describe the specific internal control weakness (s) in the system that causes or contributes to the risk.
XYZ Limited is a clothing wholesaler that sells name-brand clothing to department stores and boutique dress shops. The Figure at the end of this question describes the credit sales procedures of XYZ Limited. In particular, the Figure describes different business activities of four departments including (1) Sales Department, (2) Accounting Department, (3) Warehouse/Shipping, and (4) Mailroom. Further, these activities are elaborated below.
The sales department received the customer orders by fax and email. You should be aware that these sales orders are usually unstandardised sales orders.
The sales clerk, who works on commission, performs the following tasks:
- approves the credit sales,
- calculates commission and discounts, and
- records the sales in the sales journal from the PC in the sales department.
After entering these records, the sales clerk then prepares three documents, including (1) a sales order, (2) a customer invoice, and (3) a packing slip. These documents are forwarded to the department of accounting for further processing.
The accounting clerk receives these documents and updates the accounts receivable subsidiary ledger. After updating this subsidiary ledger, the accounting clerk forwards the invoice to the customer. According to the prevailing standards, the accounting clerk forwards the sales order and packing slip to the warehouse/shipping department.
Based on this given information, the warehouse/shipping clerk arranges the inventory and sends the inventory along with 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 mailroom, 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 check, updates the AR subsidiary ledger, and records the cash receipts journal's cash receipt. 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:
For each risk, describe the specific internal control weakness (s) in the system that causes or contributes to the risk.
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