Apollo_Shoes

Apollo Shoes Case ACC/491 May 17, 2009 Date: Thu, 17 JAN 2008 7:42:53 +0000 From: "Darlene Wardlaw" Subject: Understanding the Revenue Cycle Attachment: I’ve attached a Sales internal control questionnaire from another engagement that I think you can use for Apollo. You may want to talk to Karina Ramirez to get answers to the questions. 1. Complete the ICQ for Apollo. For “yes” answers, add a comment stating which department and clerk performs the function. For “no” answers, describe the possible “errors” or “frauds” that could occur because of the control weakness. 2. I’ve started a flowchart and listed some strengths and weaknesses, but had to leave before I could finish it. See if you need to add any more strengths and/or weaknesses that you find from the ICQ and narrative descriptions of the revenue cycle. DW Date: Thu, 17 JAN 2008 13:02:47 +0000 From: "Karina Ramirez" Subject: Revenue and Collection Cycle Documentation I have excerpted from our workpapers a description of Apollo’s Accounting and Control Systems over the Revenue/Collection Cycle and Purchasing/Cash Disbursements. I’ve also gave a copy of a flowchart of sales transaction processing to Darlene. We have not developed one for the purchasing cycle yet, but we plan to do so once your audit is ended and our assistance is no longer necessary. Hope you find the info useful. Let me know if you have any questions. Karina Karina Ramirez Director, Internal Audit Apollo Shoes, Inc. This Apollo message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message and are hereby notified that any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. Apollo Accounting and Control Systems: Revenue and Collection Cycle As evident in the company organization chart, Apollo has several departments and offices concerned with management, accounting, and control. The company also has an abbreviated accounting and control manual, although the manual has not been kept up to date. Officers and employees have described accounting and control procedures informally under the heading of several transaction cycles. Their descriptions of the company's current revenue cycle activities appear below. Credit Approval and Sales Processing Customer orders are received in the mail, over the telephone, and over the counter by salesclerks in the marketing department. The clerks prepare written sales orders for telephone and counter customers, signing each one and asking the counter customers to sign in person. The sales orders contain the customer name, a customer number (assigned immediately for new customers), customer address, identification of products, and the quantity ordered. The sales order forms are kept in the salesclerks’ working area through which many people pass during the day. The sales order documents used in the offices are not prenumbered. The salesclerks prepare an estimate of the dollar amount of the order and write it on the form. The sales orders are then hand-carried to the credit manager, who is in the treasurer’s department. The credit manager checks the customers’ accounts receivable balances and other credit file information using a computer-based inquiry system. If credit is approved, the credit manager signs the sales order. If credit is not approved, the customer is asked to pay in advance, and the sales order is held until notification of payment is received from the cashier. The sales order is stamped “paid” and sent to the billing department. Likewise, when customers pay cash over the counter, the money is taken by the cashier, and the sales order is stamped “paid” and sent to the billing department. For bookkeeping convenience, these “cash” sales are treated the same as credit sales, with the invoice amount being charged to an account receivable set up for the customer, and the customer’s payment being applied immediately to the same account. After credit has been approved, or a payment received, the sales orders are sent to the billing department in the controller’s office. The billing clerks produce a four-copy sales invoice on a prenumbered invoice form. Using a screen facsimile on a personal computer, they insert the customer and product information from the customer order, the date, and the product unit prices from an approved price list. Sales taxes, delivery charges, and the invoice total are computed and put on the invoice. The sales invoice forms are kept in a locked closet in the billing department, and sheets in the numerical sequence are removed only for billing clerks’ immediate loading onto the computer