2. EVALUATION OF INTERNAL CONTROLS The Never Sink Canoe (NSC) Company is a small manufacturer of high-quality canoes, pontoons, and fishing craft. It sells its products to sporting good stores throughout the northeast United States and parts of Canada. NSC began as a small family- owned company that served a local market. Over the years, it expanded its market through the use of seasonal sales force employees. The sales staff work on straight commission and travel extensively while taking orders from customers at sporting outlets and trade shows during the water sports and fishing season. All sales are on credit and pay- ment is due within 30 days after being billed. In late fall when the season ends, the temporary sales per- sonnel are laid off until the following spring. Employee turnover is high with approximately 50 percent of the laid-off sales staff returning the fol- lowing year. NSC’s revenue and expense procedures associated with its sales force activities are as follows: The salesperson takes an order, reviews the custo- mer’s creditworthiness, and submits the approved order to the accounting clerk at the main office who calculates the sales commission to be remitted and promptly writes a check to the salesperson. The clerk then sets up an accounts receivable for the cus- tomer. The clerk also receives cash in payment of customer accounts and updates the related customer AR records. The order is then sent to the billing department, where the sale is recorded and the customer is billed. Finally, the order is sent to the warehouse where the items are selected, packaged, and shipped to the cus- tomer. The warehouse clerk then updates the inven- tory subsidiary ledger to reflect the shipment. Sales staff periodically submit travel expense reimbursement claims on hard-copy forms to the accounting clerk. NSC policy requires sales staff to keep receipts, but they are not required to submit them with the reimbursement forms. The clerk pre- pares an account payable for each salesperson based on their reimbursement form and twice each month writes checks for them for the amount indicated in their individual AP account. After the end of the past season, and after the temporary employees had been laid off, NSC finan- cials showed a substantial rise in sales compared to previous years. These increases were, however, offset to a great extent by a high rate of product returns. Furthermore, travel expenses were disproportion- ately high compared with previous years. Required a. Using the COSO internal control model for con- trol activities (e.g., transaction authorization, and segregation of duties), identify any potential internal control weaknesses in the NSC system. b. For each weakness, discuss the potential for fraud in the system. c. Make recommendations for correcting each iden- tified control weakness.
12. EVALUATION OF INTERNAL CONTROLS The Never Sink Canoe (NSC) Company is a small manufacturer of high-quality canoes, pontoons, and fishing craft. It sells its products to sporting good stores throughout the northeast United States and parts of Canada. NSC began as a small family- owned company that served a local market. Over the years, it expanded its market through the use of seasonal sales force employees. The sales staff work on straight commission and travel extensively while taking orders from customers at sporting outlets and trade shows during the water sports and fishing season. All sales are on credit and pay- ment is due within 30 days after being billed. In late fall when the season ends, the temporary sales per- sonnel are laid off until the following spring. Employee turnover is high with approximately 50 percent of the laid-off sales staff returning the fol- lowing year. NSC’s revenue and expense procedures associated with its sales force activities are as follows: The salesperson takes an order, reviews the custo- mer’s creditworthiness, and submits the approved order to the accounting clerk at the main office who calculates the sales commission to be remitted and promptly writes a check to the salesperson. The clerk then sets up an
a. Using the COSO internal control model for con- trol activities (e.g., transaction authorization, and segregation of duties), identify any potential internal control weaknesses in the NSC system.
b. For each weakness, discuss the potential for fraud in the system.
c. Make recommendations for correcting each iden- tified control weakness.
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