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 1 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. Cash Transaction Cycle - Processing cash receipts The sales cycle is complete upon receipt of cash from the customers. Once cash is received from customers the relevant records are updated and accounts receivable is also updated. Some customers send cash or deposit cash in Digitexs bank account directly. The company's normal practice is to demand cheque payment which means customers cannot pay by other means such as bank transfers and credit cards which is a factor in late customer payments. The cheques are received by post and banked the next day by the cashier who handles all cash receipts and payments. He makes a list of all cheques and hands then over to the credit clerk who then updates customer accounts. The cashier attends to some cash paying customers personally at their business premises to collect the cash. GROUP TASK: TRANSACTION RELATED QUESTIONS 1. Draw a graphic representation of Sales and Collection Cycle for Digitex LLC showing/using all the relevant accounts/transaction entries listed below: a. Sales b. Cash in bank C. Cash Discounts Taken d. Accounts Receivable e. Sales return and Allowances f. Bad debt expense You graph representation should show all the relevant T-Accounts with book-keeping entries relating to: 1. Tandy LLC - a cash-paying customer who has purchased goods for AED 10,000 on 13th January 2019 Revalo LLC - Credit facility customer who has purchased goods for AED 20,000 on 15th January 2019 and paid in full by 15th March 2019 (the due date) Tandy returns some faulty goods back to Digitex AED 2,000 15th January 2019-a cheque for reimbursement was sent to Tandy the same day