printer. Copy 1 and copy 2 of the sales invoice, the customer order, and the sales order are sent to the accounts receivable accounting department, which is also in the controller’s office. These documents are held in invoice numerical order in a “pending shipment” file, awaiting matching with copy 4 of the invoice, which was first sent to the inventory stores department as authority for the storekeeper to put the order together and move it to the shipping department. Copy 3 of the invoice is sent to the shipping department, where it is initially held in a “pending release” file. Shipment and Delivery Upon receipt of an invoice copy 4, which serves as the authorization to move goods to the shipping area, the inventory storekeeper supervises removal of shoe products from shelves and bins. Copy 4 is sent to the shipping area with the products. In the shipping area, shipping employees remove copy 3 from the “pending release” file. They check both copy 3 and copy 4 for the correct quantity of each product, then pack the order in suitable boxes. Copy 3 is sent to the inventory records department in the controller’s office, where it serves as the source of entries to reduce the perpetual inventory records. If any items shown on the invoice are not shipped, the handlers are supposed to alter the invoice copies to show the correct quantity. When customers are on the premises, they can pick up their own orders at the shipping area, where they are asked to sign copy 4 as acknowledgment of receipt. Otherwise, a prenumbered bill of lading is filled out in two copies for shipments by contract truckers. Copy 1 of the bill of lading is attached to the shipment. Copy 2 of the bill of lading is sent with invoice copy 4 to the accounts receivable accounting department. Internal Control Revenue and Cash Receipts Cycle Date: Mon, 25 May 2009 2:56 From: Team A Subject: ICQ and flowchart Attachment: completed ICQ and Flowchart Internal Control Questionnaire—Sales Transaction Processing Assertions and Questions Yes, No, N/A Comments Occurrence assertion: 1. Is the credit department independent of the sales department' yes Credit Manager is in Treasurer’s Department 2. Are sales of the following types controlled by the same procedures described below' Sales to employees, COD sales, disposals of property, cash sales, and scrap sales. Yes Billing Clerk – All sales handled in the same way 3. Is access to sales invoice blanks restricted' Yes Billing Clerk – kept in locked cabinet 4. Are pre-numbered bills of lading or other shipping documents prepared or completed in the shipping department' Yes Shipping Clerk Completeness assertion: 5. Are sales invoice blanks pre-numbered' Yes Billing Clerk 6. Is the sequence checked for missing invoices' Yes Accounting Clerk 7. Is the shipping document numerical sequence checked for missing bills of lading numbers' No Possible missed sales Accuracy assertion: 8. Are all credit sales approved by the credit department prior to shipment' Yes Credit Manager 9. Are sales prices and terms based on approved standards' Yes Billing Clerks – used approved price lists 10. Are returned sales credits and other credits supported by documentation as to receipt, condition, and quantity, and approved by a responsible officer' No Possible duplicate or inaccurate credit to customer 11. Are shipped quantities compared to invoice quantities' Yes Shipping Employees 12. Are sales invoices checked for error in quantities, prices, extensions and footing, and freight allowances, and checked with customers’ orders' No Possible errors on invoices due to math error with extensions 13. Is there an overall check on arithmetic accuracy of period sales data by a statistical or product-line analysis' Yes Marketing Vice President 14. Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting' Yes General Ledger Supervisor Classification objective: 15. Does the accounting manual contain instructions for classifying sales' Yes Accounting Clerk – 3 product lines Cutoff objective: 16. Does the accounting manual contain instructions to date sales invoices on the shipment date' Yes Accounting Clerk - Instructions are to date them the same date Apollo Revenue Cycle Flowchart (S-1) Credit department and sales department are independent of each other. All credit sales are approved by the credit department prior to shipment. (S-2) All sales prices and terms are based on approved standards and checked by billing clerks. (A) Pre-numbered bills of lading or other shipping documents are prepared or completed by the shipping