SECTION 1: CASE STUDY: Audit of Sales and Collections Cycle (85 Marks) Read the case below for Digitex LLC and answer the question that follow: Brief company background Digitex LLC has been in business since 1998 and has grown rapidly over the Middle East. The company is a distributor of electronic parts and equipment to the IT industry in the GCC region. Digitex has some strong internal controls policies and procedures over its business environment both internally and externally. However, the business environment is semi- computerized Business transaction - Processing customer order Orders may arrive by email, telephone, or from a field representative who visited the customer. These orders are processed, and orders are shipped to the customers. The customer order processing is computerized, and all bar-codes are selected from a drop-down menu in the order processing procedure. Prices for orders are automatically shown against each part selected. Business transaction - Granting credit The company has many customers both old and new. Some new customers have been in business for many years, however, have recently started to trade with Digitex. Other customers have been trading with Digitex for 4-7 years. Most existing customers are given credit facilities and payment period is between 1 - 3 months, depending on the background of the company and its trading history. Credit facility provided to new customers is subject to vetting (checking) of the customer according to the company policy. Credit amounts range between AED 50,000 to AED I million. There is a hierarchy of credit approvers within Digitex who approve credit facilities for accepted customers ranging from senior managers to the Board of Directors. Policy requires that new customers applying for credit must: 1. Have been in business for at least past seven years with audit accounts as evidence 2. They should provide at least last 5 years bank statements to prove their existence 3. New customers must provide 5 references from existing suppliers with whom they have been trading 4. Existing suppliers must have traded with the new customers for at least 1 year 5. New customers must provide their business cash flow forecast for next three years if their credit application is for over AED 100,000 The due diligence for credit facility is carried out by a third-party company on behalf of Digitex LLC. Existing customers that have credit facility are automatically granted time to pay based on their current outstanding amount. Presently there is no facility for discounts for customers that pay early. Occasionally a customer may go over the agreed credit amount on the approval of a senior manager. Digitexs policy states that customers must pay their outstanding amount on agreed credit facility basis. However, many customers take longer to pay beyond their agreed payment date. This is frequently overlooked by credit control and so cash flow is slow in Digitex Recently a few important customers, with credit facilities have stopped ordering with Digitex, these include: Customer Outstanding amount (AED) Tresco LLC Fresco Company Presco LLC Dresco Traders LLC 170,000 190,000 150,000 130,000 There is evidence that the above customers are out of business and no longer transacting. This means there is possibility of bad debts for Digitex which require correction to the accounts receivables. (This section relates to questions 8 and 9 below). Business transaction - Shipping customer order Workers at Digitex manually arrange the orders and deal directly with the customers for any queries and clarifications. There is no supervision of parts leaving the stock room. Furthermore, the company keeps manual records of goods-in and goods out of the stock room. The records are frequently out of date. Order are occasionally lost to competitors due to absence of stock records and when an order comes in there may not be the parts available and so the customers goes to another supplier. Some customers email their orders with attached purchase orders. These orders are processed and shipped to customers using local couriers. Once orders are prepared they are packaged and sent by local couriers. The sales team arranges for couriers and no authorization exists that monitors courier charges. Many deliveries are late to the customers who have complained about late deliveries. Business transaction - Invoicing customers Invoices are generated from the computer once parts are shipped to customers. Each invoice has a unique invoice number and every customer order is references on to the invoice. Three- part invoices are generated by the computer, white, red and green. The white involce goes to the customer, the red invoice to the accounts department and the green to the purchasing department 2. Paul Company is a trader in the UAE and a long-standing customer of Digitex limited. He has AED 70,000 credit facility at his disposal. Paul currently has AED 32,000 outstanding payable on 28th February 2019 and has occasionally missed the deadline for payments. Paul recently made the following transactions with Digitex: Customer 14 Aug 2019 - Previous balance outstanding AED 32,000 1 Aug 2019 - Ordered electronic parts on purchase order 1123 42,000 1" Aug 2019-order processed by workers and packaged 2nd Aug 2019-order dispatched by courier to Pauls 2nd Aug 2019 - invoice raised and sent to Paul with purchase order 1123 A junior manager approved the extended credit to Pauls as they are close friends and the junior manger trusts Paul as they have known each other for past ten years. Company policy on exceeded credit limit Company policy is that a customer may occasionally go over the credit limit by no more than 10% of the total credit limit facility afforded to that customer. For example, if a customer has total credit facility of AED 40,000, they can be allowed to go over by no more than AED 4,000. However, two conditions are attached to this facility: 1. The customer must not have previously missed any payment deadlines 2. The increase over the credit limit is approved by a senior manager Required: a. Calculate the new balance outstanding at 2nd Aug 2019 b. Identify and explain the weakness in credit control procedures and processes in Paul's case from the scenario. C. Discuss the internal control procedures that should have been applied to Pauls case and why there is a failure in respect of Paul d. Suggest three methods how Pauls can be encouraged to pay his debt either early or within his credit facility timeframe (15 marks)