Write an IOM to the CEO concerning your analysis of the following case stating s

Question

Write an IOM to the CEO concerning your analysis of the following case stating strengths and weaknesses giving testing tools and recommendation for controls.

A Ocean View Spa Company is a 15-store chain in the Midwest that sells hot tubs, supplies and accessories. Each store has a full-time, salaried manager and an assistant manager. The sales personnel are paid an hourly wage and a commission based on sales volume.

The company uses electronic cash registers to record each transaction. The salesperson enters his or her employee number at the beginning of his/her shift. For each sale, the salesperson rings up the order by scanning the item’s bar code, which then displays the item’s description, unit price, and quantity (each item must be scanned.) The cash register automatically assigns a consecutive number to each transaction. The cash register prints a sales receipt that shows the total, any discounts, the sales tax, and the grand total.

The salesperson collects payment from the customer, gives the receipt to the customer, and either directs the customer to the warehouse to obtain the items purchased or makes arrangements with the shipping department for delivery. The salesperson is responsible for using the system to determine whether credit card sales are approved and for approving both credit sales and sales paid by check. Sales returns are handled in exactly the reverse manner, with the salesperson issuing a return slip when necessary.

At the end of each day, the cash registers print a sequentially ordered list of sales receipts and provide totals for cash, credit card, and check sales, as well cash and credit card returns. The assistant manager prepares a daily reconciled report for the store manager’s review.

Cash sales, check sales, and credit card sales are reviewed by the manager, who prepares the daily bank deposit. The manager physically makes the deposit at the bank and files the validated deposit slip. At the end of the month, the manager performs the bank reconciliation. The cash register tapes, sales invoices, return slips, and reconciled report are mailed daily to corporate headquarters to be processed with files from all the other stores. Corporate headquarters returns a weekly Sales and Commission Activity Report to each store manager for review.

Explanation / Answer

IOM (Internal Office Memo)

Testing of Controls

Strengths

1. Use of ERP software to record sales and sales return transactions.

2. Control on approved credit card sales or Check sales.

3. Daily reconciliation report preparation.

4. Centralization of records at corporate headquarters ensuring control over the accounting records.

5. Weekly communciation on sales and commission activity report from corporate headquarters to the individual stores managers.

Weaknesses

1. No segregation of duties: all kind of sales i.e. cash, check sales, credit card sales are reveiwed by the manager and the same manager prepares the daily bank deposit. again, same manager makes depsoit at the bank and files validated deposit slip. at month end, manager performs the bank reocnciliation.

2. No checking of physical cash with the reports: there is no checking in place for physical cash against cash sales reported by sales person.

Suggestion

There should be an independent person for depositing slips in bank and store manager should not do this work. further on daily basis, physical cash check should be conducted by assistant manager. In addition, a surprise cash check should be done by store manager once in a while to keep things under control.

Overall the present controls in place are satisfactory and can be strengthened further as suggested above.

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