Recursos Humanos

Internal Control Questionnaire - Accounts Receivable

Client: The Lakeside Company Prepared by: Date: Questions Comments on Current System Significance Suggestions 1 Does an independent party on a regular basis reconcile the subsidiary ledger? The subsidiary ledger is reconciled annually by the independent auditors.

During the year, virtually no control is maintained over Miller's handling of the subsidiary ledger. The

possibility that errors or irregularities will be discovered on a timely basis becomes remote if not impossible. In addition, Miller has the opportunity for manipulating the records to cover thefts and other defalcations.

On a periodic basis, a member of the administrative staff should verify that the subsidiary ledger for accounts receivable agrees with the general ledger control account.

2 Are appropriate,

Questions Comments on

Current System Significance Suggestions place for writing off

doubtful accounts?

are nebulous and seemingly based solely on the judgment of Miller.

the consistency of removing bad debts from one year to the next. Once again, no control appears to exist over Miller's judgment.

bad accounts. This system need be no more than a list of steps to be taken prior to the decision to remove an account. Company needs to ensure a review of these accounts. 3 Are accounts to be

written off properly reviewed and authorized by an independent party?

No independent party authorizes the write-off of bad accounts.

The removal of bad accounts can be used to cover cash thefts. Also, write- offs may be approved without sufficient attempts being made at collecting the receivables.

Once a system has been established for the write-off procedure (see Question 2), an independent employee should be required to review every account prior to removal to make certain that all proper steps have been followed.

4 Is an appropriate follow up made on accounts that are written off?

Follow-up of bad debts is not addressed in the case; Mitchell does not ask this specific question.

If no follow-up is made, the company reduces the

possibility of making any future collection. Additionally,

attempting to collect an old account receivable is a control mechanism to ascertain that the balance has not actually been paid and the money stolen or the collection recorded incorrectly. Finally, if no follow-up is carried out, the opportunity exists for employees to steal the money if it should be received at a later date.

The receivable can be turned over to an outside collection agency or, as an alternative, a member of

Lakeside's staff can be assigned to look into the bad

accounts periodically.

5 Does the company periodically re- evaluate the method in use for estimating

No reevaluation of the method for estimating bad accounts has been

No proof exists that the bad debt expense and the allowance for

Client should schedule recent bad accounts to arrive at a new estimation of

Questions Comments on

Current System Significance Suggestions bad accounts? made by the client

company.

doubtful accounts is fairly presented.

the bad debt percentage. 6 Are customers billed

regularly by a party separate from the subsidiary ledger?

The first three invoices are mailed by the sales division; any further billing is made by Miller, who is in charge of the subsidiary ledger.

By having Miller send the last invoices, the opportunity for manipulation is increased. In a small company such as Lakeside, this situation is not unusual, but it should be accom- panied by additional control and reconciliation features. Control can be established by allowing Miller to continue the billing, but with the addition of the control procedures suggested in several of the other questions. 7 Is an independent verification made of complaints from customers

concerning their bills?

The responsibility for looking into

complaints is vested in Miller.

Again, all of the responsibilities are in the hands of one person with no independent control being applied. This lack of control reduces the

possibility that errors will be discovered. Basically, an opportunity to establish control over Miller's work is being missed.

Lakeside should have complaints sent to an employee who can then discuss the matter with both Miller and the customer to make certain that the issue is properly resolved.

8 Was the company’s policy of granting credit changed over the past year?

According to the client, no formal change in the policy of granting credit has been made.

However, the increases in the size of the receivables, the increase in the average age of the balances, and the apparent write-off of additional

uncollectible accounts indicate the possibility that some, perhaps informal,

Any shift in credit policy requires auditor attention as to the effect on the allowance account and bad debt expense. Abernethy and Chapman may want to review the new customer accounts opened during the current year for any indication of a change in credit policy. This issue may be especially significant in the

Lakeside should adopt a policy to guide Rogers in his credit decisions. In addition, outside verification of credit ratings on a periodic basis would help reduce the risk of high bad debt losses.

Questions Comments on

Current System Significance Suggestions modification has

occurred. Because the credit policy has never been formally established, the auditor may have trouble

distinguishing an actual change.

Lakeside audit since credit reports are filed by the sales representatives who are paid on

commission, thus benefiting from an increase in sales. 9 Can a credit sale

possibly be made without prior credit approval?

No indication is given in the case as to whether sales invoices are verified after the shipment to ascertain appropriate credit approval. The system is designed so that credit approval is

necessary before the sale is made, but no control mechanism is identified to assure that the system is working properly.

To the auditor, the possibility of a sale being made without credit approval casts further doubts on the reliability of the system of controls. As a part of the tests of controls, the auditor will want to review a sample of sales invoices for proper credit approval.

At the point in the accounting system at which the extensions and prices are verified, the presence of credit approval should also be checked.

10 Are credit files complete and periodically reviewed?

Credit files contain only the sales representative's credit reports and do not appear to be reviewed periodically.

As indicated above, the credit granting policy is informal and based almost solely on Rogers'

judgment. Thus, the efficiency of the system is unknown, and review of the system by the auditor is quite difficult. As a part of the design of a comprehensive credit system, Lakeside should determine the desired contents of a credit file including items such as outside credit reports, financial statements, correspondence, etc. Periodically, these files need to be reviewed by an independent Lakeside employee to verify that all information is complete and up-to- date. Each

customer's file is also reevaluated at regular time intervals to judge whether

Questions Comments on

Current System Significance Suggestions credit should continue to be offered. 11 Are invoices verified

as to agreement with goods shipped and price of goods?

Verification of goods and prices is made by Lakeside employees. Miller implies that his checking of prices and extensions are not made on a timely basis. In addition, this verification is another responsibility pertaining to accounts receivable concentrated in Miller's hands. Verifying extensions and prices after the invoice has been sent to the customer is not a logical approach. Also, having Miller perform this task adds nothing to the efficiency of the organization.

All verifications should be made prior to mailing the invoice, ideally by a different employee.

12 Are extensions and

footing recalculated? See answers for question 11. 13 Are cash discounts

recomputed and verified as to actual days?

Cash discounts are verified by the sales division. System appears adequate. Financial information should be fairly presented. None.

14 Can a sale possibly be made and goods shipped without an invoice being recorded or mailed?

Using prenumbered sales invoices and bills of lading along with the periodic verification of all numbers is essential in assuring that all sales are recorded. In an earlier case, the use of

prenumbered forms is mentioned. Miller suggests that the presence of all forms is tested periodically, but the auditor should specifically ask about that procedure.

If the possibility exists that the company can make sales without recording them, the auditor's ability to gain assurance as to completeness assertion may be severely hampered.

Since the documents are already

prenumbered, the auditor needs to make certain that Lakeside has a policy for periodically verifying the

presence of all forms.

(2)

Case 5 - Exercise 2