The customer billing and cash receipts functions of Robinson Company Ltd, a small paint manufacturer, are attended to by a receptionist, an accounts receivable clerk, and a cashier who also serves as a secretary. The company's paint products are sold to wholesalers and retail stores. The following describes all the procedures performed by the employees of Robinson Company pertaining to customer billings and cash receipts:
1. The mail is opened by the receptionist, who gives the customers' purchase orders to the accounts receivable clerk. Fifteen to 20 orders are received each day. Under instructions to expedite the shipment of orders, the accounts receivable clerk at once prepares a five-copy sales invoice form that is distributed as follows:
(a) Copy 1 is the customer billing copy and is held by the accounts receivable clerk until notice of shipment is received.
(b) Copy 2 is the accounts receivable department copy and is held for the ultimate updating of the accounting records.
(c) Copies 3 and 4 are sent to the shipping department.
(d) Copy 5 is sent to the storeroom as authority for the release of goods to the shipping department.
2. After the paint order has been moved from the storeroom to the shipping department, the shipping department prepares the bills of lading and labels the cartons. Sales invoice copy 4 is inserted in a carton as a packing slip. After the carrier has picked up the shipment, the customer's copy of the bill of lading and copy 3, on which are noted any undershipments, are returned to the accounts receivable clerk. The company doesn't 'back order' in the event of undershipments; customers are expected to reorder the merchandise. Robinson Company's copy of the bill of lading is filed by the shipping department.
3. When copy 3 and the customer's copy of the bill of lading are received by the accounts receivable clerk, copies 1 and 2 are completed by numbering them and inserting quantities shipped, unit prices, extensions, discounts and totals. Copies 2 and 3 are stapled together.
4. The accounts receivable clerk then enters the sales transactions into the computer records from copy 2. Only the quantities, prices, discounts and accounts are entered because the computer calculates extensions and totals. These extensions and totals are then compared with copy 1. The accounts receivable clerk then mails copy 1 and the copy of the bill of lading to the customer. Copy 2 is then filed, along with staple-attached copy 3, in numerical order.
5. Because Robinson Company is short of cash, the deposit of cash receipts is also expedited. The receptionist turns over all mail receipts and related correspondence to the accounts receivable clerk, who examines the cheques and determines that the accompanying vouchers or correspondence contain enough detail to permit the entering of the transactions into the computer. The accounts receivable clerk then endorses the cheques (with a stamp 'a/c payee only') and gives them to the cashier, who prepares the daily deposit. No currency is received in the mail, and no paint is sold over the counter at the factory.
6. The accounts receivable clerk uses the vouchers or correspondence that accompanied the cheques to enter the transactions in the accounts receivable master file. The accounts receivable clerk is the one who corresponds with customers about unauthorised deductions for discounts, freight or advertising allowances, returns and so forth, and prepares the appropriate credit notes. Disputed items of large amounts are referred to the sales manager for settlement. Each month, the accounts receivable clerk prints out a trial balance of accounts receivable and compares the total with the general ledger control account for accounts receivable.
REQUIRED
a. Identify the internal control deficiencies in Robinson Company's procedures related to customer billings and cash receipts and the accounting for these transactions. Use the methodology for identifying control deficiencies discussed in Chapter 8.
b. For each deficiency, identify the error or fraud that could result.
c. For each deficiency, list one substantive audit procedure for testing the significance of the potential misstatement.