Lane Manufacturing Company is a relatively small local business that specializes in the repair and renovation of antique furniture. The owner is an expert craftsperson. Although a number of skilled workers are employed, there is always a large backlog of work to be done. A long-time employee who serves as clerk- bookkeeper handles cash receipts, keeps the records, and writes cheques for disbursements. The owner signs the cheques.
The clerk- bookkeeper pays small amounts in cash, subject to a month- end review by the owner. Approximately 80 regular customers are extended credit that typically amounts to less than $ 1,000. Although credit losses are small, in recent years the clerk- bookkeeper had established an allowance for doubtful accounts, and all write- offs were made at year- end.
During January 2014 (the current year), the owner decided to start as soon as possible the construction of a building for the business that would provide many advantages over the currently rented space and would allow space to expand facilities. As a part of the considerations in financing, the financing institution asked for 2013 audited financial statements. The company statements had never been audited. Early in the audit, the independent accountant found numerous errors, and one combination of amounts in particular, that caused concern.
There was some evidence that a $ 2,500 job completed by Lane had been recorded as a receivable (from a new customer) on July 15, 2013. The receivable was credited for a $ 2,500 cash collection a few days later. The new account was never active again. The auditor also observed that shortly thereafter, three write- offs of trade receivables balances had been made to allowance for doubtful accounts as follows: Jones, $ 800; Blake, $ 750; and Sellers, $ 950— all of whom were known as regular customers. These write- offs drew the attention of the auditor.
Required:
1. Explain what caused the auditor to be concerned. Should the auditor report the suspicions to the owner?
2. What recommendations would you make with respect to internal control procedures for this company?