Definition Electronics (Definition) is one of Canadas leading retailers of home video and audio equipment. Ten years ago, Definition began as a local electronics store. It has rapidly grown and it now operates 11 stores across the country and it employs over 200 people. You, CPA, recently joined as a financial analyst in January 2014. It is your first day on the job and you meet with John Gomery, Definitions controller. John explains that he believes because of the rapid growth, there are significant control weaknesses. Part of the issue is they are using an old proprietary software system called eDef. He goes on to tell you how the system works and you note the following:

eDef is used to manage inventory and record sales and purchases. The primary activities used on a daily basis include:

Recording of sale transactions. Definition does not use cash registers. Salespeople use networked PCs to record sales in eDef. eDef calculates sales taxes and generates invoices. It updates the inventory on hand at the same time.

Recording returns. A merchandise return results in a refund issued to the customer. However, the item is not added back into inventory as the owner feels very strongly about not selling opened packages. Returned inventory is tracked manually in a spreadsheet on the server and periodically sold through a clearance sale or on eBay.

There is no separate return module. Returns are recorded as negative sales transactions and the system has been programmed not to update inventory quantities for such transactions.

Recording inventory purchases. eDef automatically generates purchase order when the on-hand quantity for any given SKU falls below a preset limit. When the inventory is received, the quantity on hand can be updated only if an open purchase order exists.

Calculation of commissions. On a monthly basis, eDef calculates sales staffs commissions. Definitions salespeople earn a low base salary and a 5% commission on their net sales.

At month-end, Definitions accounting staff download sales and inventory transactions from eDef into Quicken, a small business accounting system. They prepare financial statements which are required by the bank within 15 days of month-end.

eDef and the hardware it runs on have lately been unable to cope with the volume of transactions recorded in multiple locations. It has crashed 4 times last month, each time for at least 3 hours.

The controller goes on to discuss the policies currently in place. They are as follows:

1. All merchandise may be returned within 30 days of sale. Whenever possible, the return should be processed by the salesperson that made the original sale in order to maintain the customer relationship.

2. The store manager counts all inventory weekly. An eDef report is generated and the manager then counts the items in the store based on the report. Any discrepancies should be reported to George.

3. Salespeople may, based on their judgment, reduce prices by up to 10% for repeat customers.

4. Daily sales journal by salesperson is generated by eDef and reconciled to the daily cash receipts (or credit card slips) by the store manager. The journal reflects both sales and returns.

5. Salespeople can edit sales records from the same day (in case they make a mistake they discover after the invoice is printed). At the end of the day, once the sales journal is reconciled, the store manager locks the days records. Subsequent changes must be processed as either additional sales or returns.

6. If the system is temporarily down, salespeople are instructed to prepare invoices using a Microsoft Word template (which to the customer looks like a regular Definition invoice) and keep a copy of it. When the system is back up, the store manager enters these manual invoices into eDef using the normal sales module.

7. Salesperson commission (based on net sales) is paid monthly. Store manager bonus (based on store net sales) is paid quarterly.

Required:

Identify the control weaknesses at Definition. For each item, address the implication of the weakness and make a recommendation.

Definition Electronics (Definition) is one of Canadas leading retailers of home video and audio equipment. Ten years ago, Definition began as a local electronics store. It has rapidly grown and it now operates 11 stores across the country and it employs over 200 people. You, CPA, recently joined as a financial analyst in January 2014. It is your first day on the job and you meet with John Gomery, Definitions controller. John explains that he believes because of the rapid growth, there are significant control weaknesses. Part of the issue is they are using an old proprietary software system called eDef. He goes on to tell you how the system works and you note the following:

eDef is used to manage inventory and record sales and purchases. The primary activities used on a daily basis include:

Recording of sale transactions. Definition does not use cash registers. Salespeople use networked PCs to record sales in eDef. eDef calculates sales taxes and generates invoices. It updates the inventory on hand at the same time.

Recording returns. A merchandise return results in a refund issued to the customer. However, the item is not added back into inventory as the owner feels very strongly about not selling opened packages. Returned inventory is tracked manually in a spreadsheet on the server and periodically sold through a clearance sale or on eBay.

There is no separate return module. Returns are recorded as negative sales transactions and the system has been programmed not to update inventory quantities for such transactions.

Recording inventory purchases. eDef automatically generates purchase order when the on-hand quantity for any given SKU falls below a preset limit. When the inventory is received, the quantity on hand can be updated only if an open purchase order exists.

Calculation of commissions. On a monthly basis, eDef calculates sales staffs commissions. Definitions salespeople earn a low base salary and a 5% commission on their net sales.

At month-end, Definitions accounting staff download sales and inventory transactions from eDef into Quicken, a small business accounting system. They prepare financial statements which are required by the bank within 15 days of month-end.

eDef and the hardware it runs on have lately been unable to cope with the volume of transactions recorded in multiple locations. It has crashed 4 times last month, each time for at least 3 hours.

The controller goes on to discuss the policies currently in place. They are as follows:

1. All merchandise may be returned within 30 days of sale. Whenever possible, the return should be processed by the salesperson that made the original sale in order to maintain the customer relationship.

2. The store manager counts all inventory weekly. An eDef report is generated and the manager then counts the items in the store based on the report. Any discrepancies should be reported to George.

3. Salespeople may, based on their judgment, reduce prices by up to 10% for repeat customers.

4. Daily sales journal by salesperson is generated by eDef and reconciled to the daily cash receipts (or credit card slips) by the store manager. The journal reflects both sales and returns.

5. Salespeople can edit sales records from the same day (in case they make a mistake they discover after the invoice is printed). At the end of the day, once the sales journal is reconciled, the store manager locks the days records. Subsequent changes must be processed as either additional sales or returns.

6. If the system is temporarily down, salespeople are instructed to prepare invoices using a Microsoft Word template (which to the customer looks like a regular Definition invoice) and keep a copy of it. When the system is back up, the store manager enters these manual invoices into eDef using the normal sales module.

7. Salesperson commission (based on net sales) is paid monthly. Store manager bonus (based on store net sales) is paid quarterly.

Required:

Identify the control weaknesses at Definition. For each item, address the implication of the weakness and make a recommendation.