The transactions of sales are very important and any system that has been designed to accommodate the accounting practices of the business should cover all transactions that change the statement figures and those that do not change the financial figures but do are important to the operations of the business. These will include those records and processes that cover the receipt of orders, dispatch of goods, record of sales and sales returns and those relating to the receipt of payments.
Principal documentation in relation to the receipt and process of orders
For KK to operate properly various files must be developed in regard to the receipt of orders. The company must create a file in the sales master files that has in it various customer files that have been developed and designed to contain most of the important information of the customer such as; the customers name, address, contact e.g. phone number, email address and a client number or code that helps identify the client from the others. This file should be updated with all the orders that the customer places with the company. All the customers must have accounts created for them. If a customer places an order, the entries should be recorded with details of the order in his/her account and if the customer is a new one, then s/he should have an account created to record all transactions with them. Some of the most important files that should be found in KKs system should include the sales order file and open sales order files in which information that relates to sales orders will be recorded.
After receiving an order, a copy of this order should be stored in a customers account in the sales order open files so as to be used in the future. The records kept regarding to the customers order must be updated frequently depending on the actions taken such as the approval of an order, the shipment or the back-order in the order open files. The open file is thus important to help understand the stage of execution of various orders.
Dispatch of goods
Once an order has been placed and an approval has been made, a confirmation can be made to ensure that the goods are in stock. Once it has been confirmed that the goods are in stock, those in KKs warehouse would start to prepare the goods for the customers whose orders are approved as per the policy of the company. The goods will be prepared and a verified dispatch note will be issued and also filed in the systems as a proof that the goods have been issued out of the warehouse which should in turn used to prepare a delivery note that is delivered together with the goods to the customer and adjust the inventory in the warehouse. In case of a back-order, i.e the goods are not enough to cover the order a back-order note is prepared and send together with the delivery and the delivered goods to the customer. The system should have a provision to record the goods that have been dispatched to which client in the warehouse files which should also update the customers account and the inventory in the warehouse once the delivery note is issued.
Sale and receipt of payments
The system should provide for the generation of invoices after the goods are delivered to the customers and or sold to internal customers within the KK company staff. The generated invoices are used to update the sales journal which is a journal that depicts the various sales made. All sales made are recorded as individual entries in the journal. Information in this journal will be used to update the Journal voucher file which shows a summary of all journals. These files must be in the new system that KK is intending to purchase.
The system should have an accounts receivable subsidiary ledger in which, every customer should have a detailed an account with all relevant information; transaction dates, invoice number, address ,name, available credit, credit balances, current credit and the sales returns and discounts; and which is updated by information from the sales order. Entries made in this journal will generally update the accounts receivables account of the company. The system should be such that information keyed in updates the accounts of the customers when the recordings are done.
In transactions that have been done through the credit terms of sale, the payments are to be effected on a future date. On the remittance of payments, payments could be in terms of payments to the bank or through the use of checks. A check receipts journal is one of the important documents kept in the system for the record of received payments from the customers. After the preparation of remittance documents this is used to make entries in the customer accounts within the accounts receivable journal (AR) which periodically makes balances to the general journal. The payments are periodically verified through the reconciliation of the cash receipts journal and deposits through reconciliation with the bank generated statement.
A sales return will be when a customer returns good that had been sold to him/her. This transaction demands that the company should credit the customers account in the AR (Hall, 2008). The files that will be in the system will include a return note with which goods are returned back to the warehouse and also used in preparation of a credit memo to authorize the crediting of the clients account. In the processing of this transaction, the credit memo is recorded as a contra entry in the sales journal, while in the AR journal it is used to adjust the accounts receivables and the specified customer account within the journal (Hall, 2008).
