The auditors for Drawing Heavy Industries, Inc. recently completed an audit of the company-owned store used by its employees and their families. Following are the findings and recommendations reported by the auditors:

Findings The overall evaluation of the company store was favorable. The auditors concluded that the store was providing a valuable service to the company and its employees and that store operations generally were being conducted in a professional and businesslike manner.

However, there were three critical exceptions:

1. Cash receipts were not being reconciled with cash register totals on a daily basis. Rather, a courier from the company’s accounting office went to the store at 5:00 p.m. every day to pick up the day’s cash receipts. Since the’ store closed at 6:30 p.m. every day, some cash from the day’s sales remained in the store overnight and was counted as part of the following day’s cash totals picked up by the courier. Consequently, cash register totals did not correspond to any single day’s count. Rather than make the necessary calculations for adjusting the totals so that they might be easily reconciled, both the cash register totals and the daily pickup totals were tallied by store management for a full month. The store manager then would send all of the cash register totals with the record of daily pickups by the courier to the accounting department to reconcile for management’s monthly reports. Often the totals did not correspond, and in three of the past 12 months examined the totals differed by more than $2,500.

2. The company store’s accounting system did not have an accounts receivable subsidiary ledger. The store maintained only a handwritten log of the names of employees who bought on credit and the amounts of their credit purchases. When these employees paid their store bills, the amounts were recorded in the log. When the full payment was received, the employees were crossed off the list by a single line drawn through their names. Each credit transaction and payment was simply added in the next available line on the log sheets. No dates were recorded for any of the transactions. Store management said the dates were recorded on the receipts and were not necessary on the log, since it was only an informal record.

3. The company store had no credit collections system. There was no aging of accounts, and a few employees had outstanding bills with purchases made as many as five years prior to the beginning of the audit. One of these employees no longer worked for the company, and had left owing the store more than $1,500. Employees never received any bills, and payment arrangements were made on an informal basis with no interest charges. It was apparent that some employees had received hundreds of dollars of merchandise without making arrangements for payment within a reasonable time period.

Recommendations The auditors made the following recommendations as a result of these findings:
1. A daily reconciliation of cash and credit sales with cash register totals is needed. If it is impossible for the courier to pick up the daily cash receipts at the end of the store hours, then the receipts between the time of pickup and the store’s closing time could be kept separate from the following day’s cash receipts. They could be counted separately, and the amount could be added appropriately so that each day’s receipts could be accounted for and checked against cash register totals. It is appropriate for such reconciliation to be performed both at the store and in the accounting department, and the two results should be compared to ensure that they agree.
2. The store needs an accounts receivable subsidiary ledger. Entries into the subsidiary ledger can be made on a daily basis, using copies of customer’s receipts as documentation.
3. A formal collections system is needed for the store’s charge accounts. A monthly aging of accounts and customer billing is needed to improve the collections of these accounts.
Specific follow-up by company and store management would enhance the collection of excessively old accounts. In the case of the former employee who left owing the store more than $1,500, a special effort is needed to find him and collect the money he owes.
4. It was recommended that management consider making payments on store accounts a part of the company’s payroll deduction program, especially for excessively old accounts.
Required:
Outline a plan for follow-up procedures to review each of the findings and recommendations. You will need to determine three things in your analysis:

a. What information is needed for the review?

b. What type of review is most appropriate — simple inquiry, written auditee response, and/or an on-site review?

c. What specific procedures are required?