When Lakers Co. receives telephone and fax orders, the billing department prepares an invoice.

The
invoice is mailed immediately. A copy of the invoice serves as a shipping notice. The shipping
department removes inventory from the warehouse and prepares the shipment. When the order is
complete, the goods are shipped. The clerk checks the customer’s credit before recording the sale in the
general journal and the account receivable subsidiary ledger.

The receptionist opens the mail and lists all payments. The receptionist also handles all customer
complaints and prepares sales return forms for defective merchandise. The cashier records all cash
receipts in the general journal and makes the appropriate entry in the accounts receivable subsidiary
ledger. The cashier prepares the daily bank deposit.

Required:

1. Provide at least three (3) internal control weaknesses at Lakers Co.

-In the case presented, Lakers Co.’s three internal control weaknesses are the following:
 The company’s cashier has incompatible duties which he/she has access to both
accounts receivable subsidiary ledger and the general ledger.
 Management has not authorized the use of sales return forms.
 The customer’s credit is checked after the goods are shipped.

2. For each weakness, identify the following:

a. Financial statement misrepresentation/s or misstatement/s which may result from [the control
weakness]; and
-Considering the weaknesses that have identified, the financial statement misinterpretations
which may result from control weakness are the following:
 The company’s cashier has incompatible duties which he/she has access to
both accounts receivable subsidiary ledger and the general ledger. The
company’s cashier might manipulate the amounts in both accounts receivable
subsidiary ledger and general ledger in which there’s a possibility that the
accounts receivable will be understated.
 Management has not authorized the use of sales return forms. Unauthorized
sales return forms can be used to conceal a misappropriation of cash.
 The customer’s credit is checked after the goods are shipped. Financial
statement misinterpretation that might arise is that the accounts receivable
might be overstated once the customer will not honor their accounts.
b. Substantive test/s (e.g. audit procedures) that an auditor would perform to identify the material
misrepresentations.
-The substantive test that the auditor would perform to identify the material misinterpretations
are the following:
 The company’s cashier has incompatible duties which he/she has access to
both accounts receivable subsidiary ledger and the general ledger. The auditor
should conduct interviews with department staff to learn about their
responsibilities. In addition, the auditor should watch how each employee does
their work and what kind of system access they have.
 Management has not authorized the use of sales return forms. Confirm that
the sales return goods is accurate as what is indicated in the sales return forms.
 The customer’s credit is checked after the goods are shipped. Confirm that the
balances in accounts receivable and bad debts expense are correct by
contacting customers.