(a). Principal Documentation Processes and Records
Karla Kay plc payments should be in such a way that no single person controls the entire transaction alone. The procedure for payment should include a presentation of formal documents to the authority that sanction the payment. The authorities should have a limit on sanction powers such that some payment requires the top management of KK Company to sanction. The records and documents of payments must be properly recorded in the cashbook and maintained. Checks have to be pre-numbered and checked to avoid double payment. Checkbooks should be kept in safe custody. Internal audits of payment are carried out periodically.
Receipts of KK Company should involve segregation of duties such that no single person has exclusive control of the entire transaction of receipts of cash, checks, and drafts. Cash, checks, and drafts should be deposited into the bank when they are received. There should be preparation of bank reconciliation statement, cashbook, and posting of all entries in the ledger accounts. The procedure for receipts should be that only a specified person receives cash and checks. There should also be proper recording and maintenance of all receipts. The receipts in the cashbook are entered the same day and the supervisor checks daily. Unused receipt books and cashbooks should be kept in safe custody. There is also a need for insurance against theft and misappropriation of cash (Gupta 1987, p.129).
KK Company should have documentation, processes, and records in purchases. The procedure for processing orders should involve preparing written purchase requisition by authorized persons. Purchase orders should be pre-numbered, and unused forms kept in safe custody. Suppliers should sign copies of purchase orders, and the copies forwarded to goods receiving department and accounting department. Received goods should only be taken by the receiving department and supported by goods received note (Gupta 187, p.130). The quantity and quality of materials received should also be verified once it arrives, and copies sent to accounting departments, purchases, and stores department. The supplies invoices must be received in the accounting department and matched with purchase order and goods received note. Invoices must be checked for accuracy and entered in the purchase book. Each involves should also have a serial number.
Sales of KK Company products involve processing and dispatching goods. Standard prices of products must be maintained, and controls for discounts and rebates established. A written order is prepared on receipt of order from customers. Sale orders must also be pre-numbered, and there must be proper authorization of credit, price, quantity and other terms of sale. A copy of each sale order has to be sent to dispatch department and accounting department. Each consignment is checked before leaving premises. Acknowledgments of receipts from customers should be maintained. Preparation of sales invoice happens upon receipt of dispatch document.
KK Company should have proper documentation, process, and records of sales return. KK Company should have a limit on the authority of managers on acceptance of goods returned and period returned. Returned goods are accepted after inspection and an inward return note prepared promptly. Returned goods should be returned to the store and a note sent to inventory records. Credit note is also prepared based on inward return note. Credit notes of the company should be pre-numbered and analyzed with reference to reason for goods returned.
KK Company should have an inventories process that ensures proper separation of duties. There must be the authority of purchase, receipts, and issues of inventories. Managers must approve the transfer of inventories between departments. There should be proper documentation of receipts of goods from suppliers and issued of goods. Transfers between departments must also involve documentation. There should be recording of inventory records as receipts and issues take place. KK Company must periodically reconcile the inventories against financial records and cost accounting records. Inventories should also be properly stored, insured, and accessed by authorized persons only.
(b). Principle Risks of Errors, Fraud or Theft
Fraud may be committed on sales and sales return through employees, managers and employees, employees and customers. An employee may manipulate cash received by understating it. The employee may also record a different date from which the actual transactions takes place. He or she would also manipulate sales by recording fictitious sales. The employee may fail to record returned goods. Employees may also collude with customers to defraud a business.
Fraud in sales and sales return can be managed through several control mechanisms. Human resource department ensures that there is periodic evaluation of employees based on risks. Each employee should be vetted to ensure only people of integrity is recruited. The organization should also ensure that it has a robust IT system that promptly detects fraud. Strong passwords should be highly encouraged to curb cases of fraud. Passwords should be highly secretive and never shared between staff. The boards of management have more oversight to probe any new cases of fraud. There should be more frequent monitoring of employees activities by management to detect any new activities by employees.
(c). Tasks of KK Auditors
I. Internal Controls
The KK’s external auditors will inspect the new system to ensure that customer orders are examined for evidence of customer approval. They also ensure the system can examine sales invoice for supporting bill of landing and approved customer order. In addition, the new system must examine file of batch totals for initial of data control clerk. They will also check the new system to ensure it checks sales invoice for supporting documents. The KK’s external auditors also check the new system to ensure it allows for inspection of document package for internal verification. They also check the system to ensure it can scrutinize evidence that account receivable master file is reconciled to the general ledger (Arens et al. 2007, p.436).
II Substantive Testing
The KK’s external auditors will ensure that the new system performs analytical procedures on sales, sales returns, allowances, for doubtful accounts, bad debts, and aging of receivables. They will ensure that the system can review account receivables ledger, cash receipt journal, and sales journal to determine large or unusual items. They will also ensure that the new system allows for examination of evidence of successive cash collection from the customers (Albrecht et al. 2008, p.436). In addition, they will ensure the system enables proper treatment of all related party sales and account receivables. They will check the system to ensure it allows for conducting interviews to client personnel. The KK’s auditors will also ensure that the new system allows for inquiry to management and other client persons about related party receivables. The external auditors will ensure that the new system tests the accuracy of sales by tracking details from sales journal to supporting documents.
Albrecht, WS, Albrecht, CC, Albrecht, CO, & Zimbelman, MF (2008), Fraud examination. Cengage Learning.
Arens, A, Best, P, Shailer, G, Fiedler, B, Elder, R, & Beasley, M (2007), Auditing and assurance services in Australia: an integrated approach, Pearson Education, Australia.
Gupta, K (1987), Contemporary auditing, Tata McGraw-Hill Publishing Company.