Evaluating the Effectiveness of Credit Sales Control Procedures at Peach Blossom Cologne Company

(1)

Using the flowchart, the internal control questionnaire, and the system

narrative, describe the control procedures (strengths) in the system of controls over Credit Sales. For each control procedure, describe a test of control you could perform to test the operating effectiveness of the control. Use form CSF-1.

Keep in mind the six categories of control procedures: (1) segregation of duties, (2) access limited to authorized persons, (3) authorization for the proper

execution of transactions, (4) input controls, (5) processing controls, and (6) output controls. Classify the strengths under these six captions.

Peach Blossom Cologne Company Credit Sales

Internal Control Strengths

Strength Possible test of control

Segregation of functions

- Segregation among sales, stores, shipping, and accounts receivable.

Observe; trace a credit sales transaction through the system (walk-through)

Authorization

- Credit sales are approved before shipment

Examine credit manager’s initials on sales invoice listing

- Sales orders are approved Examine sales manager’s initials on sales invoice listing

- Credit memos are approved Examine initials on credit memos

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(2)

Input Controls

- Invoices are controlled and prenumbered

Account for numerical sequence

- Shipping documents are all

prenumbered Account for numerical sequence

- Credit memos are controlled and prenumbered

Account for numerical sequence

Processing Controls

- Accounts are aged periodically Examine aging of accounts

- A record of accounts previously written

off is maintained Examine the list of accounts. Determine effectiveness of follow-up collection

procedures and trace recording of collection into records

- Customer subsidiary ledgers are

reconciled with the control accounts Examine the computer generated balancing reports

(3)

For each weakness, you find in the controls related to credit sales, list the weakness, a possible error or irregularity that could occur because of the weakness, and a compensating substantive test of transactions or balances to detect the error or irregularity assuming the necessary records and documents are available to you. Use form CWF-1. Classify the weaknesses under the six categories of control procedures as outlined in (2) above. You should keep these weaknesses in mind, as well as the five financial statement assertions when you write the substantive audit steps for your programs to audit the financial

statements.

Peach Blossom Cologne Company Credit Sales System

Internal Control Weaknesses

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