Question #3

The head office of Lighttime Ltd., wholesalers of electrical equipment, has asked you to review the system of control over cash collection at the Edmonton 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. Inquiries reveal the following procedures for invoicing sales and collecting cash (note: cash refers to currency and cheques):

1. There are two sets of invoices, one for cash sales and the other for credit sales.

2. 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.

3. Credit sales invoices are sent to the customers.

4. Mail is opened by the secretary, who passes any cheques to the credit manager for his review, without recording the amounts received.

5. The credit manager gives the cheques to the cashier by depositing them in a tray on the cashier's desk.

6. The cashier then makes a listing of the cheques, which is used by the credit controller for posting to the accounts receivable ledger.

7. The 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.

8. The credit controller posts remittances to accounts receivable using a computerized accounting system and verifies the cash discount allowable.

9. The credit manager 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) Using a table similar to the format below;

i. Identify and explain all control weaknesses in the accounting for cash receipts.(12 Marks)

ii. For each identified, suggest an improvement in internal control to prevent irregularities. (6 Marks)

b) As the auditor, identify and explain any/all substantive audit procedures necessary to determine whether any irregularities have taken place (hint: remember to state any associated assertions). (8 Marks)