PurchaseCycle

Purchase

requisition

Goods

receivednote

Invoice

Remittance

advice

Orderform

(GRN)

Paymentmade

invoiced&recorded

Goodsreceived

Orderstage

Purchase-controlobjective

thepurchasecanenjoycompetitivepriceandsatisfiedquality

thegoodsbeingpurchasedarereallyrequiredbythecompany

thegoodsreceivedaretheitemsonordersandwithcorrectquantityandgoodquality

allgoodsorderedhavebeenreceivedintime

allpurchasetransactionshavebeenaccountedforthetransactionhasbeenaccountedforcorrectly

allpaymentshavebeenauthorisedproperlyandthusnoerrororfraudinpaymentsuchaspaymenttwice

Background-control

Objective

Staffintheorderingdepartmentusethislisttoplaceorderswithauthorisedsuppliers.

Ensurethepurchasecanenjoycompetitivepriceandsatisfiedquality

Background-control

Objective

Alldeliveriesarecheckedagainsttheordersplacedfilebeforebeingaccepted.Ahand-writtenpre-numberedgoodsreceivednote(GRN)israisedinthegoodsinwardsdepartment

Ensurethegoodsreceivedaretheitemsonordersandwithcorrectquantityandgoodquality

Background-control

Objective

TheordersplacedfileisupdatedwiththeGRNnumbertoshowthatthepartshavebeenreceived

Ensureallgoodsorderedhavebeenreceivedintime.

Inadditionifnocheckismadeagainstorderthenthecompanymayhavesignificantpurchaseorderswhichareoutstanding,leadingtolostsales.

Background-control

Objective

Paperinvoicesaresentbyallsuppliersfollowingdispatchofgoods.Invoicesaresenttotheaccountsdepartment,wheretheyarestampedwithauniqueascendingnumber.

Ensureallpurchasetransactionshavebeenaccountedfor

Background-control

Objective

InvoicedetailsarematchedtotheGRN,whichisthenattachedtotheinvoice.

EnsuretheinvoicesreceivedareconsistentwithGRNs

InadditionifnomatchmadeagainstGRNsthenthecompanymayaccountforthetransactionincorrectly.

Background-control

Objective

Invoicedetailsarethenenteredintothecomputerisedpayablesledger.Theinvoiceissignedbytheaccountsclerktoconfirmentryintothepayablesledger.

Ensureallinvoicedreceivedhavebeenaccountedfor

Background-control

Objective

After30days,thepayablesledgerautomaticallygeneratesacomputerisedlistofpaymentstobemade,whichissentelectronicallytothechiefaccountant.

Thechiefaccountantcomparesthislisttotheinvoices,signseachinvoicetoindicateapprovalforpayment

Ensureallpaymentshavebeenauthorisedproperlyandthusnoerrororfraudinpaymentsuchaspaymenttwice

PurchaseCycle2

June2013Q1andmanagementletter

AstheexternalauditorsofFoxIndustriesCo,writeareporttomanagementinrespectofthepurchasingandpaymentssystemdescribedabovewhich:

IdentifiesandexplainsFOURdeficienciesinthesystem;and

Explainsthepossibleimplicationofeachdeficiency;and

Providesarecommendationtoaddresseachdeficiency.AcoveringletterISrequired.

Note:

Uptotwomarkswillbeawardedwithinthisrequirementforpresentationandtheremainingmarkswillbesplitequallybetweeneachpart.(14marks)

Introduction

FoxIndustriesCo(Fox)manufacturesengineeringparts.IthasoneoperatingsiteandacustomerbasespreadacrossEurope.Thecompany’syearendwas30April2013.Belowisadescriptionofthepurchasingandpaymentssystem.

Purchasingsystem

Wheneverproductionmaterialsarerequired,therelevantdepartmentsendsarequisitionformtotheorderingdepartment.Anorderclerkraisesapurchaseorderandcontactsanumberofsupplierstoseewhichcandespatchthegoodsfirst.Thissupplieristhenchosen.Theorderclerksendsoutthepurchaseorder.Thisisnotsequentiallynumberedandonlyordersabove$5,000requireauthorisation.

