ABC Limited operates its business as one of the leading clothing wholesalers in the region and sells its clothes to retailers. You recently joined this wholesaler for a short project where your primary responsibility is to analyse their transaction process system critically. For this purpose, you are provided with the description of various business activities of the following four departments (also see Figure 1.1 on the next page): (1) Sales Department, (2) Accounting Department, (3) Warehouse/Shipping, and (4) Mailroom.

The sales department of ABC Limited has a part-time sales clerk, Miss Emma, who works on the commissions. Miss Emma encourages its customers to forward the orders in any form, including mail, e-mail or fax (recall our discussion on the revenue cycle during the interactive tutorial for week 4). Miss Emma approves the credit sales and calculates commission and discounts. Then, she records the sales in the sales journal from the PC in the sales department. After entering these records, Miss Emma prepares three documents (a sales order, a customer invoice, and a packing slip) and forwards these documents to the accounting department for further processing.

Miss Simone works in the accounting department, and she is the best friend of Miss Emma. Miss Simone receives these documents and updates the account receivable subsidiary ledger. Miss Simone then prepares and forward the invoice to the customer. You further analyse that Miss Simone forwards the sales order and packing slip to the warehouse/shipping department. The warehouse/shipping clerk arranges the inventory and sends the inventory along with the packing slip to the carrier for shipment to the customer. Finally, the warehouse/shipping clerk updates the inventory subsidiary ledger and files the sales order in the department.

Further analysis of the transaction process system of ABC Limited reveals that cash receipts from customers go to the mailroom, which has one supervisor overseeing ten employees performing similar tasks:

• A clerk opens the envelope containing the customer check and remittance advice.
• Inspects the check for completeness.
• Reconciles check with the remittance advice.

Sends the remittance advice and check to the accounting department

Miss Simone then performs the following four tasks:

• reviews the remittance advice and the checks,
• updates the AR subsidiary ledger, and
• records the cash receipt in the cash receipts journal.

At the end of the day, Miss Simone updates the AR control, cash, and sales accounts in the general ledger to reflect the days sales and cash receipts.

Required:

1. Identify the internal control weaknesses in the transaction processing system of ABC Limited
2. Describe the risk associated with the internal control weaknesses identified in (a) above.