Verona Shoe Company is considering automating its credit approval function. It manufactures a brushed pigskin shoe and acts as a wholesaler by buying closeouts of other brands and selling them to approximately 3,000 retail customers. The company has moved into new lines by recently acquiring the U.S. distribution rights to an important European brand of ski equipment and ski wear. The ski line will be sold to approximately 750 different retail outlets, but three major chains will constitute over 50% of the sales.

Required

a. What factors should the company consider in setting its credit policies? How could data normally contained in the client's computer system assist the company in setting its overall credit policies?

b. Assume that the company chooses to automate much of its credit approval process. Outline the control procedures the company should consider utilizing to ensure that credit is granted only in accordance with company credit policies.

c. For each control procedure identified in part (b), briefly indicate how the auditor might go about testing the effectiveness of its operation.