Purchasingsystem

Purchaseinvoicesareinputdailybythepurchaseledgerclerk,whohasbeenintheroleformanyyearsand,asanexperiencedteammember,hedoesnotapplyanyapplicationcontrolsovertheinputprocess.Everyweekthepurchasedaybookautomaticallyupdatesthepurchaseledger,thepurchaseledgeristhenpostedmanuallytothegeneralledgerbythepurchaseledgerclerk.

Paymentssystem

Foxmaintainsacurrentaccountandanumberofsaving(deposit)accounts.Thecurrentaccountisreconciledweeklybutthesaving(deposit)accountsareonlyreconciledeverytwomonths.Inordertomaximisetheircashandbankbalance,Foxhasapolicyofdelayingpaymentstoallsuppliersforaslongaspossible.Suppliersarepaidbyabanktransfer.Thefinancedirectorisgiventhetotalamountofthepaymentslist,whichheauthorisesandthenprocessesthebankpayments.

Reporttomanagement

DearSirs,

AuditofFoxIndustriesCo(Fox)fortheyearended30April2013

BoardofdirectorsFoxIndustriesCo15DogStreetCatTown

X Country6June2013

Pleasefindenclosedthereporttomanagementondeficienciesininternalcontrolsidentifiedduringtheauditfortheyearended30April2013.Theappendixtothisreportconsidersdeficienciesinthepurchasingandpaymentssystem,theimplicationsofthosedeficienciesandrecommendationstoaddressthosedeficiencies.

Pleasenotethatthisreportonlyaddressesthedeficienciesidentifiedduringtheauditandiffurthertestinghadbeenperformed,thenmoredeficienciesmayhavebeenreported.

Thisreportissolelyfortheuseofmanagementandifyouhaveanyfurtherquestions,thenpleasedonothesitatetocontactus.

YoursfaithfullyAnauditfirm

Background

controlweekness

Explanation

Implicaiton

Recommendation

control

ThiscouldresultinFox

orderinggoodsatamuch

Anapprovedsupplierlist

higherpriceoralower

shouldbecompiled;this

Whenraisingpurchaseorders,theclerkschoosewhicheversuppliercandespatchthegoodsthefastest

qualitythantheywouldlike,astheonlyfactorconsideredwasspeedofdelivery

Itisimportantthatgoodsaredespatchedpromptly,

butthisisjustoneofmany

shouldtakeintoaccountthepriceofgoods,theirqualityandalsothespeedofdelivery.

Oncethelisthasbeenproduced,allorders

shouldonlybeplacedwith

criteriathatshouldbeused

suppliersontheapproved

indecidingwhichsupplier

list.

touse.

Backgroundcontrolweekness

ExplanationImplicaiton

Recommendationcontrol

Purchaseordersarenotsequentially

FailingtosequentiallynumbertheordersmeansthatFox’sorderingteamareunabletomonitorifallordersarebeingfulfilledinatimelymanner;thiscouldresultinstockouts.

Iftheordersarenumbered,thenasequencecheckcanbeperformedforanyunfulfilledorders.

Allpurchaseordersshouldbesequentiallynumberedandonaregularbasisasequencecheckofunfulfilledordersshouldbeperformed.

Background

controlweekness

Explanation

Implicaiton

Recommendation

control

Purchaseordersbelow$5,000arenotauthorisedandareprocessedsolelybyanorderclerk.

ThiscanresultingoodsbeingpurchasedwhicharenotrequiredbyFox.Inaddition,thereisanincreasedfraudriskasanorderclerkcouldplaceordersforpersonalgoodsuptothevalueof$5,000,whichissignificant

Allpurchaseordersshouldbeauthorisedbyaresponsibleofficial.

Authorisedsignatoriesshouldbeestablishedwithvaryinglevelsofpurchaseorderauthorisation.

Deficienciesandcontrolsforpurchasesystem

Background

controlweekness

Explanation

Implicaiton

Recommendation

control

Purchaseinvoicesareinputdailybythepurchaseledgerclerkandduetohisexperience,hedoesnotutiliseanyapplicationcontrols.

