TOPIC 41 INTERNAL CONTROL SALES CYCLE

Transcription

1 TOPIC 41 INTERNAL CONTROL SALES CYCLE To understand the need for controls, it is helpful to break down the sales process into its component stages. Bear in mind that a purchase (see next Session) is simply a sale viewed from the other party s perspective, and hence much of the documentation (and many of the controls) is a mirror of the sales process. The table shows the various stages of the sales.cycle., together with: What could go wrong Control procedures to meet the control objectives (that things don t go wrong!) It is essential that you understand the difference between: OBJECTIVES what the company wants to achieve (or avoid) PROCEDURES what the company does to address its objectives- i.e. Control Activity put in place 1

2 Stage in Cycle Risks/Objectives Control Activity Order Received 1. Order may be forgotten 2. Customer unlikely to pay Goods Despatched (or service performed) 3. Product not available 4. Goods are dispatched to poor credit risks 1. Wrong items sent 2. Customer does not receive delivery Invoice raised 1. Wrong items invoiced 2. Invoice does not add up 3. Delay in posting invoices 4. Errors in posting to Receivables Control Account 1. All orders confirmed in writing 2. Carry out credit checks for new customers 3. Warehouse checked before orders accepted 4. Customer credit limit is reviewed prior to goods being dispatched 1. Goods dispatch note prepared from Order form and all dispatches checked against GDN before they leave the warehouse. 2. A named person at customer is required to sign for goods, confirming receipt 1. Invoice checked against GDN 2. Random invoices arithmetic checked 3. Sequence checks on invoicing to ensure complete posting 4. Control Account reconciled on a regular basis to the Receivables Listing 2

3 Payment Received or.. 1. Errors in posting payment to the Receivables Control Account 2. Payment is stolen by employees 3. Settlement discount wrongly allowed Note: The awarding of credit is a particularly dangerous area as the easiest way to hide stolen money is to give customers credit instead 1. Control Account reconciled on a regular basis to the Receivables Listing 2. The post is opened by 2 people, both independent of the Accounts dept. A further non Accounts employee banks money 3. All settlement discounts to require authorisation of senior responsible official Credit Given (i.e. Sales Returns) 4. Delay in Banking 5. Customer does not pay/is slow to pay 1. Wrong Amount credited 2. Unauthorised credit given 3. Sales returns mistakenly accounted for as purchases 4. Regular Bank reconciliations to spot delays in banking 5. Credit control function to chase customers 1. Credit notes referenced back to original invoice 2. Goods to be returned and checked to ensure credit deserved. All credit notes to be authorised by manager 3. Booking system for returns, with separate holding area 3

4 NOTES All documents should be pre-numbered in a sequence, so that completeness and validity are easy to verify All documents should be cross-referenced, so that it is easy to trace from the original order through to the Accounts COMMON FRAUDS Money Received Is Stolen By Staff Stolen money is hidden by false entries to the Receivables Ledger Receipt of money (whether by post, or by bank transfers) should be organised by different staff to those able to make entries to the Receivables Ledger (segregation of Duties Control Activity) In Shops, Money Stolen By Staff Cash, so more attractive/easy to steal (Cash & Inventory are very susceptible to theft) In McDonalds, staff have uniforms without pockets Cash registers should need keys to open These keys identify the member of staff Cash registers require staff to enter PRODUCTS rather than amounts to stop overcharging (and then stealing the excess) Price lists should be easily accessible to customers, to avoid overcharging Reconcile till record to cash therein (over/unders list published daily Supermarkets!) 4

