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RISKS AND INTERNAL CONTROLS
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
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 mail room, 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
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- Use the following flowchart of the cash receipts subsystem for Rockmart Manufacturing for questions 4-8. Customer checks Customer remittance advices Separate remittance advices and checks Customer remittance advices Customer checks Prepare tape Customer checks Paper tape Assemble into batches Batches of remittance advices B Customer remittance advices Paper tape Remittance advices Error listing and D summary information Daily accounts receivable run E A 4. The customer checks accompanied by the control tape (refer to symbol A) would be: a. forwarded daily to the billing department for deposit. b. taken by the mail clerk to the bank for deposit daily. c. forwarded to the treasurer for deposit daily. d. accumulated for a week and then forwarded to the treasurer for deposit weekly. [CMA adapted] 5. The appropriate description that should be placed in symbol B would be: a. keying and verifying. b. collate remittance advices. 6. The next action to take with the customer remittance advices…arrow_forwardAble, an accounts payable supervisor for ABC Company, bought supplies for a company he owned on the side. Able entered vouchers in ABC Company’s accounts payable system for the cost of the supplies. Checks were cut to pay for these unauthorized expenses during normal daily check runs. The goods ordered were drop-shipped to a location where Able could collect them. This is an example of: a. An expense reimbursement scheme b. A commission scheme c. A billing scheme d. An invoice kickback schemearrow_forwardWhich of the following best represents a key control for ensuring sales are properlyauthorized when assessing control risks for sales? A. The separation of duties between the billing department and the cash receipts approval department. B. The use of an approved price list to determine unit selling price. C. Copies of approved sales orders sent to shipping, billing, and accounting departments. D. Sales orders are sent to the credit department for approval.arrow_forward
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