Question Tag: Segregation of Duties

You are carrying out the audit of the sales system of Sofa Limited, a company that manufactures office furniture. The company has annual sales revenue of N150 million. All the shares are owned by Sofi and her husband Andy. Neither is involved in the running of the business. The chairman is responsible for running the business, but does not own any of the company’s shares.

The bookkeeper maintains all the accounting records and prepares the annual financial statements.

A stand-alone computer is used to maintain the accounting records, including those of the sales system. Standard accounting software is used, which was purchased from an independent supplier. For the sales system, a sales ledger is maintained to which sales invoices, credit notes, cash, and discounts are posted. When sales invoices are posted and credit notes are input into the computer, the value is updated in both the sales ledger and the nominal ledger.

You have determined that the documents and personnel involved in the sales ledger are as follows:

• When order is received by telephone, it is recorded by the sales clerk in the sales department. This is usually done on a notepad.
• The sales clerk will then pass the sales order to the stores, to the goods outwards department where the office furniture is kept.
• If the goods ordered are in inventory, then the goods will be loaded onto one of the delivery trucks. A two-part dispatch note will be prepared to accompany the sales order. This is usually done before the stores have received the sales order from the sales department.
• The goods are delivered to the customer together with the top copy of the goods dispatch note.
• The driver on his return will inform the sales department that the delivery has been successful and will maintain the last copy of the goods dispatch note in the stores.
• At the end of the week, the sales department prepares a sales invoice for the customer.
• When the post is received, it is opened by a staff of the sales department.
  The person opening the post will both make a list of all the cheques
  received and that same person will then go to the bank and bank the
  cheques. Upon return, the remittances and cheque paying-in book are
  passed to the book keeper for updating the receivables ledger.
• The receivables ledger is reviewed by the book keeper on a monthly basis
  to see which customers are above their credit terms and will inform the
  sales staff who to telephone and chase their debt.

Required:

a. Identify and describe eight weaknesses in the sales system of Sofa Limited. (8 marks)

b. Provide recommendations to rectify each of the weaknesses identified. (8 marks)

c. Explain why segregation of duties is important in an internal control system. (4 marks)