Reference no: EM132965387

Cloud City Toys Co. ("Cloud City") is a manufacturer of children's building block toys. It has been in business for more than 35 years and it sells to a wide variety of customers including large and small toy retailers across the country. The company's year end is May 31, 2021.

The company has a large manufacturing plant, four large warehouses, and a head office. Upon manufacture, the toys are stored in one of the warehouses until they are shipped to customers. The company does not have an internal audit department.

Each customer has a unique customer account number and this is used to enter sales orders when they are received in writing from customers. The orders are entered by an order clerk and the system automatically checks that the goods are available and that the order will not take the customer over their credit limit. For new customers, a sales manager completes a credit application; this is checked through a credit agency and a credit limit is entered into the system by the credit manager. The company has a standard price list, which is updated twice a year.

Larger customers are entitled to a discount; this is approved by the sales director and set up within the customer master file.

Once the order is entered, an acceptance is automatically sent to the customer by email confirming the goods ordered and a likely shipping date. The order is then sorted by customer address. The warehouse closest to the customer receives the order electronically and a shipping list and sequentially numbered goods shipped report (GSR) are automatically generated. The warehouse team packs the goods from the shipping list and, before they are sent out, a second member of the team double-checks the shipping list to the GSR, which accompanies the goods.

Once shipped, a copy of the GSR is sent to the accounting team at head office and a sequentially numbered sales invoice is raised and compared to the GSR. Periodically, a computer sequence check is performed for any missing sales invoice numbers.

At the end of every month, the credit manager reviews the outstanding receivable balances and specifically provides for customer balances that are greater than 90 days outstanding plus any other customer balances that are doubtful due to the customer's financial position.

Required

Problem a) Name three controls utilized at Cloud City and identify the audit objective being covered or the "what could go wrong" that each control mitigate