clerk. (B) Copy 3 of the invoice is sent to the shipping department, where it is initially held in a “pending release” file. (W-1) The shipping employees compare all shipping quantities to invoice quantities and put order together. Apollo Accounting and Control Systems: Purchasing and Expenditure Cycle The employee prepares a purchase requisition and has a supervisor approve it. The supervisor retains Copy 2 of the pre-numbered purchase requisition for the department, sends Copy 1 to the Purchasing Department and Copy 3 to Accounts Payable. When the Purchase Department receives the purchase requisition, they search the approved vendor list and consult the listed prices for the goods desired for each vendor. Once a vendor has been selected, five copies of a pre-numbered purchase order are prepared. Copy 5 is retained in the purchasing department and filed with the accompanying purchase requisition. Copy 2 is sent back to the department who prepared the purchase requisition, where both source documents are filed by number together. Copy 3 is sent to the Receiving Department. However, their copy is modified so that the quantity of the items ordered is blacked-out. Copy 4 is sent to Accounts Payable. Copy 1 of the purchase order is sent to the selected vendor. When the goods are received, the invoice is sent to Accounts Payable and the packing slip is retained in Receiving. The Receiving department verifies the order by comparing the external packing slip with the internal purchase order. Then they count and inspect the items received. The blacked-out purchase order helps to ensure accurate counting of the items ordered. To further assure that the items received are counted, the receiving clerk is required to sign the receiving report. Once the manual process is complete, the inventory file is updated to reflect the goods received and three copies of a pre-numbered receiving report are prepared. Copy 1 and the goods received are sent to the department that requested the items, where it is filed with the accompanying purchase requisition and purchase order. The Receiving Department files Copy 2 of the receiving report with the packing slip and their copy of the purchase order. Copy 3 of the receiving report is sent to A/P where it, the purchase order, and the purchase requisition are compared to the vendor’s invoice for accuracy. The voucher package is then filed according to payment date. This allows the potential for taking any vendor discounts offered. When payment is due, a disbursement voucher is prepared and is sent to the cashier and the voucher package is sent to the Finance Department. Upon receipt of the disbursement voucher, the cashier will review, sign and cancel the disbursement voucher and prepare a check. The VP of Finance will sign the check after reviewing it with the voucher package for consistency and accuracy. The VP of Finance cancels the voucher package and sends it to A/P. The canceled disbursement voucher is sent to A/P from the cashier, where it is matched and filed with the accompanying canceled voucher package. The VP of Finance sends a copy of each signed check to A/P. The copy is then attached to the canceled voucher package and canceled disbursement voucher and filed as paid. A journal entry is recorded to show the payment of the payable. Apollo Shoes, Inc. ICC-2 Revenue Cycle Test of Controls Prepared by BC For Year Ended 12/31/2007 Reviewed by Team A Deviation Sample # Invoice Month Day Amount Customer Deviation 1 21 39918 Sep. 23 $35,029 Nuke Me Wrong quantity. Overcharge $250. CM Nov. 5. 2 37 39357 Aug. 28 $11,326,574 Mall-Warts No credit approval. Unpaid as of Dec. 31. 3 50 35669 Apr. 18 $2,447,119 Mall-Warts No credit approval. Paid in full on time. 4 51 41612 Dec. 10 $2,165,501 Run For Your Life No credit approval. Unpaid as of Dec. 31 5 52 42056 Dec. 28 $730,588 Shoe Shack Wrong quantity. Overcharge $200. No CM. Unpaid. 6 61 40812 Nov. 3 $3,051,755 Neutralizer No credit approval. Unpaid as of Dec. 31. 7 66 39684 Sep. 13 $139,246 Imelda's Closet No credit approval. Paid in full on time. 8 67 33762 Feb. 21 $1,478,296 Mall-Warts No credit approval. Paid in full on time. 9 72 40004 Sep. 27 $35,029 Nuke Me Wrong quantity. Overcharge $180. CM Nov. 4. 10 86 40256 Oct. 8 $9,582 Wall of Shoes No credit approval. Unpaid as of Dec. 31. 11 89 34233 Mar. 5 $35,029 Nuke Me No credit approval. Paid in full on time. 12 91 39640 Sep. 11 $92,900 Pump It Up Shoes Arithmetic error. Overcharge $8,100. CM Nov. 1. 