5 INTERNAL CONTROL CHECKLISTS FOR THE SALES CYCLE. As noted earlier, auditors need to establish what controls are in operation, document the system (ICQ & ICEQ), and then test that controls are operating properly. We also saw that one method of documenting controls was to use some form of internal control questionnaire/checklist. For sales, an Internal Control Questionnaire (ICQ) would be a checklist of questions to establish which controls were in operation. For example: ICQ SALES ORDERS RECEIVED Q1 Are all new customers credit-checked before goods are sent on credit? Q2 Are all sales orders received in writing on standard, pre-numbered forms? If the auditor is using an Internal Control Evaluation Questionnaire (ICEQ), the layout would be slightly different, with an emphasis on establishing whether specific errors/frauds are possible, rather than establishing whether certain desirable controls are in operation ICEQ - SALES ORDER RECEIVED Q1 Could the company send goods on credit to a customer who is unlikely to pay? (important to auditors as it impacts on the need for a doubtful debt provision) Answer no, because of the following controls: All new customers are credit checked using an external reference agency Customer is then given a credit limit, which is reassessed every 3 months 5

6 TESTS OF CONTROL OF SALES (for inclusion in a work programme). If you can come up with control procedures, then tests of control are easy simply ask yourself how you would find out if a particular control procedure had taken place? What evidence might exist? With some controls, the easiest form of evidence may be to observe the control in operation (one of the reasons auditors like to attend a client s inventory count). For those controls that have operated in the past, inspection of documents showing that the control took place (e.g. a signature to evidence authorisation) might be suitable. CONTROL TEST For a sample of customers, obtain the customer file and inspect written reply from credit reference agency. This test proves customer that a control exists over the screening of a potential customers credit worthiness so as to minimise the risk of selling to poor credit risk customers EXERCISE: LENTON Your firm is the auditor of Lenton Textiles and you have been asked to work on the sales system. 6

7 Lenton sells its goods to shops. Most sales are made on credit, but very small customers collect their purchases and pay in cash. For these cash sales: The customer orders the items from the sales department, which raises a pre-numbered multi-copy advice note. The despatch department make up the order and give it to the customer with a copy of the advice note. The customer gives the advice note to the cashier, who prepares a handwritten sales invoice. The customer pays by cheque or with cash. The cashier records and banks the cash. For credit sales, cheques and cash are received by post. The post is opened by two people, who record cash and cheques received. The cheques and cash are given to the cashier who records them in the cash book and pays them into the bank. The cashier reports the cheques and cash received to the sales accounting department, which posts them to the receivables ledger. Credit notes must be authorised before being sent to customers and posted to the receivables ledger. Required: a) State the weaknesses in the cash sales system. b) Explain why two people should open the post containing cash and cheques. c) List the reasons why credit notes may be issued and describe the audit work you would perform to ensure that all credit notes have been authorised for a valid reason. 7

8 SOLUTION TO EXERCISE: Lenton (a) Cash Sales CPA P2 Audit Practice & Assurance Services Sales invoices are not sequentially numbered (without this it is impossible to monitor completeness of sales recording). There is no control to ensure payment for goods. Goods should only be released upon receipt of an invoice verified by the cashier. As the cashier raises the invoice there is no control to correct any errors he might make. For example, he may use incorrect prices. There is no control to ensure that the cashier banks all of the cash. A separate employee should check that for every advice note there is an invoice, and should perform regular reconciliations of the cash book to the bank statements. (b) Mail Two people should open the mail because it involves both recording of a transaction, and custody of an asset. An individual would be able to pocket money and not record its arrival. Of course, the benefit of using two staff members may be lost if they collude with each other, so mail-opening duties should ideally be rotated on a regular basis. (c) Credit notes Main reasons for them being issued are: Company were not able to fulfil the entire order Mistakes on the invoice leading to overcharging Faulty goods Failure to give relevant discounts 8

9 The main audit work to verify credit notes would be: Select a sample of credit notes and agree amounts back to original invoice If goods were returned, look for evidence of a returns note, and checks having been done on the product Inspect credit note for evidence of authorisation by a senior official (i.e. a signature) Review correspondence with the customer to check reason for credit If credit is due to pricing errors, check correct prices to price lists (or the order) Check the credit note sequence to ensure it is complete, and free from additional out of sequence items 9