UNDERSTANDING THE INTERNAL CONTROL PROCESS AND ASSESSING CONTROL RISK ?MN customers are a mix of businesses, such as pharmacies, department stores, hotels, beauty spas and bouquet gifts stores and individual consumers. The businesses customers can buy on accounts and individual consumers purchase via the seven stores or MN’s website. As part of the interim audit, Ann Hill the audit senior on this audit has completed a ‘walk-through’ to understand the sales processes. The following is a summary of the procedures she documented on the audit file:?eneral information on Magic Natural Ltd’s IT computer systems?agic Natural Ltd owns its own computers and computer software for sales, inventory management, purchases, payroll, general ledger, and other accounting applications. None of the accounting processing is outsourced. Darshana Patel, the IT manager heads Magic Natural’s computer operations. Darshana is relatively new to the company. She also has taken on the responsibility for system security. Emily Wong serves as an assistant to the Financial Controller, Mike Penrose, and she is responsible for following-up on exception reports generated by the computer systems (outlined below). The company’s accounting and inventory management systems comprises a network of computers at locations in the offices, warehouse, and a central server to handle all accounting and inventory entries. Printers are located in areas in which printed documents or records are routinely needed. The computer system is used to control and process most transactions, to print documents, produce accounting records, and prepare periodic financial statements. Access is controlled by passwords. Only employees with jobs requiring computer data entry or access to file information and reports are given passwords. Passwords are required to enter the system and specific applications within the system. All entered data are processed by batch processing at the end of the day. Data is stored in the respective transaction files in the central server. Most input is backed up by paper trails of source documents. The company has strong backup capabilities and no hardware malfunctions have resulted in the loss of data.?nitiating Sales Business customers make orders via phone or email to sales staff. Sales orders are entered into the computer by sales staff. The computer only accepts a sales order if the customer is in the approved customer list. If the customer is not on the approved customer list the order is routed to Emily Wong who searches the prospective customer’s credit background and compile the information for Mike Penrose to review. Mike then puts his written approval or disapproval on the credit report. If credit is not approved, Emily contacts the customer directly and asks if the company is prepared to pay before delivery. If the customer is willing to pay before delivery, the customer will be on the approved customer list with a notation to ship only on payment received basis. If credit is approved, the customer is added to the approved customer list by Emily and a credit limit of $3000 is automatically assigned. For credit sales, the standards payment term is 30 days since the day of shipment, but this can be negotiated. An interest is charged on all receivables over 30 days or an agreed period (if a customer has non- standards credit limit or payment terms) at a rate of Official Cash Rate (OCR) plus two percent. Mike Penrose and Emily Wong are the only individuals with authority to update the approved customer master file which includes information on whether goods can be shipped on credit or pay before delivery.??elivering Goods? sales order is stored in ordering transaction file. Every night, the computer in Warehouse retrieves information from the ordering transaction file. In the morning, a warehouse supervisor accesses the computer and prints out the list of sales orders. The warehouse supervisor works with a warehouse clerk together to pack each order on the list (they split the list to pack. For example, each person packs 20 orders). Whoever packs an order also prepares a triplet of pre-numbered packing slips. One copy goes with the package to be shipped, one copy goes on file in the Warehouse and the third copy goes to Emily (see below). The warehouse supervisor then updates the computer based on all the packing slips to show that the sales orders have been packed. At this time, the inventory level is reduced. Once the products are packed, the packages are shipped on the day or the next day. MN uses an external carrier to deliver chemicals. The carrier comes once a day to pick up the packages in the afternoon, they give the Warehouse a delivery docket for each shipment. After the carrier picks up the packages, the corresponding packing slips, and the delivery dockets, which signed by the freight carrier, are sent to Emily. According to the sales policy, the sales are recognised at time of shipping.?ecording Sales Once the Warehouse updates the sales orders as packed, both the sales transaction file and the accounts receivable master file are updated. Sales invoices are prepared every night based on the information entered in the Warehouse. The computer prepares an invoice based on the customer information, the information on goods shipped, and the pricing information from the master price file. Approved prices are modified quarterly based on quantities in inventory, recent production costs, and competitive forces in the marketplace. Prices are determined at a meeting involving Celia Miller, Mike Penrose and Alice Wilson, the sales director. Mike Penrose is responsible for updating the master price file, which is reviewed by Alice. The company also grants a 5% discount to orders over $5000, which automatically calculated by the computer. The computer checks to see that the following fields have appropriate alpha or numeric information before the invoice is processed: ?ustomer information (code and address) ?uantities ordered for each stock number ?uantities packed for each stock number?Prices are checked against the master price list?Packing slip number?The computer performs a reasonableness test on the amount of the sale invoice based on the customer number and customer sales history. A transaction is not processed without further approval if the calculated sales invoice is greater than 120% of the largest sale to the customer in the last two years. The computer automatically sends an electronic invoice to the contact details stored in the approved customer file. Transactions that do not pass the above controls are not processed and are printed on an error report. Emily Wong is responsible for clearing all exceptions in the next day, including approving sales that exceed the reasonableness test.?eceiving payments?ustomers are required to pay directly to the bank accounts of Magic Natural. Kathy Bloom, the cashier, logs onto MN’s internet banking (view only access) and prepares a daily list of receipts received. The daily list of receipts is sent to Emily who receives remittance advices from customers. (Not all customers sent remittance advices). Emily agrees the amount showed in the list to the corresponding sales invoice and remittance advice. If it agrees, she ticks the invoice as paid in the computer, which reduces the account receivables balances.?ther Procedures?mily prepares a monthly bank reconciliation which is reviewed by Mike. Mike also reviews an aging of accounts receivable monthly. She and Emily Wong follow-up on past due accounts. Mike Penrose prepares any journal entries to write-off accounts receivable for amount this is overdue over 120 days.?uestion 3 Assessing control risks in the revenue cycle Identify four control weaknesses in the revenue cycle. Explain how each control weakness may affect the financial statements (i.e. which accounts and assertions are at risk of material misstatement) and identify the audit procedures to test the account(s) and assertion(s) that are at risk. Use the format below:Identify a control weakness which accounts and assertions are at risk of material misstatement Audit procedures to test the account(s) and assertion(s) that are at risk 1 2 3 4Identify five control strengths in the revenue cycle and explain why each control is a strength (i.e. which accounts and assertions does it strengthen). For each control strength, identify audit procedures to test the effectiveness of control. Use the format below:Identify a control strength Why it is a strength (which accounts and assertions does it strengthen) test of control 1 2 3 4 BusinessAccountingACTY 7209Get a plagiarism-free order today we guarantee confidentiality and a professional paper and we will meet the deadline.
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