Withoutapplicationcontrolsthereisariskthatinvoicescouldbeinputintothesystemwithinaccuraciesortheymaybemissedoutentirely.

Thiscouldresultinsuppliersbeingpaidincorrectlyornotall,leadingtoalossofsuppliergoodwill.

Thepurchaseledgerclerkshouldinputtheinvoicesinbatchesandapplyapplicationcontrols,suchascontroltotals,toensurecompletenessandaccuracyovertheinputofpurchaseinvoices.

Prctice2

PurchasecycleDec2010Q1

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GreystoneCoisaretailerofladiesclothingandaccessories.ItoperatesinmanycountriesaroundtheworldandhasexpandedsteadilyfromitsbaseinEurope.Itsmainmarketisaimedat15to35yearoldsanditspricesaremidtolowrange.Thecompany’syearendwas30September2010.

Inthepastthecompanyhasbulkordereditsclothingandaccessoriestwiceayear.However,iftheirgoodsfailedtomeetthekeyfashiontrendsthenthisresultedinsignificantinventorywritedowns.Asaresultofthisthecompanyhasrecentlyintroducedajustintimeorderingsystem.Thefashionbuyersmakeanassessmentninemonthsinadvanceastowhatthekeytrendsarelikelytobe,thesegoodsaresourcedfromtheirsuppliersbutonlylimitednumbersareinitiallyordered.

GreystoneCohasaninternalauditdepartmentbutatpresenttheironlyroleistoperformregularinventorycountsatthestores.

Orderingprocess

Eachcountryhasapurchasingmanagerwhodecidesontheinitialinventorylevelsforeachstore,thisisnotdoneinconjunctionwithstoreorsalesmanagers.ThesequantitiesarecommunicatedtothecentralbuyingdepartmentattheheadofficeinEurope.Anorderingclerkamalgamatesallcountryordersbyspecifiedregionsofcountries,suchasCentralEuropeandNorthAmerica,andpassesthemtothepurchasingdirectortoreviewandauthorise.

Asthegoodsaresold,itisthestoremanager’sresponsibilitytore-orderthegoodsthroughthepurchasingmanager;theyarepromptedweeklytoreviewinventorylevelsasalthoughthegoodsarejustintime,itcanstilltakeuptofourweeksforgoodstobereceivedinstore.

Itisnotpossibletoordergoodsfromotherbranchesofstoresasallorderingmustbeundertakenthroughthepurchasingmanager.Ifacustomerrequestsanitemofclothing,whichisunavailableinaparticularstore,thenthecustomerisprovidedwithotherbranchtelephonenumbersorrecommendedtotrythecompanywebsite.

GoodsreceivedandInvoicing

Tospeeduptheorderingtoreceiptofgoodscycle,thegoodsaredelivereddirectlyfromthesupplierstotheindividualstores.Onreceiptofgoodsthequantitiesreceivedarecheckedbyasalesassistantagainstthesupplier’sdeliverynote,andthentheassistantproducesagoodsreceivednote(GRN).Thisisdoneatquiettimesofthedaysoastomaximisesales.ThecheckedGRNsaresenttoheadofficeformatchingwithpurchaseinvoices.

AspurchaseinvoicesarereceivedtheyaremanuallymatchedtoGRNsfromthestores,thiscanbeaverytimeconsumingprocessassomesuppliersmayhavedeliveredtoover500stores.Oncetheinvoicehasbeenagreedthenitissenttothepurchasingdirectorforauthorisation.Itisatthisstagethattheinvoiceisenteredontothepurchaseledger.

Required:

AstheexternalauditorsofGreystoneCo,writeareporttomanagementinrespectofthepurchasingsystemwhich:

IdentifiesandexplainsFOURdeficienciesinthatsystem;

Explainsthepossibleimplicationofeachdeficiency;

iiiProvidesarecommendationtoaddresseachdeficiency.

