A friend of yours, Ben Jones, recently purchased all the shares in Campit (Pty) Ltd, a wholesaling company which sells all kinds of goods for camping. The company sells only on credit. Debtors pay only by cheque or EFT. The previous owners who were also the directors, spent more time socialising than in looking after the business, choosing to leave the running of the business in the hands of various managers and other employees. The goods which the company sells are popular so the business has survived this ownership neglect, and your friend sees potential in the company. He asked you to have a look at the accounting system and internal controls which you did, only to find that, despite the design, and the documentation of the system being basically sound, the control awareness and proper operation of control activities by employees was poor. The cycle has been broken down into the usual functions for a revenue and receipts cycle and all functions are adequately staffed. On reporting to Ben Jones, his response was “OK, as I am the sole director and will not be involved much in the business I want you to explain two things to me. Firstly if we assume that the staff are honest but careless, or as you say, not very control aware, what could go wrong in the revenue and receipts cycle, and secondly, if some of the staff are dishonest, including the managers, how could they be stealing from or defaulting the company?” Required a) Explain to Ben Jones what could go wrong in the revenue and receipts cycle, assuming that all staff are honest but careless and not very control aware (15) b) Explain how dishonest employees (including managers) could be stealing from/defrauding the company in this cycle. (10)
A friend of yours, Ben Jones, recently purchased all the shares in Campit (Pty) Ltd, a wholesaling company which sells all kinds of goods for camping. The company sells only on credit. Debtors pay only by cheque or EFT. The previous owners who were also the directors, spent more time socialising than in looking after the business, choosing to leave the running of the business in the hands of various managers and other employees. The goods which the company sells are popular so the business has survived this ownership neglect, and your friend sees potential in the company. He asked you to have a look at the accounting system and internal controls which you did, only to find that, despite the design, and the documentation of the system being basically sound, the control awareness and proper operation of control activities by employees was poor. The cycle has been broken down into the usual functions for a revenue and receipts cycle and all functions are adequately staffed. On reporting to Ben Jones, his response was “OK, as I am the sole director and will not be involved much in the business I want you to explain two things to me. Firstly if we assume that the staff are honest but careless, or as you say, not very control aware, what could go wrong in the revenue and receipts cycle, and secondly, if some of the staff are dishonest, including the managers, how could they be stealing from or defaulting the company?”
Required
a) Explain to Ben Jones what could go wrong in the revenue and receipts cycle, assuming that all staff are honest but careless and not very control aware (15)
b) Explain how dishonest employees (including managers) could be stealing from/defrauding the company in this cycle. (10)
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