, there is high probability of errors occurring in the whole process of receivables recording.	Company to introduce a system of matching the delivery advice with Sales order automatically. The company can implement a system of marking the Sales order unique identification number on the delivery advice itself to match both.
Collections management and Write-off	Absence of segregation of duties or maker-checker control	Accounts affected: Accounts receivable, Allowance A/c Assertions: Accuracy In the given situation, though Ms. Jones decided the action to be taken for individual accounts, the Secretary can look up individual accounts, write off invoices or whole accounts and generate customer statements. There are no segregation of duties or maker-checker controls. There is high opportunity to commit fraud or write off any customer account in the books	Company to introduce maker-checker controls by which Secretary records the write offs, but the same gets posted only when Controller approves it
Sales returns	Absence of documentation regarding the call for return of goods Absence of proper controls over using the initials of other employees	Accounts affected: Accounts receivable, Sales returns Assertions: Security In the given situation, there is no proper mail communication or written communication regarding the return of goods, implying that there is no evidence of communication from the customer. (This proves to be disadvantageous especially when the time period within which the return occurred cannot be traced). Mr. Harris enters Ms. Jones initials into the credit memorandum. Initials cannot be used by other employees. Ms. Jones herself can initial the credit memorandum to avoid frauds in future	Company to implement system of written communication from the customer for return of goods Company to implement strict initials usage policy
Cash receipts	Delay in recording the receipts	Accounts affected: Bank Assertions: Security The recording of receipt happens at the end in the given process. Ideally, the recording of receipt in company's books of Accounts should happen first and then the checks may be sent to the Bank for collection. Delays in recording the receipts may lead to incorrect Customer ageing and non-availability of information of available cash	Company to implement a system of recording the receipts first and then sending the same for collection