Control Deficiencies CASE FOR DISCUSSION 1 QUESTION B
You have been assigned to review the internal controls of the credit department of a recently acquired subsidiary. The subsidiary imports several lines of microcomputers and sells them to retail stores throughout the country.The department consists of the credit manager (hired six months ago to replace the previous manager, who retired), a clerk, and a part-time secretary. Sales are made by 15 sales representatives: 5 are at company headquarters and handle large accounts with retail chains and the local area, and 10 are located throughout the country. Sales representatives visit current and prospective customers and, if a sale is made, prepare a customer order form consisting of the original and three copies. One copy is retained by the customer, one by the sales representative, and one is sent to the warehouse; the original is sent to headquarters. For new customers with orders of more than $6,000 a credit application is also completed and sent along with the order to headquarters.The credit application includes a bank reference and three credit references along with financial statements. The sales order sent to headquarters goes first to the credit department for approval.The credit department looks up the customer’s credit in a card file that is maintained for customers with “good credit.” If the customer is found, the clerk examines a monthly report listing all accounts that have not been paid in 60 days. If the customer’s account is not listed in the report, the clerk initials the order as approved and sends it to accounting for recording and billing.Thecredit manager holds orders from new customers or from customers listed on the 60-day report for review. For orders of more than $6,000 from new customers, the credit manager reviews the credit application along with the financial statements and calls at least one of the credit references. If the order is approved, the manager initials it and gives it to the secretary, who prepares a card for the clerk’s card file and then files the credit application. If the order is denied, the manager adds the customer’s name to a list of past rejected credit applications and canceled accounts. For new customers placing orders for less than the $6,000 limit, the credit manager reviews the order and checks it against the list of past rejections. If the customer’s name is not on this list, the manager initials the order as approved and sends it to accounting. For orders from customers with accounts 60 days past due, the manager reviews the details of the accounts and the original credit application. If approved, such orders are initialed and sent to accounting. If orders are not approved, the credit manager calls the warehouse to stop shipment. The order is marked “Credit Not Approved” and given to the secretary, who notifies the sales representative and the customer. The order and the credit application are then thrown away.
Once each quarter, the credit manager requests that the accounting department provide a list of all accounts more than 90 days old with supporting detail of account activity for the past 12 months. The credit manager reviews the information and determines whether action should be taken. Action consists of the following:
· The manager calls the sales representative and asks him or her to contact the client about payment
· If payment is not made in three weeks, the credit manager calls thecustomer and requests payment.The customer’s card is also pulledfrom the customer card file.
· If payment is not made within two additional weeks, the account isturned over to a collection agency.
When an account has been with a collection agency for twomonths without receiving payment, it is written off.The credit managerprepares the necessary adjusting entries
