XYZ Electronics is a company specializing in the production and sale of consumer electronics. XYZ has approached you, CPA, for their December 31, 2023 year end and asked the following request: "Are you able to review our meeting notes and identify any control weaknesses and provide recommendations for improvements?"

It is also noted that once you have completed your review of the meeting notes, the partner sat down with you to discuss the file.

Partner: Hello CPA, I was hoping you would be able to provide a preliminary assessment of what financial reporting issues may exist. Now, I know you are not a financial accountant so I am not hoping for an in-mdepth analysis, but just point out where I should be looking and why.

CPA: I will to the best of my abilities

Partner: Oh and one more thing, can you provide a basic procedure that we could perform to help us with these financial reporting concerns?

Meeting Notes from visit at XYZ Electronics:

Similar to many companies in the tech industry, XYZ Electronics offers various types of incentives and rebates to its customers based on bulk purchases. These rebates are usually tracked by the Assistant Controller in a detailed spreadsheet. However, the Assistant Controller went on a maternity leave last quarter and has not been replaced. As a result tracking has been a bit spotty since. The terms and amounts of these rebates are often negotiated by the sales representatives during the contract discussions, however, there is a general set of guidelines that are usually seen as acceptable.

The Vice President of Sales and the sales representatives are incentivized through bonuses based on net sales (after discount). The bonuses are calculated based on the previous years sales and recorded at that time, this process usually takes place in early January. The delay in recording the bonus is usually just based on the delay in getting the information from sales associates. This creates a strong motivation for the sales team to secure favorable rebate arrangements with customers while still maximizing their bonus. The calculation is performed based on the sales representative reporting their sale and the related discount to the Assistant Controller which is typically done immediately upon the sales invoice being created. The Assistant Controller takes the information from the sales associate and enters it into their tracker.

Meanwhile, the purchasing team, under the supervision of the Vice President of Purchasing, is responsible for negotiating contracts with suppliers. There are no set requirements for required suppliers, however, the purchasing team has been known to retain consistent suppliers in order to ensure consistency of the products. The products provided by XYZ are always changing and as a result new suppliers for new parts are constantly being introduced and old suppliers are phased out if they do not innovate their offerings. The Vice President of Purchasing typically approves purchase invoices exceeding $50,000, however, there are no formal guidelines and sometimes the amount approved can be lower or higher. The VP of Purchasing relies on the purchasing team to identify new suppliers that fit the business needs. The cheques to vendors are always signed by the president, although he remains high-level and not involved in the day-to-day.

The VP of Purchasing recently signed off on an invoice for $120,000 for product that was ordered for February 2024 and recorded in accounts payable for the year under audit. The VP of Purchasing indicated that based on the extraordinarily high amount, he had reviewed the invoice and the supplier details for the purchase to ensure it was appropriate.

Certain amounts of inventory are sold to a third party wholesaler who then resells it to the general public. It is noted that this third party wholesaler does not take ownership of the good directly, and as a result only pays for the invoice when they sell the goods to the public. This inventory is not tracked or recorded by XYZ because it is deemed sold.

The regular inventory held by XYZ is counted once annually, just before year end for their main inventory count. During this count, there is consistently inventory adjustments that are corrected at that time. The inventory count includes counting all items in their warehouse and comparing to the internal inventory records. There usually is adjustments for shrink but this year there was also several large adjustments for inventory found that was not in the records.

The inventory staff has been complaining about having less and less shelf space. This past year, there was three new shelves installed in the warehouse at a cost of $50,000 which were expensed to warehouse costs. It was noted that two shelves were installed last year and the year previous without removing any of the pre-existing shelving. The President has been discussing building a new warehouse within the next year or so, but really does not understand what is causing the constraints. The President noted that the sales levels have remained consistent and there hasn't been any significant changes to their purchasing habits, yet inventory levels continue to rise.

The invoicing team for XYZ has a very robust credit review for customers. This credit review includes references and detailed background checks in order to determine credit worthiness and this review is always completed before goods are shipped out to the customer. This complete credit review typically takes 3-5 weeks for a brand new customer while only 4-7 days for a pre-existing customer. This incredible credit review process has led to very minimal bad debts for the company (near 0% each year) which has made the President quite satisfied. However, there are times where large sales are cancelled as a result of improper references or an incomplete background check being available. The Sales Manager has noted that there is a significant amount of cancelled invoices/orders that usually occur early in the new year which is chalked up to new customers making Christmas orders that end up falling through. This past December, there was a surge in Christmas orders, most of which were cancelled by the invoicing team.