13 104 39036 Aug. 14 $35,079 Nuke Me Wrong price. Overcharge $50. CM Sept. 12 14 109 41326 Nov. 27 $45,258 Eight East No credit approval. Unpaid as of Dec. 31. 15 112 39113 Aug. 17 $524,239 Walkabout Wrong price. Overcharge $50. CM Sept. 1. 16 116 41754 Dec. 16 $10,458,848 Paul Bunion No credit approval. Unpaid as of Dec. 31. 17 121 33430 Feb. 11 $2,492,336 Paul Bunion Missing BL. Paid in full on time. 18 123 41774 Dec. 17 $3,376 Pump It Up Shoes No credit approval. Paid in full in Jan. 19 125 37526 June 14 $35,029 Nuke Me No credit approval. Paid in full on time. 20 132 42065 Dec. 29 $2,649 Doug's Arithmetic error. Overcharge $15. CM Jan. 15. 21 133 33217 Feb. 4 $35,029 Nuke Me No credit approval. Paid in full on time. 22 137 40725 Oct. 30 $146,446 Lockup Shoe Store No credit approval. Paid in full on time. 23 143 39160 Aug. 19 $110,002 Evil Spirt Wrong price. Overcharge $220. CM Sept. 30. 24 148 39130 Aug. 18 $112,239 Wild Hair Shoes Wrong price. Overcharge $50. CM Sept. 20. 25 161 38488 July 19 $4,333,275 Mall-Warts No credit approval. Paid in full 60 days. 26 161 38488 Wrong price. Overcharge $700. CM Aug. 5. 27 166 38816 Aug. 4 $3,000 Blue Bird Shoes Wrong price. Overcharge $2,000. CM Sept. 10. 28 180 41898 Dec. 22 $35,029 Nuke Me No credit approval. Paid in full in Jan. 29 186 39163 Oct. 19 $1,030,239 Tread Wrong price. Overcharge $1389. CM Dec. 4. (Neutralizer) 30 190 41341 Nov. 27 $13,332 Blue Bird Shoes No credit approval. Paid in full on time. 31 191 38669 July 27 $62,300 Intnl Soccer Federation Wrong price. Overcharge $100. CM Aug. 15. 32 193 35969 Apr. 24 $22,450 Pump It Up Shoes Missing BL. Paid in full on time. 33 225 39439 Aug. 31 $65,392 Custom Shoes No credit approval. Paid in full on time. 34 228 38191 July 6 $357,246 Pump It Up Shoes No credit approval. Paid in full on time. 35 228 38191 Wrong price. Overcharge $100. CM Aug. 6. 36 232 36111 May 1 $1,257,923 Mall-Warts No credit approval. Paid in full on time. 37 234 39485 Sep. 4 $35,069 Evil Spirt No credit approval. Paid in full on time. 38 238 40425 Oct. 16 $6,242 Blue Bird Shoes No credit approval. Paid in full on time. 39 240 32270 Jan. 6 $2,447,829 Mall-Warts No credit approval. Paid in full on time. 40 242 37498 June 13 $250,326 Sassy Shoes No credit approval. Paid in full on time. 41 245 41306 Nov. 26 $63,259 PayMore Shoes No credit approval. Unpaid as of Dec. 31. 42 252 38582 July 23 $5,249 Blue Bird Shoes No credit approval. Paid in full on time. 43 259 39057 Aug. 14 $4,792 Blue Bird Shoes Missing BL. Paid in full on time. 44 265 39578 Sep. 8 $63,259 Company B No credit approval. Unpaid as of Dec. 31. 45 268 35100 Apr. 1 $35,029 Nuke Me No credit approval. Paid in full on time. 46 269 38773 Aug. 1 $329,374 Trenchfoot Wrong price. Overcharge $35. CM Aug. 22. 47 280 38744 Aug. 1 $750,000 Intl Soccer Federation Wrong price. Overcharge $25. CM. Aug. 10. 48 289 39436 Aug. 31 $35,029 Nuke Me No credit approval. Paid in full on time. 49 291 38740 Aug. 1 $139,666 Sassy Shoes Wrong price. Overcharge $500. CM. Aug. 22 50 292 41976 Dec. 28 $5,765,082 Mall-Warts No credit approval. No purchase order. Unpaid as of Dec. 31. 51 296 40686 Oct. 28 $5,765,082 Sassy Shoes No credit approval. Unpaid as of Dec. 31. Revenue Test of Controls Apollo Shoes ICC-1 Bridge Working Paper Revenue Cycle December 31, 2007 Index Colum S - # / W - # Control Activity Strength/Weakness Test of the control Compensating Procedures S – 1 Credit Sales are approved by the credit department Separating the approval of credit from the sales department ensures that only customers that are credit worthy are given credit. Determine size and parameters of the credit sales population. From this population select a representative sample and ensure that the approval for credit was given by the credit department. Obtain a copy of the credit guidelines given to the credit department and compare this to a sample of customers given credit to ensure that only financial sound customers are given credit. S – 2 Sales Prices and terms are standardized and sales are reviewed by the billing clerk to ensure compliance with company standards By standardizing the price and terms of sales contracts the company ensures that the sales department does not have discretion. The review by the clerk of the sales ensures that customers are billed properly Determine size and parameters of sales invoice population. From the population select a representative sample and confirm that the invoice was within the company stated standards and that it was reviewed by the billing clerk. Send out confirms to a select sample of customers who have been billed