ACME Mining Supply sells tools and supplies to the mining industry. They have accounting manual explaining how transactions should be recorded, as well as extensive policies and procedures governing employee jobs.

The industry is competitive. Sales to customers are generally in the tens of thousands of dollars. Salespeople have the ability to grant up to $50,000 in credit, if necessary to get an order. Larger requests for credit must be approved by the Regional Sales Manager, as well as all sales of explosives using in mining. Credit requests larger than $500,000 must be approved by the Credit Manager in addition to the Vice-President of Sales.

Once the Credit Manager approves the level of credit, further sales can be made as long as the customer is under their credit limit. Increases in the credit limit can be temporary or permanent. In both cases, again, the Credit Manager and VP Sales must approve the increase. In all cases, the Credit Manager and VP Sales pull a credit report from the Wynne and Donne credit rating agency. Wynne and Donne are one of the oldest and most respected rating agencies in the mining sector.

The Credit Manager also makes collection calls when payment exceeds the normal terms of net 30 days. The Credit Manager and VP Sales meet monthly with the salespeople to discuss the state of the industry and any rumours. ACME has found that usually the salespeople can spot problems at the mine site well before the credit rating agencies, stock market, or news organizations find out. The Credit Manager has full authority to reduce credit limits as well as increase them.

Salespeople receive commission on their sales. The VP Sales gets a bonus based on sales and collections. The Credit Manager gets a bonus based on collections. ACME feels that this incentive system prevents the Credit Manager from granting credit too easily, and, forces the VP Sales to balance the desire for sales with ensuring that all sales are collected. As an employee, the Credit Manager reports to the Chief Financial Officer.

Identify what works well and what does not work well in this system of controls over credit granting. Overall, and prior to testing of documents, would you rate the Control Risk high or low for credit granting? Why?