Feedback to Lakeside Case 4, Ex 2a

INTERNAL CONTROL - PRELIMINARY ANALYSIS

CLIENT: The Lakeside Company
SYSTEM: Cash Receipts
DATE: December 31, 2012
PREPARED BY: SR

List each document found in this system, the number of copies, and whether it is prepared internally or externally.

Invoice Slips (one copy per payment) - prepared internally but returned directly by outside party. It is the bottom portion of the number 4 copy of the sales invoice.
Validated Bank Deposit Slips (two copies per day) - prepared internally but validated by outside bank and mailed directly to the Assistant to the President.
Cash Remittance List (four copies per day) - prepared internally.
Sales Invoice (second copy) - prepared internally.
Bill of Lading (only fourth copy is a part of this system) - prepared internally, two copies sent to customer.
Bank Statement (one copy per month) - prepared externally.
Bank Reconciliation (one copy per month) - prepared internally.

Answer each of the following questions. For each "No" answer, comment on whether an internal control weakness is indicated.

QUESTION	YES	NO	COMMENT
(1) Is each document within this system pre-numbered?	X		Exhibits 4-3 and 4-4 indicate that the sales invoices (including the sales invoice slip) and the bills of lading are pre numbered. None of the other documents shown in this system would normally be pre-numbered.
(2) Is the authority for completing each document clearly delineated?	X		Exhibit 4-4 indicates that all documents within this system are clearly assigned to a specific department.
(3) Are all documents subsequently reviewed by an independent party within the company?		X	A number of the documents are reviewed prior to the beginning of this system such as the sales invoice and the bill of lading. The validated bank deposit slips are reviewed by the Assistant to the President while the cash remittance list is reviewed by the Controller's Office. The bank statement is reviewed by the Assistant to the President. Finally, the bank reconciliation is prepared by the Assistant to the President but does not appear to be reviewed. The failure to review this document would constitute an internal control weakness.
(4) Are appropriate procedures clearly spelled out for completing and reviewing each document?		X	All instructions on the flowchart appear to be reasonably complete, although any set of written instructions could be put into more detail. One problem does exist: None of the instructions give guidance when discrepancies are found. For example, according to the flowchart, a major problem exists in the sales division at point B. According to the explanation, no instructions exist when the collection is less than the amount of the invoice. Rather than rebilling the additional amount, the invoice information is placed in a permanent file. Although this rebilling process may be handled through the Assistant to the President or some other party, this procedure is not indicated by the flowchart.
(5) Is the record-keeping function independent of the custody function at all points throughout the system?		X	The Treasurer's Office, which serves the custodial function for the cash funds, also records the initial receipt of cash. That type of organization is typical of small companies but does offer the opportunity for theft or cash manipulation. In addition, the Assistant to the President maintains the Accounts Receivable Subsidiary Ledger and reconciles the bank statements. Although not specifically a control weakness because this individual does not have access to the cash account, these combined responsibilities do offer the opportunity for successful theft through collusion.
(6) Are all mathematical computations independently verified?		X	All computations are independently verified except for the cash discounts. The flowchart is unclear as to the procedure to be applied when the sales division calculation does not agree with the customer's payment.
(7) Does record-keeping begin at the origin of the transaction?	X		The record-keeping function appears to begin immediately upon receipt of the cash.
(8) Are all transactions authorized?	X		All transactions seemed to be appropriately authorized.

(9) Indicate any other specific internal control features that have been built into this system.

checks are immediately stamped "For Deposit Only"
spot checks made of cash remittance list totals to bank statement deposits are made to counter potential "lapping" activities.

(10) Indicate any other specific internal control weaknesses that appear to be present in this system.

Other control weaknesses that you might notice are: invoice slips and related documents are permanently filed by invoice number in the sales division rather than by customer name without any apparent cross-referencing. In case of a later dispute, locating the invoice might be difficult.