Case 10-43 (Objective 10-5) The following is the description of sales and cash receipts for the Lady s Fashion Fair, a retail store dealing in expensive women s clothing. Sales are for cash or cre

Case 10-43 (Objective 10-5) The following is the description of sales and cash receipts for the

Lady’s Fashion Fair, a retail store dealing in expensive women’s clothing. Sales are for

cash or credit, using the store’s own billing rather than credit cards.

Each salesclerk has her own sales book with prenumbered, three­copy, multicolored

sales slips attached, but perforated. Only a central cash register is used. It is operated by

the store supervisor, who has been employed for 10 years by Alice Olson, the store owner.

The cash register is at the store entrance to control theft of clothes.

Salesclerks prepare the sales invoices in triplicate. The original and the second copy

are 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 presents the money to the cashier with the invoice copies.

All clothing is put into boxes or packages by the supervisor after comparing the

clothing to the description on the invoice and the price on the sales tag. She also rechecks

the clerk’s calculations. Any corrections are approved by the salesclerk. The clerk changes

her sales book at that time.

A credit sale is approved by the supervisor from an approved credit list after the

salesclerk prepares the three­part invoice. Next, the supervisor enters the sale in her 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.

At the end of the day, the supervisor recaps the sales and cash and compares the totals

to the cash register tape. The supervisor deposits the cash at the end of each day in the

bank’s deposit box. The cashier’s copies of the invoices are sent to the accounts receivable

clerk along with a summary of the day’s receipts. The bank mails the deposit slip directly

to the accounts receivable clerk.

Each clerk summarizes her sales each day on a daily summary form, which is used in

part to calculate employees’ sales commissions. Marge, the accountant, who is prohibited

from handling cash, receives the supervisor’s summary and the clerk’s daily summary

form. Daily, she puts 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 salesclerk, cash sales, credit sales, and total sales. Marge compares this

output with the supervisor’s and salesclerks’ summaries 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, Marge’s assistant files all sales

invoices by customer number. A list of the invoice numbers in numerical sequence is

included in the sales printout.

The mail is opened each morning by a secretary in the owner’s office. All correspon­

dence and complaints are given to the owner. The secretary prepares a prelist of cash

receipts. He totals the list, prepares a deposit slip, and deposits the cash daily. A copy

of the prelist, the deposit slip, and all remittances returned with the cash receipts are

given to Marge. She uses this list and the remittances to record cash receipts and update

accounts receivable, again by computer. She reconciles the total receipts on the prelist

to the deposit slip and to her printout. At the same time, she compares the deposit slip

received from the bank for cash sales to the cash receipts journal.

A weekly aged trial balance of accounts receivable is automatically generated by the

computer. A separate listing of all unpaid bills over 60 days is also automatically prepared.

These are given to Mrs. Olson, who acts as her own credit collector. She also approves all

write­offs of uncollectible items and forwards the list to Marge, who writes them off.

Each month Marge mails statements generated by the computer to customers. Com­

plaints and disagreements from customers are directed to Mrs. Olson, who resolves

them and informs Marge in writing of any write­downs 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 Marge prepares

financial statements. Marge also prepares a monthly bank reconciliation and reconciles

the general ledger to the aged accounts receivable trial balance.

Because of the importance of inventory control, Marge prints out the inventory

perpetual totals monthly, on the last day of each month. Salesclerks count all inventory

after store hours on the last day of each month for comparison with the perpetuals. An

inventory shortages report is provided to Mrs. Olson. The perpetuals are adjusted by

Marge after Mrs. Olson has approved the adjustments.

Requirements:

a . For each sales transaction­related audit objective, identify one or more existing

controls.

b . For each cash receipts transaction­related audit objective, identify one or more

existing controls.

c . Identify deficiencies in internal control for sales and cash receipts.

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