The Catering Company Ltd.

You recently ran into an old friend from university, Rachel Jones. Rachel is the owner and sole shareholder of The Catering Company Ltd. (CC). The company specializes in catering business functions and personal celebrations such as weddings and anniversaries. It also does catering for the local film and television production industry. The company has been in business for eight years and employs 10 full-time and up to 20 part-time staff.

Impressed by your business card, Rachel asked if you would give her your thoughts about how she is running her business. She offered a number of gift baskets. You happily agreed, thinking "All my Christmas shopping is now done!"

Rachel takes you to her store and gives you a tour of the premises. The business has a small storefront where it does some retail sales of gift baskets, preserves, sauces, and condiments. The back of the store where the industrial kitchen is located is very busy.

Approximately 70% of the company's sales are on credit. The remaining sales are either paid in advance or immediately after the event or sale. Only Rachel is permitted to grant credit to customers. Any customers seeking credit must provide financial statements. Generally, as long as the customer "makes money or shows a decent profit," Rachel grants them credit. Rachel is often away from the store most of the day, seeing clients and suppliers, so she usually prepares the sales invoices (for sales on credit) during the weekend.

Normally, Rachel orders product for the store. If she is not present, any one of the full-time staff can order product as long as they tell her about it later. When the goods arrive, whoever ordered them, signs for them. If they are busy or out of the store, someone else will sign for them or the delivery person will be asked to leave them by the back door. Occasionally especially when it is busy goods will sit near the back door waiting for the person to deal with them.

The company's major suppliers offer the company terms of 2/10, net 30. If Rachel is not in the store, and a supplier requires payment COD (cash on delivery), she advises staff to use one of the two pre-signed cheques she keeps on hand for such circumstances.

Rachel's 19-year-old daughter, Annie, handles the bookkeeping for the company. Annie is in her second year of university. She lives on campus, sharing a room with two other students. Annie does the bookkeeping on her laptop computer, which she also uses for her academic studies.

Once a month, Annie goes to the store to pick up the paperwork for the month, together with a "care package" from her mother and returns to her residence on campus. Annie is usually able to complete the bookkeeping entering sales and purchases transactions and cash transactions and writing cheques (for Rachel's signature) in a week, except when she has exams, when it takes longer. The company does one cheque run each month, although, if necessary, Rachel will prepare cheques manually when required.

The most time-consuming and challenging task for Annie is coding the purchase transactions. During any given month, there may be up to 200 purchase transactions. Once Annie has completed the bookkeeping for the month, she returns to the store, files the paperwork, gives her mother a USB key with the updated computer files, and picks up another "care package" to take back to her residence. Rachel immediately signs the cheques and later prints off the financial reports from the USB key.

Inventory is counted three times a year. Rachel would prefer it be done more frequently, except that it takes so long to count everything. Because there are a number of catering functions on New Year's Eve, this year, inventory will be counted on December27 and then adjusted (rolled forward) for purchases and items sold or used between December28-31:

Inventory on hand, December27

+ Purchases from December28-31

- Items sold/used from December28-31

Inventory on hand, December31

This year, the part-time staff will be performing the inventory count because the full-time staff will be so busy preparing food for the New Year's Eve functions.

Rachel tells you that the company is having a review engagement performed on its financial statements for the first time this year. She is admittedly nervous about it. You realize that the CPA firm performing the review (Able and Co.) will likely have some concerns about the company's ending inventory.

Required:

Provide Rachel with an analysis of the control issues in her business. Discuss at least eight control issues:

Weakness Implication Recommendation