in the past period. Asking them to confirm the specifics of the invoice, i.e. date, price, terms and return the confirm directly to the auditor. This will test whether invoices were altered after they were completed. S – 3 Invoice from the Shipping Department are sent to the A/R department once shipment is complete The matching of the sales invoices from the Shipping Department to the A/R Department ensures that all sales have been carried out. Determine size and parameters of the population. From the population select a representative sample and confirm that the 2 invoices that were initially sent to the A/R Department are matched with the invoice sent from the shipping department. Send out confirms to a select sample of customers to confirm that they received the product, number of products, and timing of shipment as specified in the invoices in the files of the A/R Department. A Pre-numbered bills of lading or other shipping documents are prepared or completed by the shipping clerk. The pre-numbered bills of lading and other shipping documents ensures that items are not shipped that have not been properly ordered. Determine size and parameters of the population. From the population select a representative sample and confirm that the pre-numbered bills of lading match the sales invoice numbers Complete the original test for this control but work backwards selecting invoices and confirming that there is a corresponding pre-numbered bill of lading or shipping document B Copy of invoice is sent to shipping department and put in a "pending shipment" file. When the items for shipment are received from the store manager the shipping department can compare the items to be shipped are inconformity with the invoice Observe the process of the shipping department receiving an invoice and creating a "pending shipment" file. Sample a list of "pending shipment" files and agree these to the invoices sitting with the store manager. W – 1 Shipping Employees compare shipping invoices to shipping quantities. Ensures that the proper numbers of items are shipped. Determine size and parameters of the population. From the population select a representative sample and confirm the review of the shipping employees of quantities to be shipped, can also be seen in any alteration. Reperform the process with the shipping employees. Memorandum From: Team A Subject: Problems found in the sampling of Sales and Accounts Receivables We have audited a sample of sales transactions for compliance with the procedures for A/R and Sales. 1. We just picked 120 transactions, 10 from each calendar month. From this, we should be able to safely assume that all deviations should be evenly distributed each month, if the control performance were uniform for the year. However, that was not the case. 2. Another issue we have is that we noticed that Apollo Shoes faced financial problems in the fourth quarter of the year—the problems could come from the amount unpaid totaled to be $38,668,942—all without credit approval, when clearly in the company’s revenue and collection cycle states that “If credit is not approved, the customer is asked to pay in advance, and the sales order is held until notification of payment is received from the cashier.” This shows that the company does not follow its procedures as the cycle states that it does. 3. Stating that, we noticed that within the 120 transactions, there were total overcharges of $13,964, $2,849 of it was in December. Overcharges and other mistakes can make a big difference in December on the financial statements. 4. In going over the minutes of the board of officers meeting held June 30, 2007 we noticed that the board had advanced Mr. Lancaster, a member of the board of officers, $1,000,000 at a 1% rate not returnable until 2045 and voted to “hide” this advance in the ‘other receivables” section of the financials. We see this as a possible serious cause for fraud alarm and should adjust assessments to investigate. We’ve listed just several problems—enough to affect our audit procedures. These problems require us to do more extensive testing by confirming most or all the accounts receivable balances. We will perhaps need to do some confirmations with some of Apollo Shoe’s clients, positive confirmations to those customers with a balance greater than $1,000,000, and negative confirmations to those with a balance less than $1,000,000. Internal Control Purchasing and Cash Disbursements Cycle Date: Sat, 19 JAN 2008 00:35:24 +0000 From: "Darlene Wardlaw" Subject: Purchasing Cycle Bridge