Aarco Landscaping Supplies (ALS) sells sand, gravel, and top soil. It is open both to individual homeowners as well as commercial landscaping companies. The following process refers to the commercial side of the business, known as Bulk Sales.

Customers typically approach ALS through a telephone or web listing. ALS is well known in the industry. New customers must complete an online questionnaire providing incorporation details as well as key financial information. Sometimes they complete a printed version of the questionnaire when onsite. One key question is how much credit they are applying for. There is no credit manager but the Controller checks any credit requests above $5,000 with trade credit bureaus. Another key question is the tax code since some customers do not pay regular sales taxes.

In Bulk Sales, a vehicle is usually only buying one type of material at a time which is shown on a customer purchase order. When a customer arrives. the weigh station attendant takes a copy of the customer purchase order and quickly looks at it to determine that ALS has the quantity of goods needed at the price on the customer purchase order. The customer vehicle stops on a weighing pad and gets a cardboard ticket with a ticket number on it. The ticket also shows the vehicle weight when empty.

At a product loading station, an employee uses a handheld scanner to read the ticket and then selects the material. At that point they use a front-end loader to scoop material from a large pile and load it into the customer vehicle.

To leave the site, the customer must insert the ticket into another station while parked on a separate weighing pad. They are charged based on the weight of material added to their vehicle.

The electronic ticket creates an invoice showing the entry weight, the material type, the exit weight and the price from the master price list. At the exit gate, an attendant prints out three copies of the invoice and first confirms the type of goods purchased against the invoice. The customer then signs a delivery copy, gets a different copy, and drives off. A third copy is bundled with other invoices and sent to the accounting office daily along with the customer purchase order sent by the first attendant.

Daily, the Sales Accountant matches customer purchase orders with the ticket information and the paper invoices. The clerk enters the information into the customer sales records in the accounting system.

The nature of the business means that all sales are FoB the loading site. There are never any returns since there is no control over the gravel or sand once it leaves the site. Plus, the customer has the chance to inspect the goods while being loaded and before exiting the site.

On a weekly basis, exception lists are printed for missing ticket numbers and missing paper invoices. The clerk follows up. The most common reason for missing items is that on final inspection, the gate attendant or the customer driver find that they picked up the wrong goods. The truck must then return to the loading station, be unloaded, weighed on exit to be close to entry weight, and then re-enter the as a new arrival. The gate attendant marks the ticket and all three copies of the sales invoice as void and includes these in the daily submission to accounting. Still tickets and occasionally invoices go missing at this stage.

Inventory is maintained on a periodic basis. There are rules of thumb for estimating the weight of a pile of sand or gravel based on its height and circumference or angle. Sales quantity data from the invoices is compared with sales data based on the periodic count. Allowable variances differ by product. Some products like sand are prone to loss due to the wind blowing. The allowed variances are built into the pricing. Overall, Aarco is happy with their system of controls.

Required

Evaluate Aarcos system of controls over Bulk Sales. You do not have to duplicate the checklist. Only identify weaknesses or matters that require explanation.

For any internal control weaknesses, create the part of the Letter to Management on Deficiencies in Internal Controls. You only have to write the part identifying the design weakness and what fraud or error that may lead to.

SALES	1.0	Environmental	Is the credit department independent of the sales and marketing department?
SALES	2.0	Environmental	Are nonroutine sales such as sales to employees, Cash On Delivery sales, sales of property, and sales of scrap, controlled by the same procedures described below?
SALES	3.0	Environmental	Is access to sales invoice blanks restricted?
SALES	4.0	Environmental	Are prenumbered bills of lading or other shipping documents prepared or completed in the shipping department?
SALES	5.1	Environmental	Are copies of shipping documents prepared or completed in the shipping department forwarded to the sales department?
SALES	5.2	Environmental	Are copies of shipping documents prepared or completed in the shipping department forwarded to the billing department?
SALES	6.0	Validity	Are all customers approved by the credit manager who ensures the customer exists.
SALES	7.0	Validity	Does someone other than in sales or marketing confirm that the ship-to address is an address associated with the customer?
SALES	8.0	Validity	Are invoices prepared only when shipping documents or service records are received by the billing department?
SALES	9.0	Validity	Is there a check that all contractual and post-sale obligations have been met prior to recording sales?
SALES	10.1	Completeness	Are sales invoice blanks prenumbered?
SALES	10.2	Completeness	Is the sequence of sales invoices checked for missing invoices?
SALES	10.0	Completeness	Is the shipping document numerical sequence checked for missing bills of lading numbers?
SALES	11.0	Authorization	Are all credit sales approved by the credit department, or, are credit sales checked to ensure the customer is within their pre-approved credit limit prior to goods being shipped or services rendered?
SALES	12.0	Authorization	Are sales prices and terms based on approved price lists?
SALES	13.0	Authorization	Are returned sales credits and other credits supported by documentation as to receipt, condition, and quantity and approved by a responsible person?
SALES	14.0	Accuracy	Are shipped quantities compared with invoice quantities?
SALES	15.0	Accuracy	Are sales invoices checked for error in quantities, prices, extensions and footing, freight allowances, and against customers orders?
SALES	16.0	Accuracy	Is there an overall check on arithmetic accuracy of period sales data by statistical or product-line analysis?
SALES	17.0	Accuracy	Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting?
SALES	18.0	Classification	Does the accounting manual contain instructions for classifying sales in terms of revenue and non-revenue accounts?
SALES	19.0	Classification	Does the accounting manual contain instructions for classifying advance or progress billings as deferred revenue?
SALES	20.0	Accounting	Are summary journal entries or batch entries reviewed for obvious errors before posting?
SALES	21.0	Accounting	Are deferred revenue accounts regularly reviewed to see if amounts can be recognized as sales revenue?
SALES	22.0	Cut-Off	Does the accounting manual contain instructions to date sales invoices on the shipment date?

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