Beаuty Supply Cо. (BSC) is а nаtiоnal supplier оf beauty products. BSC sells a variety of beauty supplies (wholesale and retail) on a credit basis on terms of 2/10, net 30 days to a large number of customers across Canada. BSC is a new audit client of Bert & Ernie (B&E) LLP Chartered Professional Accountants. Simon Fung, the audit senior, has documented the following narrative over the sales, receivables, and cash receipts process after completing his interview with the company’s Controller: Orders and Sales Customer orders are received in writing (either by mail or e-mail) or by telephone from retail stores that sell the company’s products. New credit customers must fill out a credit application form which must be approved by the company’s credit supervisor. Once approval has been made, the customer’s credit limit will be entered into the sales module of the computer system. The computer has a programmed control to notify a sales clerk if processing a sale would exceed authorized credit limits. The computer will not allow a sales order to be processed if the customer’s credit limit will be exceeded. A sales clerk will prepare a two-part pre-numbered sales order. Part #1 is sent to the warehouse and part #2 is sent to the billing clerk. Customers whose orders were not approved for credit are sent a letter stating the reasons for not filling their orders. The warehouse fills the orders and prepares the goods for shipment to the customers. Any items that are not in stock at the time an order is filled are marked “backordered” on Part #1 of the order form. The shipping clerk prepares a four-part pre-numbered “bill of lading” with the copies distributed as follows: Copy #1 is sent to the customer with the inventory Copy #2 is attached to Part #1 of the sales order form; the two documents are sent to the billing clerk. Copy #3 is retained at the warehouse in numerical sequence Copy #4 is given to the truck driver delivering the inventory, as it has the customer’s shipping address, contact information, etc. From the documents received from the shipping clerk, the billing clerk prepares a three-part pre-numbered sales invoice electronically. Invoice prices are automatically entered into the invoice upon entry of the inventory item number. Invoice quantities are entered by the billing clerk based on the number of units shipped (from the bill of lading). The invoice copies are then distributed as follows: Copy #1 (original copy) sent to the customer in the mail. Copy #2 is matched and attached to the sales order copies and bill of lading. Before they are filed by customer in the billing department, the details are matched to ensure the documents agree. Copy #3 is sent to the bookkeeper to serve as the basis for posting to the individual customer accounts and preparation of the monthly sales journal. Upon request from a customer, a customer statement can be generated by the bookkeeper and sent to the customer. Cash Receipts Customers can pay by cash, cheque, or electronic funds transfer (e-transfer). Cheques and/or cash are received in the mail or at the cash counter and recorded immediately on the cash receipts listing by the receptionist. They are then given to the bookkeeper so that the bank deposit can be prepared. Once all the cash receipts have been collected, the bookkeeper will take the deposit to the bank for processing. He deposits the cash and cheques into the bank every day. He will then give the bank-stamped bank deposit slip to the billing clerk, along with a listing of which customers have paid their accounts. The bookkeeper will also retrieve the information from the bank account and summarize which customers have paid via e-transfer. The bookkeeper will provide the bank deposit slip and a listing of e-transfers to the billing clerk, who will then use these as a basis for posting cash receipts to the customer’s individual A/R accounts. The billing clerk will update the A/R Control account in the G/L based on the total amount deposited. If a customer pays within the discount period and takes the 2% discount, the bookkeeper must approve the discount taken. Month-End Procedures The bookkeeper performs a number of month-end procedures, including the following: Bank reconciliations Review of the aged A/R Listing to identify delinquent accounts. The bookkeeper will notify the billing clerk so that phone calls can be made to encourage collection or to find out the reasons why collection has not been received. Write-off of A/R and the allowance for doubtful accounts (AFDA) provision Required: Identify three significant internal control weaknesses. For each control weakness, describe how an error could occur as a result of the weakness. Then, provide management with recommendations for improvement. Be specific! Identify two significant internal control strengths. For each control strength, explain how the control would prevent, detect, or correct errors. Then describe how you (as an auditor of BSC) would test the control. Be specific!
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