Lecture 7-Exercise-Internal Control

You are the auditor of Arcidiacono Stationery, and you have been asked to suggest how audit work
should be carried out on the sales system.

Arcidiacono Stationery Ltd sells stationery to shops. Most sales are to small customers who do not have
a sales ledger account. They can collect their purchases and pay by cash. For cash sales:

(a) The customer orders the stationery from the sales department, which raises a pre-numbered multi-
copy order form.

(b) The dispatch department make up the order and give it to the customer with a copy of the order
form.

(c) The customer gives the order form to the cashier who prepares a hand-written sales invoice.

(d) The customer pays the cashier for the goods by cheque or in cash.

(e) The cashier records and banks the cash.

Required

(a) State the deficiencies in the cash sales system.

(b) Describe the systems-based tests you would carry out to audit the controls over the system.

Question 2

Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specialising in the sale of specific products,
for example, seeds, garden furniture, agricultural fertilizers. The company has an internal audit
department which provides audit reports to the audit committee on each division on a rotational basis.

Products in the seed division are offered for sale to domestic customers via an internet site. Customers
review the product list on the internet and place orders for packets of seeds using specific product
codes, along with their credit card details, onto Rhapsody Co's secure server. Order quantities are
normally between one and three packets for each type of seed. Order details are transferred manually
onto the company's internal inventory control and sales system, and a two part packing list is printed in
the seed warehouse. Each order and packing list is given a random alphabetical code based on the name
of the employee inputting the order, the date, and the products being ordered.

In the seed warehouse, the packages of seeds for each order are taken from specific bins and
despatched to the customer with one copy of the packing list. The second copy of the packing list is sent
to the accounts department where the inventory and sales computer is updated to show that the order
has been despatched. The customer's credit card is then charged by the inventory control and sales
computer. Bad debts in Rhapsody are currently 3% of total sales.
Finally, the computer system checks that for each charge made to a customer's credit card account, the
order details are on file to prove that the charge was made correctly. The order file is marked as
completed confirming that the order has been despatched and payment obtained.

Required

(a) In respect of sales in the seeds division of Rhapsody Co, prepare a report to be sent to the audit
committee of Rhapsody Co which:

(i) identifies and explains FOUR deficiencies in that sales system;

(ii) explains the possible effect of each deficiency; and

(iii) provides a recommendation to alleviate each deficiency.

(Note. Up to 2 marks will be awarded for presentation.) (14 marks)

(b) Explain the advantages to Rhapsody Co of having an audit committee. (6 marks)

(Total = 20 marks)