Acoveringletterisrequired.Note:

Uptotwomarkswillbeawardedwithinthisrequirementforpresentation.(14marks)

PurchasecycleDec2010Q1

Background

controlweekness

Explanation

Implicaiton

Recommendation

control

Thepurchasing

Thiscouldresultin

managerdecideson

storesorderinggoods

Thepurchasingmanager

theinventorylevels

thatarenotlikelyto

shouldinitiallyholda

foreachstorewithout

sellandhencerequire

meetingwitharea

discussionwithstore

heavydiscounting.In

managersofstores;if

orsalesmanagers.

additionasafashion

meetingallstore

Thepurchasing

chain,ifcustomers

managersisnotpractical,

managermaynot

perceivethatthegoods

heshouldunderstandthe

havetheappropriate

arenotmeetingthe

localmarketsbefore

knowledgeofthe

keyfashiontrendsthen

agreeingjointlygoodsto

localmarketfora

theymayceasetoshop

bepurchased.

store

atGreystoneatall.

PurchasecycleDec2010Q1

Backgroundcontrolweekness

ExplanationImplicaiton

Recommendationcontrol

Thepurchaseordersareonlyreviewedandauthorisedbyapurchasingdirectorinawhollyaggregatedmanner(byspecifiedregionsofcountries).

Itwillbedifficultforthepurchasingdirectortoassesswhetheroverallthecorrectbuyingdecisionsarebeingmadeasthedetailoftheordersisnotbeingpresentedandheistheonlylevelofauthorisation.

Thiscouldresultinsignificantlevelsofgoodsbeingpurchasedthatarenotrightforparticularmarketsectors

Apurchasingseniormanagershouldreviewtheinformationpreparedforeachcountryanddiscusswithlocalpurchasingmanagersthespecificsoftheirorders.Theseshouldthenbeauthorisedandpassedtothepurchasingdirectorforfinalreviewandsignoff.

Background

controlweekness

Explanation

Implicaiton

Recommendation

control

Ifthestoremanagers

Automaticre-orderlevelsshouldbesetupintheinventorymanagementsystems.Asthegoodssoldreachthere-orderlevelsthepurchasingmanagershouldreceiveanautomaticre-orderrequest.

forgetorordertoolate,

Thestoremanagers

thenastheordering

areresponsiblefor

processcantakeupto

re-orderinggoods

fourweeks,thestore

throughthe

couldexperience

purchasingmanager

significantstockouts

leadingtolossof

income.

Background

controlweekness

Explanation

Implicaiton

Recommendation

control

Itisnotpossibleforastoretoordergoodsfromotherlocalstoresforcustomerswhorequestthem.

Insteadtheyaretoldtocontactthestoresthemselves,orusethecompanywebsite.

Customersarelesslikelytocontactindividualstoresthemselvesandthiscouldresultinthecompanylosingoutonvaluablesales.

Inadditionsomegoodswhichareslowmovinginonestoremaybeoutofstockatanother,ifgoodscouldbetransferredbetweenstoresthenoverallsalesmaybemaximised.

Aninter-branchtransfersystemshouldbeestablishedbetweenstores.Thisshouldhelpstoreswhosegoodsarebelowthere-orderlevelbutareawaitingtheirdeliveriesfromthesuppliers.

Weakness

Implicaiton

Control

Ifthesalesassistantsareonly

Thegoodsshouldthenbecheckedonarrivalforquantityandqualitypriortoacceptancefromthesupplier.AresponsibleofficialateachstoreshouldproducetheGRNfromthesupplier’sdeliveryinformation.

checkingquantitiesthengoods

Deliveriesare

whicharenotofasaleable

checkedby

conditionmaybeaccepted.

salesassistants

Theassistantsmaynotbe

tothesupplier’s

adequatelyexperiencedto

deliverynoteto

producetheGRN,andthisis

agreequantities

animportantdocumentusedin

butnotquality.

theinvoiceauthorisation

process.Errorscouldleadto

underoroverpayments.

