- 25 Marks
AA – L2 – Q32 – Internal Control Systems
Question
When considering the internal controls in a revenue cycle, the auditor will need to consider the following stages:
- the processing of orders; and
- the despatch and return of goods
Required:
(a) Specify the control objectives for each of the above stages in a revenue cycle where all sales are made on a credit basis and explain their importance.
(b) List the internal controls you would expect to see in place in a simple manual system in order to achieve those objectives.
Answer
(a)
| Control objective | Explanation of importance |
|---|---|
| Processing of orders | |
| To ensure that orders are only accepted from creditworthy customers. | To reduce the risk that bad debts occur. |
| To ensure that orders are only accepted at an appropriate price. | To avoid subsequent disputes over price/discount and to avoid accepting orders on which a loss would be made. |
| To ensure that orders are only accepted if goods of appropriate quality are in inventory. | To reduce the risk of goods being returned due to their poor quality and the loss of customer goodwill due to the acceptance of an order which could not be properly fulfilled. |
| Despatch of goods | |
| To ensure that goods are despatched promptly. | To reduce the risk of a loss of customer goodwill due to the late despatch of an order. It will also (for perishable goods) minimise the deterioration of inventory and avoid net realisable value problems. |
| To ensure that goods are only despatched after authorisation. | To reduce the risk of bad debts and avoid despatch notes being raised for goods not currently in inventory. |
| To ensure that customers acknowledge the receipt of goods. | To avoid subsequent disputes over delivery. Without proof of delivery, this could lead to financial loss. |
| Return of goods | |
| To ensure that returned goods are only accepted for genuine reasons. | To avoid customers being given refunds for invalid reasons. |
| To ensure that only saleable goods are returned to inventory. | If faulty goods are not separately identified, the faulty goods could be despatched to another customer or inventory value could be overstated. |
| (b) Internal controls |
|---|
| Processing of orders |
| – Establish credit limits for all customers. |
| – Credit limits should be authorised by the sales director. |
| – Prior to acceptance of an order, compare the balance on the customer’s sales ledger account to their credit limit. |
| – Check order price to current price list prior to acceptance of the order. |
| – Check discounts to approved discount list. |
| – Any variations should be authorised by the sales director. |
| – Check availability of goods (to stores or inventory records). |
| Despatch of goods |
| – Prepare pre-numbered sales orders from approved customer orders. |
| – Regularly review outstanding sales orders and despatch goods as soon as available. |
| – Prepare pre-numbered despatch notes for approved sales orders. |
| – Only despatch goods for which a pre-numbered despatch note has been prepared. |
| – Despatch notes should be two part. The customer should sign as proof of delivery. One copy should be retained and returned. |
| Return of goods |
| – Review reason for return of goods and assess validity. |
| – Credit notes should be authorised by a responsible official. |
| – A pre-numbered goods returned note should be raised recording quantity and reason for return. |
| – Physically inspect returned goods, noting any damage on the goods returned note. |
| – Store faulty goods separately, clearly identified as such. |
- Topic: Internal Control Systems
- Uploader: Samuel Duah