Read the case below for Datexx Company and answer the question that follow:

Brief company background

Datexx Company has been in business since 2002 and has seen rapid growth across the GGC region. The company is a distributor of household consumer goods parts and equipment to the IT industry in the GCC region.

Datexx has some strong internal controls policies and procedures over its business activities, both internally and externally. However, the business environment is semi-computerized and semi-manual employing human labour.

Business transaction - Processing customer order

Orders may arrive by email, telephone, or from a field representative who visit the customers. These orders are processed, and orders are shipped to the company's customers on site.

The customer order processing is computerized, and all bar-codes are selected from a drop-down menu in the order processing procedure. Prices for orders are automatically shown against each part selected.

Business transaction - Granting credit

The company has a strong customer base. Some of Datexx's new customers have been in business for many years. However, they only recently started trading with Datexx. Other customers have been trading with Datexx for 5-10 years.

Most existing customers are given credit facilities and payment period is between 1 - 3 months, depending on the background of the customers and their trading history. Credit facility provided to new customers is subject to company policy on providing credit facility and due diligence (checking) of the customer request for credit facility.

Credit amounts range between AED 25,000 to AED 500,000. There is a hierarchy of credit approvers within Datexx who approve credit facilities for accepted customers ranging from senior managers to the Board of Directors. Policy requires that new customers applying for credit must:

1.Have been in business for at least past seven years with audit accounts as evidence

2.They should provide at least last 5 years bank statements to prove their existence

3.New customers must provide 5 references from existing suppliers with whom they have been trading

4.Existing suppliers must have traded with the new customers for at least 1 year

5.New customers must provide their business cash flow forecast for next three years if their credit application is for over AED 100,000

The due diligence for credit facility is carried out by a third-party company on behalf of Datexx Company.

Existing customers that have credit facility are automatically granted time to pay based on their current outstanding amount. Presently there is no facility for discounts for customers that pay early. Occasionally a customer is allowed go over the agreed credit-limit amount on the approval of a senior manager.

Datexx's customer credit policy states that customers must pay their outstanding amount on due date. However, many customers take longer to pay beyond their agreed payment date. This is frequently overlooked by credit control and so cash flow is slow in Datexx. Recently a few important customers, with credit facilities have stopped ordering with Datexx, these include:

Customer

Outstanding amount (AED)

Meshco Company

Treshco Company

Preshco Company

Kreshco Company

190,000

160,000

170,000

150,000

670,000

Investigation has shown that there is evidence that the above customers are out of business and no longer in business. This means there is possibility of bad debts for Datexx which require correction to the account receivables. (This section relates to questions 8 and 9 below).

Business transaction - Shipping customer order

Workers at Datexx manually arrange the orders and deal directly with the customers for any queries and clarifications.

There is no supervision of parts leaving the stock room. Furthermore, the company keeps manual records of goods-in and goods-out of the stock room. The records are frequently out of date.

Order are occasionally lost to competitors due to absence of stock records and when an order comes in there may not be the parts available and so the customers goes to another supplier. Some customers email their orders with attached purchase orders.

These orders are processed and shipped to customers using local couriers. Once orders are prepared, they are packaged and sent by local couriers.

The sales team arranges for couriers and no authorization exists that monitors courier charges. Many deliveries are late to the customers who have complained about late deliveries.

Business transaction - Invoicing customers

Invoices are generated from the computer once parts are shipped to customers. Each invoice has a unique invoice number and every customer order is references on to the invoice.

Three-part invoices are generated by the computer, white, red and green. The white invoice goes to the customer, the red invoice to the accounts department and the green to the shipping department.

Cash Transaction Cycle - Processing cash receipts

The sales cycle is complete upon receipt of cash from the customers. Once cash is received from customers the relevant records are updated and accounts receivable is also updated. Some customers send cash or deposit cash in Datexx's bank account directly.

The company's normal practice is to demand cheque payment which means customers cannot pay by other means such as bank transfers and credit cards which is a factor in late customer payments. The cheques are received by post and banked the next day by the cashier who handles all cash receipts and payments.

The Cashier makes a list of all cheques and hands the list over to the credit clerk who then updates customer accounts. The cashier attends to some cash paying customers personally at their business premises to collect the cash.

Required:

1.Identify and discuss the audit evidence that currently exists for sales in Datexx

2.Identify the THREE weaknesses in internal controls that currently exist in Datexx

3.Identify and explain how internal control system could be improved in Datexx

4.Discuss if any matters are of serious or material that could impact upon audit opinion

5.Identify and explain any issues of concern in the Cash transaction cycle and how this can be improved