REVENUE CASE 4

Florist Blossom Sdn Bhd (FB) has been in flower and gift business for several years. The recent Covid-19 pandemic has affected the business quite severely in year 2020. In December 2020, the company has changed its full operation to online deliveries of fresh and artificial flowers, and gifts and started a membership program for its customers. Since then, the business performance improves gradually as many customers turning to online orderings and they get 20% discounted prices for their chosen special celebrations when customers signed up for the membership which costs around RM20. The membership lasts every two years, for which they can renew for the same cost.

FB sells flowers and gifts by cash through online transfer. The company has planned to allow the use of debit and credit card but it will be implemented when sales reached RM2,000,000 per year. As of now, the companys revenue stands at around RM100,000 to RM150,000 per month where RM30,000 to RM50,000 are coming from the sales of membership.

Once products are ordered and paid online by customers, the company immediately recognises the sales although the orders have not been delivered. The sales recognition includes the full price paid for the 2-year membership. FBs auditor, Mr. Insta, has discovered the following when discussing with the Chief Executive Officer (CEO) of FB, Miss Tweety:

• It is the companys policy to deliver the orders within 5 working days.
• Sales orders of fresh flowers cannot be refunded. Only sales orders of artificial flowers and gifts can be returned subject to 5% penalty within 5 days, and 15% penalty within 10 days. After 10 days, customers are not allowed to make sales returns.
• The customer orders are managed by Mrs. Famy who receives the orders, records the sales and cash receipts and delivers the goods. No staff is specially allocated to handle sales returns.
• Since January 2021, the company has increased its membership tremendously. Membership of customers can be revoked on a yearly basis, but none during the first year. Based on estimation, only 10% customers revoke their membership after one year.

Required:

1. Identify three (3) risky areas or accounts in the above case and state one (1) related management assertion for each area.

(6 Marks)

For each of the risky areas in (i) above, describe one (1) internal control activity that must be performed to overcome the weakness.

(3 Marks)

2. For each of the risky areas in (i) above, suggest one (1) test of controls and one (1) substantive test of transactions or details to be done on the accounts related to sales and cash receipts system of FB Sdn Bhd.

(7 Marks)

Please answer questions 1(i), 1(ii) and 1(iii) above by using the following format:

No	(i) Risky areas	(i) Management assertion	(ii) Internal control activity	(iii) Tests of control	(iii) Substantive tests of details
Sales and cash receipt system
1
2
3
4

3. For any two (2) of the risky areas in (i) above, suggest one (1) substantive analytical procedure to be done on the accounts related to sales and cash receipts system of FB Sdn Bhd.

(4 Marks)

(Total: 20 Marks)