Reference no: EM132744949

Question: This is a question about internal controls. Sunshine's Dairy Products (SDP) buys milk from dairy farmers, processes the milk, and sells various dairy products on credit to retail customers. You are the audit senior and have been assigned to audit the retail accounts receivable of Sunshine's Dairy Products. Your preliminary investigations in gaining an understanding of the client has uncovered the following information:

The company supplies various dairy products to 30 different customers around South Australia and Victoria. Ten of the customers are major supermarkets and they comprise 60% of total accounts receivable; the remainder being smaller retail shops that make up the remaining 40% of accounts receivables. All sales are made on account (on credit). At the start of each week, the Sales Manager for SDP will send an up-to-date price list to all drivers detailing the current selling price for all products.

Customers will phone Sunshine to order their dairy products. There are two staff in SDP who are responsible for taking the phone calls from customers and then initiating a pre-numbered sales order. The sales order is then given to the accounts department. The accounts department will then call the customer to confirm the details of the sales order. Once the details of an order are confirmed, the accounts department will then manually initial the sales invoice to indicate that the sales order has been confirmed with the customer. The sales invoice detailing the products ordered by the customer is then prepared to initiate the delivery of the products to the customer.

The company employs five (5) drivers to deliver the dairy products. Upon delivery, an employee of the customer will sign a pre-numbered receiving report to confirm that the products have been delivered to the customer. The drivers also collect payments directly from retailers (customers) for amounts due and record the amount received from each customer in a notepad. Given time constraints, the drivers rely on the documentation held by each customer to verify the amount owing. The drivers have limited or no accounting experience and often record the receipts against the wrong customer account or they record the wrong amounts because they have failed to apply trade discounts - meaning that accounts receivable balances are often in credit and showing the wrong amounts owed by customers.

Any differences in amounts owing by customers are documented by the driver on a pre-numbered exception reportwhich is sent to the accounts department by the driver to be compared against the records kept by the accounts department who will follow up the differences.

Each driver maintains a Daily Cash Received Record showing the cash received daily from each customer. This information is passed to the accounts department at the end of each day, and they prepare pre-numbered receipts statement for each customer detailing how much cash has been received and how much is still owed by the customer. The accounts department also prepares an accounts receivable trial balance separating amounts owed by each customer and this is used to reconcile amounts with the customer receipt statements. The amounts shown on the trial balance are then followed up every two weeks with the accounts department calling the customer to verify the amounts still owing.

The receipts statements are reviewed by the company's credit department to identify accounts which require specific follow up action to collect moneys due. Given the nature of the inventory (i.e. perishable goods) the dairy products are checked twice daily by the drivers of each truck and the temperature of the refrigerated trucks is recorded by the driver in a logbook. The logbooks are then given to the manager of the inventory who records the temperatures in the computer.

Rquired: (a) Using the information in the case, identify and explain THREE (3) internal controls (strengths) present in the sales system of Sunshine's Dairy Products. You need to provide a brief explanation of the controls and explain why they represent a control. For each of the controls identified, identify ONEaudit objective relevant to the internal control identified and provide a brief explanation for your choice of audit objective. (Please be specific).

(b) Identify and explain FOUR (4) weaknesses in internal control over credit sales. You need to provide an explanation of the nature of the weakness. For each weakness identified, identify and explain any ERRORS that could occur as a result of the weakness. (Hint: Be very specific as to the nature of the ERROR - do not discuss FRAUD)