Question

SECTION 1: CASE STUDY: Audit of Sales and Collections Cycle (85 Marks) Read the case below for Digitex LLC and answer the question that follow: Brief company background Digitex LLC has been in business since 1998 and has grown rapidly over the Middle East. The company is a distributor of electronic parts and equipment to the IT industry in the GCC region. Digitex has some strong internal controls policies and procedures over its business environment both internally and externally. However, the business environment is semi- computerized Business transaction - Processing customer order Orders may arrive by email, telephone, or from a field representative who visited the customer. These orders are processed, and orders are shipped to the customers. The customer order processing is computerized, and all bar-codes are selected from a drop-down menu in the order processing procedure. Prices for orders are automatically shown against each part selected. Business transaction - Granting credit The company has many customers both old and new. Some new customers have been in business for many years, however, have recently started to trade with Digitex. Other customers have been trading with Digitex for 4-7 years. Most existing customers are given credit facilities and payment period is between 1 - 3 months, depending on the background of the company and its trading history. Credit facility provided to new customers is subject to vetting (checking) of the customer according to the company policy. Credit amounts range between AED 50,000 to AED 1 million. There is a hierarchy of credit approvers within Digitex who approve credit facilities for accepted customers ranging from senior managers to the Board of Directors. Policy requires that new customers applying for credit must: 1. Have been in business for at least past seven years with audit accounts as evidence 2. They should provide at least last 5 years bank statements to prove their existence 3. New customers must provide 5 references from existing suppliers with whom they have been trading 4. Existing suppliers must have traded with the new customers for at least 1 year 5. New customers must provide their business cash flow forecast for next three years if their credit application is for over AED 100,000 The due diligence for credit facility is carried out by a third-party company on behalf of Digitex LLC.

Answer 1

	Sales & Collection Cycle
	Business functions	Related documents	Classes of transactions	Account balances
a	1.   Process customer orders and grant credit.	Customer order, shipping documents, delivery notes, sales invoices, sales day book, accounts receivable ledger	Sales of goods and rendering of services for cash or credit.	Dr.    Accounts receivable
	2.   Ship and deliver goods.			Cr.    Sales revenue
	3.   Bill customers and record Sales.
b & d	4.   Record cash receipts in bank	Remittance advice, pay-in slip, bank book, accounts receivable ledger	The receipt of cash from the customer for the goods and services received.	Dr.    Cash
				Cr.    Accounts receivable
c & d	5.   Record cash discount	Credit note, cash discount ledger	cash discount given based on Company policy	Dr.    Cash Discount
				Cr.    Accounts receivable
d & e	6.   Process and record goods returns and allowances.	Credit note, returns inward day book	The return of goods by the customer for cash or credit	Dr.    Sales return
				Cr.    Accounts receivable
d & f	7.   Allowance for doubtful debts	General journal, accounts receivable ledger	Allowance for doubtful debt	Dr.    Bad debt expenses
				Cr.    Allowance for doubtful debts
	8.   Write off uncollectible accounts receivable	Uncollectible account authorization, general journal, accounts receivable ledger	Write off of uncollectible accounts to bad debt expenses	Dr.    Allowance for doubtful debts
				Cr.    Accounts receivable

		In AED
	Journal Entry	Debit	Credit
13-Jan-19	Accounts Receivable	10,000
	Sales Revenue		10,000
	Being Sales made to Tandy LLC, payment term cash
13-Jan-19	Cash	10,000
	Accounts Receivable		10,000
	cash received against sales made to Tandy LLC
15-Jan-19	Accounts Receivable	20,000
	Sales Revenue		20,000
	Being Sales made to Revalo LLC, payment term 60 days credit
15-Mar-19	Cash	20,000
	Accounts Receivable		20,000
	cash received against sales made to Revalo LLC
15-Jan-19	Sales Return	2,000
	Accounts Receivable		2,000
	Being Sales Return received against faulty goods against sales made to Tandy LLC
15-Jan-19	Accounts Receivable	2,000
	Bank		2,000
	Being cheque sent to Tandy LLC against sales Return