Weakness

Implicaiton

Control

Goodsarebeingreceived

Acopyoftheauthorisedorderformshouldbesenttothestore.Thisshould

thenbecheckedtotheGRN.Oncecheckedtheordershouldbesenttoheadofficeandloggedascompleted.Onaregularbasisthepurchasingclerkshouldreviewtheorderfileforanyoutstandingitems.

withoutanychecksbeing

madeagainstpurchase

Deliveriesarecheckedbysalesassistantstothesupplier’sdeliverynotetoagreequantitiesbutnotquality.

orders.ThiscouldresultinGreystonereceivingandsubsequentlypayingforgoodsitdidnotrequire.Inadditionifnocheckismadeagainst

orderthenthecompanymayhavesignificant

purchaseorderswhich

areoutstanding,leading

tolostsales.

PurchasecycleDec2010Q1

Background

controlweakness

Explanation

Implicaiton

Recommendation

control

Amanualcheckingprocessincreasestheriskoferror,resultingininvoicesbeingacceptedorrejectederroneously.

ThecheckedGRNsshould

beloggedontothe

purchasingsystem,

Purchaseinvoicesare

matchedagainstthe

manuallymatchedto

relevantordernumber,

ahighvolumeof

thenastheinvoiceis

GRNsfromthe

receivedthisshouldbe

individualstores.

automaticallymatched.

Thepurchasingclerk

shouldthenreviewforany

unmatcheditems.

PurchasecycleDec2010Q1

Background

controlweakness

Explanation

Implicaiton

Recommendation

control

Iftheinvoiceis

Uponreceiptofaninvoicethisshouldbeloggedintoafileofunmatchedinvoices.Asitismatchedandauthoriseditshouldthenbemovedintothepurchaseledger.Attheyear-enditemsintheunmatchedinvoicesfileshouldbeaccruedfor,toensureliabilitiesarenotunderstated.

misplacedthen

Thepurchaseinvoiceisonlyloggedontothesystemasitisbeingauthorisedbythepurchasingdirector

payablesmaynotbesettledonatimelybasis.Inadditionattheyear-endthepurchaseledgermaybeunderstatedas

invoicesrelatingtothecurrentyearhavebeen

receivedbutarenotin

thepurchaseledger.

Salecycle1

Dec2013Q3

Controlobjectivesforsalesanddespatchsystem

Toensurethatordersareonlyacceptedifgoodsareavailabletobeprocessedforcustomers.

Toensurethatsalesdiscountsareonlyprovidedtovalidcustomers.

Toensurethatgoodsarenotsuppliedtopoorcreditrisks.

Toensurethatgoodsaredespatchedforallordersonatimelybasis.

Toensurethatgoodsaredespatchedcorrectlytocustomersandthattheyareofanadequatequality.

Toensurethatallgoodsdespatchedarecorrectlyinvoiced.

Toensurecompletenessofincomeforgoodsdespatched.

Toensurethatallordersarerecordedcompletelyandaccurately.

ListTWOcontrolobjectivesofOreganoCo’ssalesanddespatchsystem.(2marks)

IdentifyandexplainSIXdeficienciesinOreganoCo’ssalesanddespatchsystemandprovidearecommendationtoaddresseachofthesedeficiencies.(12marks)

Salesanddespatchsystem

SalesordersaremainlyplacedthroughOregano’swebsitebutsomearemadeviatelephone.Onlineordersareautomaticallycheckedagainstinventoryrecordsforavailability;telephoneorders,however,arecheckedmanuallybyorderclerksafterthecall.Afollow-upcallisusuallymadetocustomersifthereisinsufficientinventory.Whentakingtelephoneorders,clerksnotedownthedetailsonplainpaperandafterwardstheycompleteathreepartpre-printedorderform.

Theseorderformsarenotsequentiallynumberedandaresentmanuallytobothdespatchandtheaccountsdepartment.

Asthecompanyisexpanding,customersareabletoplaceonlineorderswhichwillexceedtheiragreedcreditlimitby10%.Onlineordersareautomaticallyforwardedtothedespatchandaccountsdepartment.

