From the case study, determine the fundamental control deficiencies associated with the credit function. Next, propose at least one (1) control improvement that the credit department management could make in the process. Provide a rationale to support your response.

You have been assigned to review the internal controls of the credit department of a recently acquired subsidiary. The subsidiary imports several lines of personal computers and sells them to retail stores throughout the country. The credit department consists of a new credit manager, a clerk, and a part time secretary.

Sales are made by fifteen sales representatives: five are at company headquarters and handle large accounts with retail chains and ten are located throughout the country. Sales represesntatives visit current and prospective customers and, if a sale is made, either submit the order electronically or prepare a customer order from consisting of the original and three copies. One copy is retained by the customer, one by the sales representative, and one is sent to the warehouse; the original is sent to headquarters.

For new customers with orders of more than $100,000, a credit application is also completed and sent along with the order to headquarters. The credit application includes a bank reference and three credit references along with financial statements.

The sales order sent to headquarters goes first tot the credit department for approval. The credit department looks up the customer's credit on a computerized file that is maintained for customers with "good credit." If the customer is in the file, the clerk examines a monthly report listing all accounts that have not been paid in 60 days. If the customer is not listed in the report, the clerk initials the order as approved and sends it to accounting for recording and billing. The credit manager holds orders from new customers or from customers listed on the 60-day report for review. For transactions submitted electronically, the computer is programmed to identify all accounts that are over 60 days old and all sales that are over $100,000 to be sent to the credit manager for review.

For orders of more than $100,000 from new customers, the credit manager reviews the credit application along with the financial statements and calls at least one of the credit references. If the order is approved, the manager initials it and gives it to the secretary, who enters the approved data into the database.

If the order is denied, the manager adds the customer's name to a list of past rejected credit applications and canceled accounts. For new customers placing orders for less than the $100,000 limit, there is no further reveiw beyond the review of previously rejected credit applicants. If orders are not approved, the credit manager calls the warehouse to stop shipment. The order is marked "Credit Not Approved" and given to the secretary, who notifies the sales representative and the customer. The order and the credit application are then thrown away.

Once each quarter, the credit manager requests that the accounting department provide a list of all accounts more than 90 days old with supporting detail of account activitiy for the past 12 months. The credit manager reviews the information and determines whether action should be taken. Actions consists of the following:

1) The manager calls the sales representative and asks him or her to contact the client about payment

2) If payment is not made in three weeks, the credit manager calls the customer and requests payment. The customer is also put on the "no credit" list in the company's database.

3) If payment id not made within four additional weeks, the account is turned over to a collection agnecy.

When an account has been with a collection agency for two months without receiving payment, it is written off. The Credit manager prepares the necessary adjustitng entries.