Katrupi, Inc., has five departments that handle all sales, billing, and collecti

Question

Katrupi, Inc., has five departments that handle all

sales, billing, and collection processes. The five

departments are sales, billing, accounts receivable,

warehouse, and general ledger. These processes

occur as follows:

a. A customer mails a purchase order to Katrupi,

and it is forwarded to the sales department.

b. A sales clerk in the sales department prepares a

fourcopy sales order. Two copies are forwarded

to billing, one copy to the warehouse, and one

copy to general ledger. The sales clerk posts the

sale to the sales journal.

c. Upon receiving the sales order, the warehouse

picks goods from the warehouse, updates the

inventory subsidiary ledger, and ships the goods to

customers. The copy of the sales order is given to

the common carrier to accompany the shipment.

d. Upon receiving the sales order, the billing

department looks up prices in the price list and

adds these prices to the sales order. One copy is

sent to the customer as the invoice. The second

copy is forwarded to accounts receivable.

e. Upon receiving the sales order from billing, the

accounts receivable temporarily stores the sales

order until the customer mails a check and

remittance advice to accounts receivable. The

accounts receivable department matches the

check to an open sales order, posts to the

accounts receivable subsidiary ledger and the

cash receipts journal, and deposits checks in the

bank daily.

f. Upon receiving the sales order from the sales

department, the general journal and general

ledger are updated.

Problem: Describe any weaknesses in these processes or

internal controls. As you identify weaknesses, also

describe your suggested improvement.

Explanation / Answer

Weakness : Co-ordination / Internal communication between the departments.

It is evident that the communication of an order flows from sales department to other 4 departments. Hence the remaining 4 departments work on the basis of the sales order received irrespective of the fact that the inventory have been despatched or not, sales is recorded in the books of accounts. Upon receiving the sales order General ledger and general journal are updated irrespective of the actual scenario of sales being made. It may be possible that goods have not been despatched and still lying in the warehouses whereas sale have been recorded in the books. This may cause mismatch.

Recommendation : katrupi Inc comprises of 5 departments based upon their functions but it is to be kept in mind that they are part of same organisation and work in sync so that organisation runs effectively and efficiently. As soon as the goods are despatched other departments should be notified to record the event of sales and bill to be raised in the name of the customer. Effective communication is the key to make the internal controls stronger so that such scenarios doesn't arise where goods are still lying in warehouse but sales recorded (on the basis of sales order) leading to mismatch of results.

Do give your feedback ! Happy learning :)

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