Background

You are the audit manager of RFC, an accounting firm with offices located throughout regional NSW and Victoria, including towns such as Bendigo, Albury, Wagga, Bathurst and Tamworth. RFC is a middle tier firm which provides audit and accounting services across a range of industries. During July 2021 you met with the audit senior of RFC, Wayne Campbell to discuss several findings related to some of RFC's clients.

Edwards Ltd

The next client Wayne tells you about is Edwards Ltd, where Wayne is evaluating the internal controls in the sales and receivables areas. Edwards manufactures small scale water purifiers which are then sold to retailers, with a year ending 30 June 2021. Wayne has identified the following internal control procedures.

• All sales are made on credit, with outstanding accounts due and payable within 30 days. Customers can purchase the water purifiers from Edwards by emailing or telephoning through their purchase order. Immediately on receipt of a customer's request, a sales clerk prepares a sales order.
• Sales orders are manually pre-numbered and produced in triplicate. One copy of the sales order is sent to the shipping department, one to the invoicing department and one copy is filed in the sales department.
• On receipt of the sales order by the shipping department, the shipping clerk obtains the items from the warehouse, packages them, prepares a shipping note and arranges transport.
• Shipping notes are also manually pre-numbered and produced in duplicate. The original shipping note is sent to the invoicing department, and the second copy is filed by the shipping clerk.
• The shipping clerk transfers the information from the shipping note to a delivery docket, which is pre-numbered and produced in triplicate. Two copies of the delivery docket are given to the carrier. One of these is retained by the customer, while the other is signed by the customer and retained by the carrier. The shipping clerk forwards the third copy of the delivery docket to the invoicing department.
• A clerk in the invoicing department checks that the information on the purchase order, the shipping note and the delivery docket match each other and then prepares the sales invoice. Sales invoices are pre-numbered and produced in triplicate. One copy of the sales invoice is sent to the customer, one is forwarded to the accounting department, and the third is filed by the invoicing clerk.
• The accounts clerk uses the invoice to make an entry to the sales journal, which is used to update the sales ledger and the accounts receivable subsidiary ledgers. The sales invoice is then filed by customer name.
• All payments are made by cheque and mailed to Edwards along with the remittance advice. Two staff are assigned to receive these payments - one who opens the mail and records the receipt of the payment on a cheque list. The other staff member takes custody of the cheques and matches them to the remittance advice, then forwards them to the accounts receivable clerk.
• The accounts receivable clerk updates the subsidiary ledger.
• Bank reconciliations are performed monthly by an accounting clerk, who is not responsible for receiving payments.
• Sales returns and allowances are only processed after the financial controller has authorised them.
• Bad debts are written-off only on the authorisation of the financial controller, after discussion with the credit manager.

RegardingEdwards Ltd:

• Three (3) internal control activities in Edwards sales and receivables, and whether these activities are intended to prevent or detected material misstatements and how this is achieved?
• For each control identified above, one (1) test of control that could be undertaken to verify the effectiveness of the internal control?
• Three (3) weaknesses in Edward's internal controls around sales and receivables, along with an explanation as to why they are weaknesses?
• For each weakness outlined above, one (1) account balance at risk of material misstatement and the related assertion most at risk, along with a justification as to why this account and assertion is at risk?