Working Paper I am glad that you don’t mind working on Saturdays. Welcome to “Busy Season!” Similar to what you did with the Revenue Cycle, I want you to prepare a bridge working paper for the audit of Apollo Shoes as of December 31, 2007, listing the major errors that could occur in the purchasing system and to describe the test of controls procedures for auditing related purchasing controls to determine whether reliable control exists. I don’t think that Apollo has enough purchase transactions that we need to rely on the controls (in other words, we’ll look at them all), but we need to document our finding for our 404 work: 1. In the first column, use an index number (S-# or W-#) to indicate potential strength or weakness. If you have time, you may want to prepare a purchasing cycle flowchart. Not required, but could be helpful. 2. In the second column, describe the control activity (or lack thereof) that may serve to prevent, detect, or correct errors or frauds. Understand that Apollo may or may not have the control activity in place. If they do, we may test the control if that is cost-effective. If they don’t, we can propose the control as a management letter comment. 3. In the third column, describe the audit implications of the strengths/ weaknesses related to the control activities with respect to transactions or accounts reported in the financial statements (e.g., the presence of a properly completed purchase order check ensures that purchases are authorized). 4. In the fourth column, describe how specifically how (recalculation, reperformance, inquiry and observation, etc.) you would test the control. 5. Finally, add a fifth column for compensating audit procedures. If the control activity is not in place, or the control activity is in place but not effective, we need to determine what audit procedure (i.e., a compensating test) we could use to catch them. (For example, we can use customer confirmations to test the validity of the transactions if we can’t rely on the client’s controls.) DW Date: Mon, 25 May 2009 3:00 From: Team A Subject: Purchasing Cycle Bridge Working Paper Apollo Shoes ICD Series Bridge Working Paper Purchasing System December 31, 2007 Index Colum S - # / W - # Control Activity Audit Implications How to test the control Compensating Audit Procedures S – 1 Purchase requisitions are approved by a supervisor and Sets control over purchasing by requiring more than one person in control of ordering Watch the process for effectiveness and problems This process will help identify missing transactions S – 2 Carbon Copies are created for purchasing, a/p and the supervisor Provides a system to check transactions against Watch the process and go through previous transactions This process will ensure that p/os are not missed S – 3 Numbered p/o’s are used and given to each the vendor, the party that ordered, receiving and a/p Ensures accuracy and communication between departments, and the vendor Check the P/O logs of each department and follow the process through until it reaches A/P This process will ensure that all invoices are recorded in a/p and that there is a paper trail to find where the p/o came from. S – 4 Accounts payable matches the invoice to the purchase order the receive Ensures accuracy on the amount of purchase dollars authorized Ensures accuracy in ordering and authority This process will help keep authorizations in check and balances straight S – 5 Purchasing must use a vendor from the approved list Ensures quality and expected pricing of materials ordered Monitor the process Sample vendors from list with calls to verify amounts on their a/r with our a/p Ensures that purchases are not made to fictitious companies and that prices and quality is in-check S – 6 Receiving manager must count and sign-off on the packing slip from the vendor Gives receiving accountability for materials received and ensures accuracy in number received Watch process without manager’s knowledge to make sure they are actually counting the incoming shipments before they sign it This process will help make sure that we are not charged for items we did not receive. W – 1 Billing Credit Approval should be separate Weakness Billing should be separate from credit approval so customers that should be on C.O.D do not get product without payment W – 2 The numbers are passing through a lot of hands Many hands can lead to misstatements due to human error in counting etc. This process must be observed to determine weaknesses better. This process will help to ensure that inventory items are correct