Question

revenue is generated by contracts to supply toiletries to hotels. Below is a descripsion of the sales system Hotel revenue The hotel revenue is made up of four kev customers, Humminghird has one sales clerk, Brenda who maintains all aspects of this revenue stream: Brenda receives customer oeders, raises sales snvoices and processes payments. In raising invoices, the sales system automatically inserts the online trade customer prices for products, However, each hotel customer has contracted prices which are lower than the online prices and hence Brenda manually edits the invoices peior to despatch. Online revenue New trade customers are set up in the sales ledeer master file upon passing saitable credit checks, and a credit limit is set at this stage by the finance director. Customers place online orders up to their pre-set credit limit: they receive an email confirmation and the sales order interfaces into the despatch system. The order number is linked to the customer account number. Goods are despatched daily with a goods despatched note which is referenced to the sales order number but are not sequentially numbered. Hummingbird used to despatch goods via a reliable national courier company. However, to reduce costs they have changed to a cheaper local courier and some orders have been delivered to customers late. Trade customers' sales invoices are automatically generated by the system on the day the online order is placed. The prices are inserted in accordance with the website rates. Occasionally Hummingbird makes special offers or discounts sales; when this occurs the master file data has to be amended to ensure that the correct prices are used on invoices. This task is usually performed by a senior sales ledger clerk Revenue and receivables records On a monthly basis statements are sent to the hotel customers; a number of trade customers have been requesting monthly statements and Hummingbird is considering this request. The company only reconciles the sales ledger control account a year-end balance. Required: 1. Write a report of the sales system described above which: (i) at the end of September in order to verify the Identifies risks and recommend the controls to address these risks in the sales system; (20 marks) Describe short procedures the auditor should perform to confirm Hummingbird (ii) Co's revenue (20 marks) COSO, which components most effective to the to 2. Define Intenal Control in accordance Hummingbird in order to build up new internal control? (20 marks) ve ne external perspective cal perspective and the social perspective SECTION B (60 marks)- consists of TWO (2) questions. Answer ALL questions. Hummingbird Scents Co (Hummingbird) manufactures and sells luxury toiletries; they have been trading for over 20 years and the company's year end is 30 September 2014. Hummingbird sells products to trade customers via its own website; this represents 60% of revenue. Remaining 5

Answer 1

Ans 1. (i) Following are the risk & control to be implemented to mitigate that risk:

a. Risk -

• Inappropriate segregation of duties -Brenda is responsible for many processes such as order receipt, preparation of invoices & payment processing. These are 3 different activities performed by the same person. As per ideal situation, different person should be given different responsibilities. Like, if Brenda is receiving the order then she should not be allowed to raise invoice which is also a manual activity.
• Fraudulent activity - Brenda may have links with offline customers & can raise invoice for lower price to the customer & accept lower payment from the customer
• Unauthorised pricing - Brenda may apply price which is not approved by the management during the agreement with the offline customers.
• Incorrect quantity in invoice - As invoice is prepared manually, hence Brenda can insert incorrect quantity.  
• Insequentially Invoicing - Invoice is not sequentially numbered, so there is risk of invoice has not been raised on customers or revenue for invoices has not been accounted in the system.  

Control - 1. There should be different person allocated to each & every activity performed by Brenda.

• 2. Maker checker mechanism should be framed to avoid unauthorized activity performed by Brenda
• 3. All the prices for offline customers are feed manually by Brenda. Prices against the customers can be incorporated in the system as well. So that no one can apply prices manually in the invoices & risk of fraud can be avoided.
• Invoices should be sequentially numbered to track the invoices raised on the customer & have track that all the invoices has been raised appropriately to the customers.

ii). Short procedures to be performed by auditor to check the Hummingbird's revenue:

a. Physical verification of Inventory: Auditor should calculate the closing inventory for the year ending & should do inventory audit to confirm the same. This is required to confirm that revenue of all the products sold has been properly accounted for in the system.

b. Verify the billing data with dispatched data: Auditor should reconcile the billing data with dispatched to check the revenue leakage. There might be a situation where products has been dispatched, however, billing has not been done or vice versa.

c. 3 way reconciliation Billing data vs dispatched data vs revenue accounted: Billing data should be reconciled with dispatched data & with revenue accounted in the accounting system. This will ensure that all the dispatched goods were billed & all the billed transactions has been accounts in the system.

d. Verify the key customers invoiced prices with prices in agreement: Auditor should check the prices invoiced to the key offline customers with the prices in agreement. This will ensure that all the sold materials were priced appropriately as compared to agreed prices. There is no unauthorized price charged to the customers.

e. Verify the integration of online prices with the approved prices by management: Auditor should audit the system which provide online prices to the customers. these prices should be in line with management approved prices.

f. Account balance confirmation from customers: Auditor should ask for confirmation from customers on account balance. This will ensure that customer has received & accounted all the revenue transactions & there is no disputed transaction between the company & customer.

2. COSO principles:

a. Focus No. 10.6 - Management segregates incompatible duties, and where such segregation is not practical management selects and develops alternative control activities.

As per this focus point, there should be segregation of duties between order booking, Invoice processing & payment processing. One person should not be responsible for above 3 activities. However, these acitivities should be linked with each other to have smooth sales system.

b. Focus No. 10.5 - Management considers control activities at various levels in the entity.

As per this focus point management should have maker checker mechanism over all the three activities done by Brenda. Further, control activity should be there on customer account balance confirmation to have assurance on the revenue transactions.

c. Focus No. 11.1 - Management understands and determines the dependency and linkage between business processes, automated control activities, and technology general controls.

As per this focus point, there should be automated control activities on the online business. As the order confirmation is automatic activity, then management should have strong internal control on the order confirmation. For ex. System should not allow order above finance approved credit limit until & unless the customer pay the organisation.

Further, System should not show online price below management approved product price.