Adailypicklistisprintedbythedespatchdepartmentandthisisusedbythewarehouseteamtodespatchgoods.Thegoodsareaccompaniedbyadespatchnoteandallcustomersarerequiredtosignacopyofthis.Onreturn,thesigneddespatchnotesaregiventothewarehouseteamtofile.

Thesalesquantitiesareenteredfromthedespatchnotesandtheauthorisedsalespricesaregeneratedbytheinvoicingsystem.Ifadiscounthasbeengiven,thishastobemanuallyenteredbythesalesclerkontotheinvoice.Duetotheexpansionofthecompany,andasthereisalargenumberofsaleinvoices,extraaccountsstaffhavebeenaskedtohelpouttemporarilywithproducingthesalesinvoices.Normallyitisonlytwosalesclerkswhoproducethesalesinvoices.

Background-Deficiencies

Control

Inventoryavailabilityfortelephoneordersisnotcheckedatthetimetheorderisplaced.Theorderclerksmanuallychecktheavailabilitylaterandonlytheninformcustomersifthereisinsufficientinventoryavailable.

Thereistheriskthatwheregoodsarenotavailable,orderclerkscouldforgettocontactthecustomers,leadingtounfulfilledorders.Thiscouldleadtocustomerdissatisfaction,andwouldimpactOregano’sreputation.

Whentelephoneordersareplaced,theorderclerkshouldchecktheinventorysystemwhilstthecustomerisonthephone;theycanthengiveanaccurateassessmentoftheavailabilityofgoodsandthereisnoriskofforgettingtoinformcustomers.

Background-Deficiencies

Control

Telephoneordersarenotrecordedimmediatelyonthethreepartpre-printedorderforms;thesearecompletedafterthetelephonecall.

Thereisariskthatincorrectorinsufficientdetailsmayberecordedbytheclerkandthiscouldresultinincorrectordersbeingdespatchedorordersfailingtobedespatchedatall,resultinginalossofcustomergoodwill.

Alltelephoneordersshouldberecordedimmediatelyonthethreepartpre-printedorderforms.Theclerkshouldalsodoublecheckallthedetailstakenwiththecustomeroverthetelephonetoensuretheaccuracyoftheorderrecorded.

Background-Deficiencies

Control

Telephoneordersarenotsequentiallynumbered.

Thereforeifordersaremisplacedwhilstintransittothedespatchdepartment,theseorderswillnotbefulfilled,resultingindissatisfiedcustomers.

Thethreepartpre-printedordersformsshouldbesequentiallynumberedandonaregularbasisthedespatchdepartmentshouldrunasequencecheckofordersreceived.Wheretherearegapsinthesequence,theyshouldbeinvestigatedtoidentifyanymissingorders.

Background-Deficiencies

Control

Customersareabletoplaceonlineorderswhichwillexceedtheiragreedcreditlimitby10%.Thisincreasestheriskofacceptingordersfrombadcreditrisks.

Customercreditlimitsshouldbereviewedmoreregularlybyaresponsibleofficialandshouldreflectthecurrentspendingpatternofcustomers.Ifsomecustomershaveincreasedtheleveloftheirpurchasesandaremakingpaymentsontime,thenthesecustomers’creditlimitscouldbeincreased.

Theonlineorderingsystemshouldbeamendedtonotallowanyorderstobeprocessedwhichwillexceedthecustomer’screditlimit.

Background-Deficiencies

Control

Adailypicklistisusedbythedespatchdepartmentwhensendingoutcustomerorders.However,itdoesnotappearthatthegoodsarecheckedbacktotheoriginalorder;thiscouldresultinincorrectgoodsbeingsentout.

Inadditiontothepicklist,copiesofalltherelatedordersshouldbeprintedonadailybasis.Whenthegoodshavebeenpickedreadytobedespatched,theyshouldbecrosscheckedbacktotheoriginalorder.Theyshouldcheckcorrectquantitiesandproductdescriptions,aswellascheckingthequalityofgoodsbeingdespatchedtoensuretheyarenotdamaged.

