AUDITING II HANDOUT PROBLEM 3 Score Name Section Essay Question (10 points). An

Question

AUDITING II HANDOUT PROBLEM 3 Score Name Section Essay Question (10 points). An auditor's working papers contain the narrative description for the cash receipts and billing function for a building supply company. The company has only one store that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of the store's sales are made to contractors in the construction business. The company employs 12 sales associates (which are on salary), a credit manager, three full time clerical workers, and several part time cash register clerks and assistant bookkeepers. The full time clerical workers perform such tasks as cash receipts, billing, and accounting and are adequately bonded. They are referred to in the narrative as "accounts receivable supervisor", "cashier", and "bookkeeper" Prepare a flowchart of the cash receipts and billing function based on the attached narrative. Indicate four weaknesses in internal control based upon the flowchart prepared and the narrative provided REQUIRED: (1) (2)

Explanation / Answer

1) Flowchart for cash receipts and billing function:-

Billing Function:-

Contractor approaches for purchase of goods >

Credit is approved by the credit manager. Those contractors having credit are given the products. >

Goods are sold to contractor. >

Invoice is prepared by the AR supervisor. >

Invoice is mailed to contractor by a part time employee. >

Details of Invoice is posted to AR subsidiary ledger by the AR supervisor. >

Transaction details are transmitted to the bookkeeper. >

Bookkeeper records the transaction in the AR primary ledger.

Cash Receipts function:-

Cashier opens the mail. >

Checks each check with the remittance advice. >

Stamps each check as "FOR DEPOSIT ONLY. >

Remittance advice is given to bookkeeper for recording. >

Cashier deposits the check and keeps the deposit slips. >

Forwards a copy of daily cash register summary to bookkeeper. >

Bookkeeper records the check receipts in the AR ledger and reduces the balance.

2) Following are the 4 major weaknesses in the internal control system:-

a) AR supervisor having access to preparation of invoice, mailing of invoice and recording in the subsidiary ledger. He can easily manipulate the accounts and invoices.

b) Cahier having the rights to open the mail, comparing the mail, depositing the check and finally the custody of the deposit slips. He can easily deposit the checks in incorrect accounts and manipulate the accounts. One person should open the mail and other should record it. No one person should have both the rights.

c) Bookkeeper having the authority to write off the accounts. Bookkeeper should not have any other rights other than recording. He should not have authorization rights.

d) CFO and credit manager should have the rights of authorisation to write off accounts and CFO should have custody rights of unclaimed checks and deposit slips.

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