worried about the possible negative effects on the collectability of accounts receivable because of the Asian financial crisis, the rising dollar and the slowing Australian economy. 14.32 Controls over cash receipts The head office of Lighttime Ltd, wholesalers of electrical equipment, has asked you to review the system of control over cash collection at the Victorian branch because it suspects that irregularities are taking place. The branch is the largest single outlet of the company and has substantial annual sales invoiced by the branch. Enquiries reveal the following procedures for invoicing sales and collecting cash. (Cash refers to currency and cheques.) l. 2. 3. 4. 5. 6. 7. 8. 9. There are two invoice sets that are used for cash sales and credit sales respectively. When payment for cash sales is received by the cashier, one copy of the invoice is stamped as paid and filed alphabetically, and the other is given to the customer. Credit sales invoices are sent to the customers. Mail is opened by the secretary to the credit controller, who passes any cheques to the credit controller for his review, without recording the amounts received. The credit controller gives the cheques to the cashier by depositing them in a tray on the cashier's desk. The cashier then makes a listing of the cheques, which is used by the credit controller for posting to the accounts receivable ledger. cheques from credit customers and receipts from cash sales are banked daily by the cashier, except for once a week when sufficient currency is retained to reimburse petty cash. The credit controller posts remittances to accounts receivable using a computerised accounting system and verifies the cash discount allowable. The credit controller obtains approval from head office to write off bad debts. Any subsequent remittances received in respect of these accounts are credited to 'sundry income'. Required (a) Describe control weaknesses in the accounting for cash receipts. (b) Suggest improvements in internal control to prevent irregularities in the collection of cash. (c) Explain substantive audit procedures necessary to determine whether any irregularities have taken place. RESEARCH question 14.33 Irregularities in accounting In the early 2000s, many large corporations such as Enron, WorldCom and HIH collapsed because of corporate greed, bad business practices and accounting irregularities. Others, such as Bristol-Myers Squibb, Xerox and Harris Scarfe were forced to restate their earnings, in some cases over a number of years, because of inflation of sales and other accounting irregularities. Required Investigate in depth two of the above companies and determine how the irregularities were perpetrated and the reasons behind them. Also determine, to the extent possible, why these irregularities were not found by the auditors during their audits of sales revenue and receivables, and other related areas of the audit. RD Allen & RJ Elder, 'An empirical investigation of the effectiveness of balance and invoice confirmations', Journal of Forensic Accounting I l, 2001, pp. 219-36. chapter14 AUDITING SALES AND RECEIVABLES 615