Ecovacs is a small company which manufactures and sells high quality knitwear. Its customers are mainly fashion boutiques. Ecovacs has two directors, one who is non-executive and the other who is involved in the day-to-day administration of the company. There are ten other employees. Six of these work in the factory, one works in the warehouse, one is a sales representative and two are accounts staff. The accounts staff consist of Miss Jones, who is responsible for processing sales and receivables, and Mrs. Singh, who is the purchases and wages clerk. Mrs. Singh works part-time, five mornings a week. The company’s sales representative visits shops throughout the region. He takes orders from customers which he records on a pre-numbered two-part order form. He passes the completed forms to the accounts department. Miss Jones files one copy of the order form in numerical sequence and passes the other to the warehouse. The completed order is dispatched from the warehouse by carrier, accompanied by one copy of a dispatch note. The other copy is sent to Miss Jones, who prepares an invoice based on the information it contains and on the company’s price list. She sends one copy of the invoice to the customer, and a second copy of the invoice is retained. Each Friday, Miss Jones inputs the week’s invoices to the computerized sales ledger. She then files the invoices alphabetically by customer name. Dispatch notes are not retained because filing space is limited. Miss Jones opens the post daily and lists remittances received from credit customers. Every Friday, she inputs the information listed to the sales ledger. Cheques received are banked daily by the executive director. Miss Jones reviews the sales ledger balances every month and writes to customers who have not paid within 90 days of receiving goods. The sales ledger is printed out annually for year-end purposes. Otherwise, no hard copy is printed and Miss Jones reviews the sales ledger on the computer screen. The company’s computer package includes the facility to produce a sales day book and sales ledger control account. These are not used because Miss Jones considers that the low volume of transactions (10-15 invoices per week) makes them unnecessary.

Requirements

1. Explain the particular issues relating to controls that would affect the audit of a small company such as Knits.
2. List six control objectives of a sales system.
3. State, with reasons, what you consider to be the potential deficiencies in Ecovacs’s present system of accounting for sales and receivables.
4. List and explain the controls that a small firm such as Ecovacs could feasibly adopt to overcome the deficiencies you have identified.

Answer rating: 100% (QA)

Answer a Explain the particular issues relating to controls which would affect the audit of a small company such as Knits i The auditor may find flaws in the companys internal control over financial r... View the full answer