Design Controls Proposal

Design Controls Proposal

Apollo Shoes, Inc., has requested a review of its internal control environment with an emphasis on its revenue and collection cycle. Our firm assigned five accountants to review each of the departments involved: Cash, Sales, A/R, Inventory, and Production. A proposal for the appropriate controls in each area follows.

Cash

Segregation of Duties

Cash, of all assets within an organization, is often times the first and primary target of fraud. Because cash is so highly liquid, it is difficult to trace cash-based fraud back to a specific individual. Good internal control for cash begins with appropriate segregation of duties. Cash is usually received at the cash registers and possibly through the mail if a customer is paying on a credit account. The employee taking the cash in should not be the same employee who records the cash receipts. Further, a different employee should make the cash deposits. Segregation of duties helps minimize the risk of theft. Combinations of two or more of these responsibilities in one person, one office, or one computerized system can open the door for errors and frauds (Louwers, Ramsay, Sinason, & Strawser, 2007).

Proper authorization

Proper authorization of cash transactions on behalf of the company should only be given to certain employees. This authorization should come from upper management (CliffsNotes.com, 2013). Proper authorization for cash transactions helps narrow down the search to discover the culprit if theft were to occur.

Documentation

Adequate documents and records consist of preprinted check numbers, receipt numbers, and the journal entries. Using preprinted check numbers and receipt numbers will ensure that cash transactions are only recorded once and will also show if something has not been recorded through journal entries.

Physical controls

The cash on hand should be physically secure at all times (CliffsNotes.com, 2013).This is done by ensuring that cash registers are locked and cash drawers and blank checks are locked in a safe when not in use. Deposits should be done daily so excess cash is not in the store.

Performance evaluations

Independent checks on employee performance should be done randomly and without employee knowledge. This is especially important for the employees who handle cash and record cash transactions. This can be done by counting the cash drawer daily but at different times each day.

Other controls

Other controls such as the bonding of employees and the rotation of employees can also be implemented. The bonding of employees helps the company in the event of employee theft. The rotation of employees can help uncover fraud.

Sales

The Sales department faces similar risks to money or cash, but they are not as liquid or mobile. The time lapse between when a sale happens and when the cash is received it can be open to many problems. It is essential that sales are correctly managed and taken into account. The controls recommended for Apollo Shoes, Inc. follow.

Segregation of duties

Having segregation of duties in sales to review cash refunds, credit terms, sales batches, shipping, and invoices.A clear segregation of responsibilities and having a clear set of policies and procedures known by all, bogus sales and mistakes can be prevented or detected before they occur (Louwers, et al., 2007, p. 253).

Adequate documents and records

The use of pre-numbered consecutive documents and the timely preparation of documents is important. Creating easy-to-use, yet sufficiently informative documents is helpful for both employees and customers. Accountants must be advised to document sales and A/R only if all supporting records are available.

Review process

Having a manager review sales batches, dates and orders with data entered such as quantity, price and other sales order terms. Authorization of credit terms to customers.No sales should be entered without a client order. A daily reconciliation must take place. Pending orders should be reviewed often to prevent failure to invoice.

Accounts Receivable

The finance department must be diligent in controlling Accounts Receivables. Most transactions will be paid with cash, but others will require customers to pay at a later date with the issuance of an invoice. These invoices are expected to be paid within 30 days of receipt. The finance department should keep proper documentation, "which should include individual account balances and a control balance for recording customer payments and credit sales." (Accounting Tools, 2013).

Credit Approval

The finance department may have problems with collecting payment from customers with poor credit. There is no way of knowing unless a credit approval is done beforehand. Management should be required to sign off on a customer's credit approval before transactions are completed to avoid this problem.

Verify payment terms and invoices

With certain purchases, there may be unusual payment terms. These payments should be verified and discussed with the customer before creating an invoice otherwise the customer may not pay the balance due. If an invoice is showing a different amount than what was expected by the customer, they may hold up payment until a corrected invoice is provided to them. Proofreading of larger invoices should be required to control this problem.

Authorization

Employees who have access to incoming customer payments can create unauthorized credit memos for whatever purpose. A manager should formally approve credit memos, which will then be verified later on through audits. With small credit memos, this step is not necessary. The finance department can create small credit memos to clean up open account balances without a concern for fraud. Also, the billing software to create these credit memos should be password-protected to minimize the risk for fraud.

Perform regular audits

Several mistakes can happen during the A/R process. A regular audit schedule of sales journals, invoices, credit authorizations, bill of lading, and cash receipts should be created and implemented to catch mistakes early. Merchandise may be sent to customers without an invoice or with the wrong invoice and payments coming in may be applied

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