The Alpha Company is a medium-sized company which assembles robots from parts and subassemblies ordered to specification. All work done by outside processors is completed prior to the time the Alpha Company receives the component parts and/or sub-assemblies. These robots are sold to steel mills, automobile companies and other manufacturing companies. Sales prices of the robots range from \(\$ 8,000\) to \(\$ 25,000\) depending upon their capacity, complexity, and variation from the standard model formats specified by the customer.

The company has been in operation approximately five years and has enjoyed increased gross revenue and earnings during each year. This year sales are expected to be about \(\$ 10\) million and net income about \(\$ 500,000\).

In the past, we have always considered internal controls over sales and accounts receivable to be very reliable. This year you find that, for the first time, a significant portion (about 20 percent) of sales is composed of replacement parts for robots. Instead of employing the same sales and accounts receivable system as for sales of new robots, which system appears very reliable again this year, the following procedures are employed for sales of replacement parts:

(The new procedures have been authorized by J.B. Brown, the vice-president of sales, to facilitate filling the replacement parts orders as expeditiously as possible so customers can minimize the "down time" of the Alpha robots in their plants. Brown believes very strongly that customers satisfaction with Alpha robots depends to a large extent on the time required to repair the robots they have.)

Customers may telephone their replacement orders (which average about \(\$ 150)\) to the sales order department which orally transmits them to the shipping department where the replacement parts inventory is stocked. The replacement parts inventory is not commingled with parts used in the assembly of new robots. The shipping department fills the order and prepares a scratch paper listing of the parts shipped which is forwarded to the billing department. The billing department prepares a special three-part prenumbered sales invoice. It enters quantities from the memo received from the shipping department and prices from a current price list, makes extensions and footings and mails the original after someone else in the department has completely checked it. The first copy is sent to the accounts receivable clerk for entry in the sales journal and on the accounts receivable ledger card and for filing in numerical order. The accounts receivable clerk frequently checks for missing invoice numbers and requests any missing invoices from the billing department. The secund copy is sent to the sales order department for filing by customer.

Perpetual inventory records are not maintained for the replacement parts. However, a physical inventory of the replacement parts inventory is taken at the end of each month by a member of the controller's department assisted by someone from the shipping department.

Required:

a. Identify the errors and irregularities that may occur in Alpha's system.

b. Opposite each item listed in a, indicate the necessary control procedures that may prevent or detect such occurrences.

c. Enumerate the tests of transactions you would apply in testing sales of replacement parts transactions.