You are the senior on the audit of Smartpart $($Pty$)$ Ltd$,$ a company which wholesales a large

range of motor vehicle accessories to garages, panel beating businesses and specialist

accessory shops. The company sells only on credit to account holders.

Smartpart $($Pty$)$ Ltd has expanded quickly over the past few years and the accounting system

and related internal controls are proving to be inadequate. You have therefore requested

various members of the audit team to document the company$$s systems to enable you to

evaluate them. One of your best trainees, Anton Goosen, has presented you with the following

narrative pertaining to certain functions in the revenue and receipts cycle:

Order receiving$/$sales authorisation

$$ No aspect of the order receiving function is computerised.

$$ Orders are received by phone or mail.

$$ Customers sometimes place an order by phone and within two or three days send a

written order to confirm the phone order.

$$ When a customer phones, the call is put through to Eddie Mercs, the sales order clerk.

$$ On taking the call, if he does not recognise the voice of the caller, he asks for the

customer$$s name and confirms that the customer has an account by referring to an upto$-$date hard copy list of Smartpart $($Pty$)$ Ltd$$s customers.

$$ This list reflects the customer$$s account number, name, address and contact details.

He also keeps an up$-$to$-$date product price list so that he can to answer customers$$

price queries.

$$ If Eddie Mercs is satisfied that the caller is an account holder, he fills out a single part

$($original only, no copies$)$ preprinted, prenumbered internal sales order $($ISO$)$ by

inserting the customer$$s account number $($which he obtains from the customer list$)$ and

recording the description and quantity of the goods ordered on the ISO.

$$ At this point, the telephone conversation is terminated. Eddie Mercs then completes

the ISO by filling out the customer$$s name and delivery address and signing it$.$

$$ If the caller does not appear on the list of customers $($i$.$e$.$ is not an account holder$),$

Eddie Mercs fills out a preprinted $$new customer form$($NCF$)$ by obtaining $($over the

phone$)$ the prospective customer$$s business name, postal$/$ delivery address and

contact details as well as the names of the business$$s bankers and two trade

references.

$$ Eddie Mercs then completes the ISO in the normal manner with the exception of

inserting the customer$$s account number.

$$ All incoming mail is received by Pearl Pillay, the receptionist, who, assisted by one of

the clerks from accounting, enters details of all letters, customer orders, etc., in a mail

register. She and the accounts clerk both sign the mail register. Whatever has been

received is then distributed.

$$ All customer orders go to Eddie Mercs, who makes out an ISO for each order, taking

the details from the customer order.

$$ Before he goes home at $4$:$30$ pm$,$ Eddie Mercs places the day$$s ISOs on the store$$s

controller, Kobus Marais$,$ desk, and if there are any NCFs$,$ he gives them to Precious

Gumede, the senior debtors administrator. $($She allocates an account number to the

new customer, files the NCF and updates the customer list.$)$

Warehouse and despatch

$$ Again, no aspect of these functions is computerised.

$$ Each morning Kobus Marais splits the ISOs between his two assistant storemen who

pick the goods ordered from the shelves.

$$ The goods picked are placed in cardboard boxes with the ISO but the box is not sealed.

$$ As the items are picked, the assistant storeman ticks them off on the ISO. If the quantity

ordered is greater than the quantity on hand, the storeman changes the quantity

ordered on the ISO to the quantity actually picked. If the item ordered is completely out

of stock, the ISO will be changed to $0$ for that item.

$$ The assistant storemen sign the ISOs once they have picked the items ordered.

$$ Once the goods have been picked, they are moved to the despatch area.

$$ Hawke Mathabula, the despatch clerk, extracts the ISO from the box and makes out a

preprinted, sequenced, four$-$part Delivery Note $($DN$),$ copying all details from the ISO

onto the DN$.$ He places the top copy in the box, and addresses and seals the box. The

second copy, along with a delivery list, are handed to the company$$s delivery driver

who checks the boxes to be delivered against the copies of the despatch notes and

delivery list as the boxes are loaded onto the truck.

$$ Hawke Mathabula attaches the ISO to the third copy of the DN and sends them $($in

well$-$controlled batches$)$ to the accounting section for invoicing at a later stage. The

fourth copy of the DN remains as a fast $($fixed in the book$)$ copy in Hawke Mathebula$$s

office in despatch.

YOU ARE REQUIRED TO:

Identify and explain the weaknesses in the order receiving$/$sales authorisation and

warehouse$/$despatch functions as described above. $(35)$

Notes

$1.$ Your explanation should convey the reason why you believe the weaknesses identified

are, in fact, weaknesses.

$2.$ You are not required to make recommendations to address the weaknesses