01 Jul Recommending Controls
In the following scenarios, recommend internal controls that need to be in place to eliminate the problems described:
An inexperienced clerk does not have the knowledge to properly prepare sales invoices. He is confused about the actual items shipped. As a result, the clerk has been preparing invoices at prices that were below the company’s sales prices.
During your audit, the controller approaches you about a problem with missing invoices. He thinks that these missing invoices were never recorded in the system, which results in the accompanying receivables not being recorded either. He reads the monthly sales data and calculates that the company has faced significant losses as a result.
Just do response each posted #1 to 3 down below only.
In the first scenario the clerk is somehow creating invoices for things he doesn’t know are getting shipped or not. I am not sure how he could do any of his job not knowing what is shipped or how much things cost. This is causing incorrect invoices to go out and the correct accounting is not getting recorded. The first control that needs to be done is have a segregation of duties between who records inventory, invoices, and the accounting. If the company does this they will be able to identify any differences between what is in inventory compared to the invoices and accounting. Next I would create a control that uses IT resources to record items on an invoice when they are pulled from inventory. This will reduce the amount of chance for errors.
In the second part of the audit, there were some missing invoices that resulted in accounting errors that show the company had a significant loss. The same controls I mentioned in the first part would greatly reduce the chance of this type of thing happening. A two part control would result in a back up in data. The change in inventory, invoices, and accounting should be reconciled every month to identify these kinds of errors. If there are large purchases happening a daily or weekly recon should be done between the area to make sure everything is in balance. Segregation of duties is the biggest control I would put in place because it is independant people comparing notes to be able to identify any differences.
Bragg, S. (2017, December 23). Separation of duties. Retrieved from https://www.accountingtools.com/articles/what-is-separation-of-duties.html
Professor and Class,
For the first problem, when it comes to preparing sales invoices there needs to be procedures in place for the employees to go by in order to prepare these invoices. These procedures need to be put in place by the controller and checked by the CFO. There can be templates made for the invoices where all that the employees need to do is fill in the information. Also, if there is an issue with the prices not being correct, then the clerk needs to check to make sure the information he/she has is correct before putting it in the invoice.
For the second problem, there should be a system in place where invoices and receivables is checked to make sure everything is going through the system. Everything should have a purchase order that goes through to make sure everything being ordered is being invoiced and sent to the customer for the receivables.
Good evening classmates,
This week, we discuss issues that have occurred when an inexperienced clerk has been preparing invoices incorrectly. From this issue, there appears to be multiple problems. The first is that the invoices were below sales prices and the second problems is that there are missing invoices.
The invoices that are below sales prices means a loss of potential profit. If there is already a small profit margin to remain competitive against rival businesses, the business could actually be taking a loss on every single one of these sales.
The second problem discovered is missing invoices. If they were not recorded in the accounting system, then the accounts receivable will not be reported. This means a loss of sales, and if the invoices cannot be found, it will be impossible for the business to receive payment on these sales. Unless a company contacted this business about their invoice, or sent a payment on the invoice, there is no way of knowing what was sold to whom. While they could perform a full inventory to determine exactly how much product went out and was possibly sold, without invoices they would not know what was sold to whom.
This stems from a serious lack of internal control. We also cannot rule out fraud in this case. While the clerk’s invoices are wrong, we are not yet certain if the missing invoices are from the clerk’s sales. There could be other employees who are performing unethical behavior and the issue just happened to arise while the problem with the clerk’s invoices were discovered.
The business is facing serious losses, and this will continue unless they immediately make changes. First, they need to properly train this clerk, and the clerk’s direct supervisors must ensure that the job is being performed correctly and that all invoices are inputted into the system. They must also check on their internal control policies and determine where the breakdown occurred. They need to determine if the missing invoices were a mistake, or an attempt at fraud (Pany & Whittington, 2016, p. 249). While this first sounds like human error that could have been avoided with property policies and oversight, a thorough internal investigation involving employees and all levels of management must occur to get this business back on track and start becoming profitable. If they do not, they will be forced to shut down and all of the stakeholders in this business will lose.
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