Internal controls in the sales system

Internal Control Purpose
The use of pre-numbered Sales Order forms, goods delivery notes and invoices. A sequence check is possible later. The accounts department can check whether the sequence of sales order and good delivery notes before preparing sales invoices.
Security checks goods in the lorry with the dispatch notes. To check whether the goods dispatched are only goods ordered/delivered to customers.
GDN is signed by customer and checked against SO by Rob. Confirmation that goods delivered to customers. Evidence that credit sales has occurred creating receivables.
Multiple copies of each document This leaves a trail of evidence and no one person can change the document without authorization from the department, which raises the document.
Authorization of new delivery date if goods not delivered for any reason. To notify the warehouse about the delivery and when to issue the invoice.
Accounts manager checks the sales invoice to ensure pricing and customer terms. The ensure completeness and accuracy of invoices. This is also segregation.
The sales daybook posted to sales ledger by one person but someone else totals the sales daybooks and posts the totals to the main ledger. Segregation of activities.
Reduces the risk of erroneous and inappropriate actions.

Compliance test of internal controls

1. Use of pre-numbered documents.
A compliance test for the use of pre-numbered documents in the sales process is carried out by going through the sample of documents from throughout the year.

It can be seen from all the samples that pre-numbered documents are used for raising sales orders, GDNs and invoices. Also the documents show that the sequence is followed where a GDN is raised after a SO has been raised and the invoice is prepared in sequence with SO and GDN.

2. Security personnel checking goods in the lorry with GND.

A compliance test for this internal control cannot be carried out since none of the documents or interviews gives more information on how this internal control is enforced in Sheridan AV. This leads to a weakness in their sales systems, which will be discussed under ‘Weaknesses in the sales system’.

3. Customer signed GDN and checked against Sales Order (SO).
Compliance test is carried out by examining the sample of documents from throughout the year. These documents show that all GDNs have been signed for by the buyer, which shows that the company has been in compliance with this internal control.

4. Maintaining of sales daybook and sales ledger by different people.
No test can be carried out for this since no documents are provided.

Weaknesses in the sales system and addressing these weaknesses

Sales order (SO) not authorized

When Sheridan AV receives an order the sales assistant takes the order and a SO is raised immediately and a copy of this SO is sent to the warehouse straightaway. The weakness in this process is that there is no check for stock before the SO is raised and none of the SOs are authorized, as in checked by a superior or the credit control department. Before the SO is sent to the warehouse department the SO should be checked by the credit department to ensure that the customer is credit worthy, has gone above the credit limit or the new order will exceed the credit limit of the customer.

Recommendations:
For every order received stock should be checked before a SO is raised. After this the SO should be sent for credit approval to the credit control department. Only following the credit approval (authorization) the SO should be sent to the warehouse/dispatch department. If the order is not authorized or not approved there is a break in the sequence of sales orders and the invoicing department should be informed about this. This is to maintain the information or audit trail.

Dealing with new customers

The sample of documents show that the company has sold to many customers not on the approved customer lists. This is without any credit check or without setting any credit limit.

Recommendations:
A department or person for approving credit should be introduced. This is important in controlling bad debts that arise from dealing with new customers who might not be creditworthy. New customers should be required to follow a formal procedure for credit granting. This should include completion of a credit application form, requiring details of trade references and bankers references. If it is an individual the earnings of the individual could be checked. Based on these information, credit limits should be established for the new customers. This information should be recorded in the customer file. Any changes in the customer file should be authorized by a senior personnel (segregation of tasks).

No segregation of tasks in the warehouse/dispatch department and no authorization of GDN
When the SO is received in the warehouse there is only one person (Rob) who does most of the tasks such as checking of stock and creating the GDN. GDN is not authorized by any other person. Also, it can be seen from many GDNs that the goods are released by the same person. All this points show that there is no segregation of tasks in the warehouse/dispatch department.

Recommendations:
The maintenance and custody of stocks must be segregated. Also the GDN should be approved by someone other than Rob based on the SO. The responsibility for approving and filling orders should also be segregated from dispatching.

Security check of goods in the lorries leaving Sheridan AV
The weakness here is that although the goods in the lorries are checked by security staff against GDNs, there is no way of actually finding out whether a certain lorry containing goods was checked or not. There is no trail of this internal control for future reference.

Recommendations:
One copy of the GDN could be stamped ‘security checked’.

Checking SO against GDN
It can be seen that the SO is checked against the GDN only after the goods have been delivered. If any mistakes are found out at this point, it might be difficult to correct it and also it could cost the company (e.g. collection of items that was sent to the customer by mistake).

Recommendations:

GDN and SO should be compared and checked against each other before goods are dispatched by the warehousing/distribution manager, not after the goods are delivered.

No regular stock takes

The stock is only checked when a customer place an order which means that stock can go missing easily and misstatements.

Recommendation:
Do a regular stock take not by Rob but a different person.