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SECTION 1: CASE STUDY: Audit of Sales and Collections Cycle (85 Marks) Read the case below for Arturo LLC and answer the question that follow: Brief company background Arturo LLC has been in business since 1995 and has grown rapidly over the Middle East. The company is a distributor of electronic parts and equipment to the automotive repair industry in the GCC region. Arturo has some strong internal controls, including policies and procedures that governits business environment, both internally and externally. However, some controls are weak. The company makes use of much modern software however, some older business methods are still used. The environment can be described as semi-computerized. Business transaction - Processing customer orders Orders may arrive by direct sales, social media account, email, telephone, or from an outside sales person, 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, some of these firms have only recently started to trade with Arturo. The typical customer has been trading with Arturo for 5-8 years. Arturo extends a credit facility with payment terms for a period between 1 - 3 months, depending on the trading background of the company with Arturo and its overall credit and 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 10,000 to AED 2 million There is a hierarchy of credit approvers within Arturo, who approve the credit for accepted customers. The final approvers range from senior managers to the Board of Directors. The Credit 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 200,000 The due diligence for credit facility is carried out by a third-party company on behalf of Arturo 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 are also updated. Some customers send cash, or they deposit cash in Arturo's bank account directly. The company's normal practice is to demand checks payment which means customers cannot pay by other means, such as bank transfer or credit cards, which is a factor in late customer payments. The checks 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 checks 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. 1. Draw a graphic representation of Sales and Collection Cycle for Arturo 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 Bad debt expense You graph representation should show all the relevant T-Accounts with book-keeping entries relating to: 1. II. Maroxis LLC - a cash-paying customer who has purchased goods for AED 20,000 on 13 January 2020 Alloette LLC. Credit facility customer who has purchased goods for AED 40,000 on 15 January 2020 and paid in full by 15 March 2020 (the due date) Maxxis returns some faulty goods back to Arturo AED 4,000 15 January 2020-a cheque for reimbursement was sent to Maxxis the same day III. NOTE: You MUST Show all relevant T-Accounts even if they are empty (10 marks) 2. Simonize is a trader in the UAE and a long-standing customer of Arturo. The firm has AED 80,000 credit facility at its disposal. Simonize currently has AED 34,000 outstanding payable on 28th February 2020 and has occasionally missed the deadline for payments. Simonize recently made the following transactions with Arturo: AED Customer 19 Jan 2020 - Previous balance outstanding 34.000 19 Jan 2020 - Ordered electronic parts on purchase order 3123 60,000 19 Jan 2020 - Order processed by workers and packaged 2nd Jan 2020 - Order dispatched by a courier to Simonize 2nd Jan 2020 - Invoice raised and sent to Simonize with purchase order 3123 A junior manager at Simonize approved extended credit to Simonize as they are close friends and Flynn, having been friends with each other since Grade School Company policy on exceeded credit limit Company policy is that a customer may occasionally go over the credit limit by no more than 20% of the total credit limit facility afforded to that customer. For example, if a customer has total credit facility of AED 100,000, they can be allowed to go over by no more than AED 20,000. 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 January 2020 b. Identify and explain the weakness in credit control over Simonize's case from the scenario. c. Discuss the internal control procedures that should have been applied to Simonize's case and why there is a failure in respect of Simonize d. Suggest three methods how Simonize's manager can be encouraged to pay his firm's debt either early or within his firm's credit facility timeframe (15 marks) INTERNAL CONTROL RELATED QUESTIONS 3. Analyze the credit granting procedure at Arturo LLC at Arturo and identify any strengths and weaknesses that exist (7 marks) Internal Control Strength/weakness in Arturo Explanation 4. Analyze and discuss the audit evidence for sales in Arturo (6 marks) Sales Audit Evidence Explanation SECTION 1: CASE STUDY: Audit of Sales and Collections Cycle (85 Marks) Read the case below for Arturo LLC and answer the question that follow: Brief company background Arturo LLC has been in business since 1995 and has grown rapidly over the Middle East. The company is a distributor of electronic parts and equipment to the automotive repair industry in the GCC region. Arturo has some strong internal controls, including policies and procedures that governits business environment, both internally and externally. However, some controls are weak. The company makes use of much modern software however, some older business methods are still used. The environment can be described as semi-computerized. Business transaction - Processing customer orders Orders may arrive by direct sales, social media account, email, telephone, or from an outside sales person, 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, some of these firms have only recently started to trade with Arturo. The typical customer has been trading with Arturo for 5-8 years. Arturo extends a credit facility with payment terms for a period between 1 - 3 months, depending on the trading background of the company with Arturo and its overall credit and 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 10,000 to AED 2 million There is a hierarchy of credit approvers within Arturo, who approve the credit for accepted customers. The final approvers range from senior managers to the Board of Directors. The Credit 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 200,000 The due diligence for credit facility is carried out by a third-party company on behalf of Arturo 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 are also updated. Some customers send cash, or they deposit cash in Arturo's bank account directly. The company's normal practice is to demand checks payment which means customers cannot pay by other means, such as bank transfer or credit cards, which is a factor in late customer payments. The checks 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 checks 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. 1. Draw a graphic representation of Sales and Collection Cycle for Arturo 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 Bad debt expense You graph representation should show all the relevant T-Accounts with book-keeping entries relating to: 1. II. Maroxis LLC - a cash-paying customer who has purchased goods for AED 20,000 on 13 January 2020 Alloette LLC. Credit facility customer who has purchased goods for AED 40,000 on 15 January 2020 and paid in full by 15 March 2020 (the due date) Maxxis returns some faulty goods back to Arturo AED 4,000 15 January 2020-a cheque for reimbursement was sent to Maxxis the same day III. NOTE: You MUST Show all relevant T-Accounts even if they are empty (10 marks) 2. Simonize is a trader in the UAE and a long-standing customer of Arturo. The firm has AED 80,000 credit facility at its disposal. Simonize currently has AED 34,000 outstanding payable on 28th February 2020 and has occasionally missed the deadline for payments. Simonize recently made the following transactions with Arturo: AED Customer 19 Jan 2020 - Previous balance outstanding 34.000 19 Jan 2020 - Ordered electronic parts on purchase order 3123 60,000 19 Jan 2020 - Order processed by workers and packaged 2nd Jan 2020 - Order dispatched by a courier to Simonize 2nd Jan 2020 - Invoice raised and sent to Simonize with purchase order 3123 A junior manager at Simonize approved extended credit to Simonize as they are close friends and Flynn, having been friends with each other since Grade School Company policy on exceeded credit limit Company policy is that a customer may occasionally go over the credit limit by no more than 20% of the total credit limit facility afforded to that customer. For example, if a customer has total credit facility of AED 100,000, they can be allowed to go over by no more than AED 20,000. 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 January 2020 b. Identify and explain the weakness in credit control over Simonize's case from the scenario. c. Discuss the internal control procedures that should have been applied to Simonize's case and why there is a failure in respect of Simonize d. Suggest three methods how Simonize's manager can be encouraged to pay his firm's debt either early or within his firm's credit facility timeframe (15 marks) INTERNAL CONTROL RELATED QUESTIONS 3. Analyze the credit granting procedure at Arturo LLC at Arturo and identify any strengths and weaknesses that exist (7 marks) Internal Control Strength/weakness in Arturo Explanation 4. Analyze and discuss the audit evidence for sales in Arturo (6 marks) Sales Audit Evidence Explanation