Background-Deficiencies

Control

Additionalstaffhavebeendraftedintohelpthetwosalesclerksproducethesalesinvoices.Astheextrastaffwillnotbeasexperiencedasthesalesclerks,thereisanincreasedriskofmistakesbeingmadeinthesalesinvoices.Thiscouldresultincustomersbeingunderorovercharged.

Onlythesalesclerksshouldbeabletoraisesalesinvoices.AsOreganoisexpanding,considerationshouldbegiventorecruitingandtrainingmorepermanentsalesclerkswhocanproducesalesinvoices.

Background-Deficiencies

Control

Discountsgiventocustomersaremanuallyenteredontothesalesinvoicesbysalesclerks.Thiscouldresultinunauthorisedsalesdiscountsbeinggivenastheredoesnotseemtobeanyauthorisationrequired.

Inaddition,aclerkcouldforgettomanuallyenterthediscountorenteranincorrectlevelofdiscountforacustomer,leadingtothesalesinvoicebeingoverstatedandalossofcustomergoodwill.

Forcustomerswhoareduetoreceiveadiscount,theauthoriseddiscountlevelsshouldbeupdatedtothecustomermasterfile.Whenthesalesinvoicesforthesecustomersareraised,theirdiscountsshouldautomaticallyappearontheinvoice.

Theinvoicingsystemshouldbeamendedtopreventsalesclerksfrombeingabletomanuallyentersalesdiscountsontoinvoices.

Salecycle2

Dec2014Q5

HummingbirdScentsCo(Hummingbird)manufacturesandsellsluxurytoiletries;theyhavebeentradingforover20yearsandthecompany’syearendis30September2014.Hummingbirdsellsproductstotradecustomersviaitsownwebsite;thisrepresents60%ofrevenue.Remainingrevenueisgeneratedbycontractstosupplytoiletriestohotels.Belowisadescriptionofthesalessystem.

Hotelrevenue

Thehotelrevenueismadeupoffourkeycustomers.Hummingbirdhasonesalesclerk,Brenda,whomaintainsallaspectsofthisrevenuestream;Brendareceivescustomerorders,raisessalesinvoicesandprocessespayments.Inraisinginvoices,thesalessystemautomaticallyinsertstheonlinetradecustomerpricesforproducts.However,eachhotelcustomerhascontractedpriceswhicharelowerthantheonlinepricesandhenceBrendamanuallyeditstheinvoicespriortodespatch.

Onlinerevenue

Newtradecustomersaresetupinthesalesledgermasterfileuponpassingsuitablecreditchecks,andacreditlimitissetatthisstagebythefinancedirector.Customersplaceonlineordersuptotheirpre-setcreditlimit;theyreceiveanemailconfirmationandthesalesorderinterfacesintothedespatchsystem.Theordernumberislinkedtothecustomeraccountnumber.Goodsaredespatcheddailywithagoodsdespatchednotewhichisreferencedtothesalesordernumberbutarenotsequentiallynumbered.

Hummingbirdusedtodespatchgoodsviaareliablenationalcouriercompany.However,toreducecoststheyhavechangedtoacheaperlocalcourierandsomeordershavebeendeliveredtocustomerslate.

Tradecustomers’salesinvoicesareautomaticallygeneratedbythesystemonthedaytheonlineorderisplaced.Thepricesareinsertedinaccordancewiththewebsiterates.OccasionallyHummingbirdmakesspecialoffersordiscountssales;whenthisoccursthemasterfiledatahastobeamendedtoensurethatthecorrectpricesareusedoninvoices.Thistaskisusuallyperformedbyaseniorsalesledgerclerk.

Revenueandreceivablesrecords.

Onamonthlybasisstatementsaresenttothehotelcustomers;anumberoftradecustomershavebeenrequestingmonthlystatementsandHummingbirdisconsideringthisrequest.ThecompanyonlyreconcilesthesalesledgercontrolaccountattheendofSeptemberinordertoverifytheyear-endbalance.

Required:

AstheexternalauditorofHummingbirdCo,writeareporttomanagementinrespectofthesalessystemdescribedabovewhich:

IdentifiesandexplainsSEVENdeficienciesinthesalessystem;and

Providesarecommendationtoaddresse