Assessment Task Two - Due 11:00pm, Sunday 21st May 2017
SCU Limited (SCU) sells clay tiles to the construction industry and has been in existence for
the last four years. During this period, the financial controller has been refining the system of
internal control and informs you that he has put together an internal control manual for the
company. He has stated that this manual will create greater awareness of controls in the
company, particularly with management which, in the past, has not been overly conscious of
the need to implement and enforce effective internal controls.
Management staff receive bonuses based on certain agreed-upon target ratios which include
measures such as targeted monthly sales volumes, variance of actual to budget departmental
overheads and profit before interest and tax. The major shareholder takes an active interest in
the performance of the company and is quick to request explanations on variances from the
agreed-upon monthly budgets.
Two years ago, the company devoted significant time and resources to the development and
implementation of a new IT system. All teething problems associated with the
implementation phase have now been resolved and the financial controller is satisfied that the
automated controls in place are assisting in producing accurate and complete accounting
records. The sales director also looks after the IT function as the position is not regarded by
management to be a full-time job. Once application programs have been tested, strict
password control exists over access to the programs. Passwords are not required for access to
The following information has been extracted from a review of the systems notes in the
permanent file and perusal of the new internal control manual:
A) Manual delivery notes for despatch of tiles to customers are raised by the despatch
department from the sales order form. Where a delivery is only partially filled, the delivery
note is marked ‘hold for invoice’ and placed on the incomplete deliveries file. At month end,
the supervisor of the despatch department is responsible for follow-up of the reasons for
incomplete deliveries outstanding for greater than 30 days.
B) Returns of tiles by customers due to breakages, inferior quality, incorrect specifications or
oversupply are received by the despatch department where staff are required to check
quantity and condition of the returned tiles. Details noted by the despatch personnel,
including the reason for the return, are recorded on a goods returned note. Once completed,
this document is passed on to the trade receivables clerk who raises a credit note and sends it
to the customer.
C) Once a delivery has occurred, the office copy manual delivery note is forwarded to the
trade receivables clerk who is responsible for generating an invoice on the computer system.
An invoice is raised by inputting the total quantity delivered (note: this could be a number of
partial deliveries) and the stock code which are both recorded on the delivery note. The
computer then automatically retrieves the stock code price from the selling price master file.
Posting to the debtors account occurs automatically once the trade receivables clerk has
performed a screen check on the accuracy of the input of delivery details.
D) For valued customers, discounts are applied in accordance with the company’s volume
rating system. The trade receivables clerk is responsible for updating the individual customer
volume ratings every six months after preparing the ‘sales volume analysis by customer’
report. This report is authorised by the sales director prior to updating the customer discounts.
E) A sales journal summarising all sales invoices is prepared monthly by the computer
system. This journal is then used by the trade receivables clerk for posting to the general
F) Receipts from debtors are passed on to the trade receivables clerk after having been
opened by the mail room. The trade receivables clerk lists all receipts from the debtors and
then prepares a bank deposit slip. The list prepared by the trade receivables clerk is used to
enter the debtors’ payments on the computer system. The batch total of postings to the
individual debtors’ accounts is balanced to the bank deposit slip before processing occurs on
G) At each month end, the trade receivables clerk prepares a reconciliation of the trade
receivables ledger to the debtors control account in the general ledger.
H) The computer generates an aged analysis at month end based upon all invoices that have
been processed onto the system for the period up until the last day of the month.
I) The financial controller obtains the latest trade receivables aged analysis at the end of each
month and reviews all amounts outstanding for longer than 90 days. The trade receivables
clerk is required to detail reasons for delays in payment by long outstanding debtors and the
financial controller discusses items of concern with the clerk.
J) Usually an action plan is agreed for follow-up; this may include involvement of debt
collectors or the issuing of writs. Where necessary, the financial controller records details of
amounts that should be provided for as doubtful debtors. While performing this review, the
financial controller notes the level of individual debtors’ balances and, in instances where he
is uncomfortable with the level of this balance, he instructs the despatch area to withhold any
shipments until a minimum prescribed payment is received.
1. Identify and briefly discuss five (5) factors at SCU you would need to consider in your
assessment of the effectiveness of SCU’s control environment?
2. Identify five (5) effective internal controls in the system and determine for each internal
control, the risk that the control would/could mitigate.
3. Identify and briefly discuss ten (10) weaknesses in internal control for sales and trade
receivables that you would bring to SCU management’s notice in your management letter.
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