Risks associated with new sales and sales returns system
There are various risks that relate to the sales and sales returns (Hall, 2008). When a new system is introduced, there are risks that in the recording of data relating to sales include:
The issue of credit to credit unworthy clients
Delivering goods to customers that have not been recorded
Incurring errors during the preparation of sales invoices
Failure to file the back-orders and the misplacement of customer orders
Recording of incorrect values for the accounts receivables
The posting of sales to the wrong periods of accounting
Fraudulent credit sales to ghost customers
Theft of goods in the warehouse or during transit
Customer write-offs by unauthorized personnel
Theft of cash by people involved in the processing accompanied by omitted entries
Presence of virus introduced by employees to destroy data
Destruction of documents and inventory by natural or human disaster
Recalling of orders by the customer after delivery of goods
Crediting the wrong customer account in the case of sales returns
Features of an ideal internal control system to control the above risks
The control system should ensure that the people who have been employed are competent, they have high level of integrity and that they can be relied upon to carry out the activities of the company.
It should also draw a clear line between authority and responsibility such that those who post sales for example are not also the ones who authorize or receive payments. This reduces the risk of fraud and theft in the company.
It should set out proper authorization procedures and command channels.
It should also ensure that there are adequate and effective recording in regard to sales and sales returns and that all transactions are properly recorded.
It should ensure physical safety though the installation of safeguarding measures such as locks, passwords and alarms to protect assets and documents from unauthorized persons.
Ensure that there are independent checks carried out regularly on performance of personnel.
It should be such that it separates the duties of various employees e.g. the cashier should not be the one who does reconciliation of the statements.
It should ensure that data is clearly recorded either through sequential numbering or varied coding to avoid confusions during entries
Role of KKs external auditors
In regard to controls on new sales and sales returns system
It is the role of the external auditor to study the internal controls of KK that have been put in place relating to the sales and sales returns and understand their operations so as to determine whether they are adequate and reliable or not (Hall, 2008). The auditor is supposed to use his professional experience and knowledge to evaluate the effectiveness of these controls through varied tests and make a written recommendation to the management in case of deficiency in the internal control system. In his written report, he should communicate to the management on the significant deficiencies and other deficiencies in the controls (Ramakrishnan, Bala V. Balachandran and Ram T. S., 1980).
If the controls are deficient, the auditor should not rely on them in his audit and should instead carry out immense tests to see the accuracy of the sales and sales returns transactions (Ramakrishnan, Bala V. Balachandran and Ram T. S., 1980).
Substantive testing of the sales and sales returns
The auditor in the event that there are material deficiencies in the internal controls relating to the sales and sales returns transaction, will have to carry out tests to verify the validity of information given relating to the transactions.
For the sales and the sales returns the auditor will carry out tests to establish the following:
Ensure that information is presented in the proper accounts and that all disclosures have been made. He will determine that the account balances are properly classified through either confirmation with the debtors or through the verification of accounts with the sales journal. He might also confirm that the account balances tally with those appearing in other accounts that relate to the same transaction like tracing the balances in the trial balance.
The auditor could also ensure that the valuation and allocation of values are accurately done and that the correct value for the transactions are made through verification of the initial documents such as official receipts and sale invoices (Ramakrishnan, Bala V. Balachandran and Ram T. S., 1980).
Carrying out a completeness test through carrying out a sales and sales returns cutoff tests to ensure that all transactions are complete, carrying out various analytical procedures on them, and testing for any omissions in the recording of the transactions.
The auditor can also test for the existence of these transactions through the inspection of agreement documents such as sales invoices, goods returned notes or the remittance note given after payments are made, or by the review of the documentations done on by the client and or confirmation of balances in the accounts receivables
He can also carry out tests to determine that there are rights and obligations of the transactions e.g. through the review of directors meeting minutes, and or reading leases for pledging agreements
Ensure that the dates of transactions in all documents do tally i.e. the date of recording a transaction in the journal with that appearing on the invoices.
Separate the sales made from the operating assets with the yearly sales to get an accurate figure from sales less disposal of assets.
Establishing any repeated entries or any deliveries to non-existent customers.
Ensuring that all bad debts written off were authorized and that efforts were put to recover the amount.
Hall, J. A., 2008. Accounting Information Systems. 7th ed. Nartove Boulvard: Cengage Learning.
Ramakrishnan, Bala V. Balachandran and Ram T. S.,...
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