1. Identify and discuss the controls for the sales and for the cash receipts.

2. Identify and discuss some possible deficiencies in the internal controls that you have described.

3. Make some recommendations as to how the deficiencies could be rectified.

The Cotton Company

The Cotton Company is a retail store dealing in expensive linens and clothing and has a staff of about 20 sales clerks. The sales are done in cash or credit, using the store’s own billing rather than credit cards. Most of the larger sales are on credit.

Each sales clerk has his own sales book with pre-numbered, three-copy, multicolored sales slips attached, but perforated. Only a central cash register is used, run by the store manager. He has been working for Zafir Diab, the store owner, for over 15 years. The cash register is physically positioned to monitor the entire store and the front door.

All sales transactions are recorded in the salesclerk’s sales books. The original and second copy for each sale is given to the cashier. The third copy is retained by the salesclerk in the sales book. When the sale is for cash, the customer pays the salesclerk, who marks all three copies “paid” and takes the money to the supervisor. The supervisor compares the clothing to the description on the invoice and the price on the sales tag. He also rechecks the clerk’s calculations. Any corrections are approved by the salesclerk. The clerk changes his sales book at that time, and the items are packaged and given to the customer.

A credit sale must be approved by the supervisor from an approved credit list after the salesclerk prepares the three part invoice. Next, the supervisor enters the sale in his cash register as a credit or cash sale. The second copy of the invoice, which has been validated by the cash register, is given to the customer. Diab must approve any credit sales that exceed $500.

At the end of the day, the salesclerks give their books to the supervisor and the supervisor compares the totals to the cash register tape. He then creates a summary of the day’s transactions. The cash is deposited in the bank the next morning by Diab, and he receives a deposit slip which he gives to the accounts receivable clerk. If Diab is unable to deposit the money, the supervisor goes instead. The cashier’s copies of the invoices are also given to the accounts receivable clerk along with a summary of the day’s receipts.

Khalid, the accounts receivable clerk, reviews the sales books and the cash register tape. He inputs all sales invoice information into the firm’s computer, which provides a complete printout of all input and summaries. The accounting summary includes sales by the salesclerk, cash sales, credit sales and total sales. Khalid compares this output with the summary and reconciles all differences.

The computer updates accounts receivable, inventory, and general ledger master files. After the update procedure has been run on the computer, Khalid’s assistant files all sales included in the sales printout. Khalid uses these files to create bills that are mailed to the customers.

The mail is opened each morning by Diab’s secretary. She gives all correspondence to Diab and all payments to the supervisor. The supervisor totals the amounts and adds this to the register for later deposit. He gives the total to Khalid to update customer accounts on the computer. Khalid uses this list and all the remittances to record cash receipts and update the accounts receivable, again on the computer. He reconciles the total receipts on the pre-list to the deposit slip and to her printout. At the same time he compares the deposit slip received from the bank for cash sales to the cash receipts journal. He has online access to the store’s bank account, which he accesses monthly to pay the store’s bills online.

The computer generates a weekly aged trial balance of accounts receivable. A separate listing of all unpaid bills is also automatically prepared, and both are given to Mr. Diab. He approves all write-offs of uncollectible items and forwards the list to Khalid, who writes them off.

Each month Khalid mails computer generated statements to customers. Complaints and disagreements are resolved by Mr. Diab, who then informs Khalid in writing of any write-down or misstatements that require correction.

The computer system also automatically totals the journals and posts the totals to the general ledger. A general ledger trial balance is printed out, from which Khalid prepares the financial statements. Khalid also prepares monthly bank reconciliations and reconciles the general ledger to the accounts receivable trial balance.

Because of the importance of inventory control, Khalid prints out the inventory perpetual totals monthly, on the last day of each month. Salesclerks count the entire inventory after store hours on the last day of each month for comparison with the perpetual records. An inventory shortage report is provided to Mr. Diab. The perpetual records are adjusted by Khalid after Mr. Diab has approved the adjustments.