Read the following case and identify the strengths and weaknesses in Internal Co
ID: 343398 • Letter: R
Question
Read the following case and identify the strengths and weaknesses in Internal Control.
Peyton Electronics, Inc (PEI) is a small wholesale discount supplier of electronic instruments and parts. PEI’s competitive advantage is its deep-discount, three-day delivery guarantee, which allows retailers to order materials often to minimize in-store inventories. PEI processes its records with stand-alone, incompatible computer systems except for integrated enterprise resource planning (ERP) inventory and accounts receivable modules. PEI decided to finish integrating its operations with more ERP modules, but because of cash flow considerations, this needs to be accomplished on a step-by-step basis.
It was decided that the next function to be integrated should be sales order processing to enhance quick response to customer needs. PEI implemented and modified a commercially available software package to meet PEI’s operations. In an effort to reduce the number of slow-paying or delinquent customers, PEI installed Web-based software that links to the Web site of a commercial credit rating agency to check customer credit at the time of purchase. The following are the new sales order processing system modules:
Sales. Sales orders are received by telephone, fax, e-mail, Web site entry, or standard mail. They are entered into the sales order system by the Sales department. If the order does not cause a customer to exceed his credit limit, the system generates multiple copies of the sales order.
Credit. When orders are received from new customers, the system automatically accesses the credit rating Web site and suggests an initial credit limit. On a daily basis, the credit manager reviews new customer applications for creditworthiness, reviews the suggested credit limits, and accepts or changes the credit limits in the customer database. On a monthly basis, the credit manager reviews the accounts receivable aging report to identify slow-paying or delinquent accounts for potential revisions to or discontinuance of credit. As needed, the credit manager issues credit memos for merchandise returns based on requests from customers and forwards copies of the credit memos to Accounting for appropriate account receivable handling.
Warehousing. Warehouse personnel update the inventory master file for inventory purchases and sales, confirm availability of materials to fill sales orders, and establish back orders for sales orders that cannot be completed from stock on hand. Warehouse personnel gather and forward inventory to Shipping and Receiving along with the corresponding sales orders. They also update the inventory master file for merchandise returned to Receiving.
Shipping and receiving. Shipping and Receiving accepts inventory and sales orders from Warehousing, packs and ships the orders with a copy of the sales order as a packing slip, and forwards a copy of the sales order to Billing. Customer inventory returns are unpacked, sorted, inspected, and sent to Warehousing.
Accounting. Billing prices all sales orders received, which is done approximately 5 days after the order ships. To spread the work effort throughout the month, customers are placed in one of six 30-day billing cycles. Monthly statements, prepared by Billing, are sent to customers during the cycle billing period. Outstanding carry forward balances reported by Accounts Receivable and credit memos prepared by the credit manager are included on the monthly statement. Billing also prepares electronic sales and credit memos for each cycle. Electronic copies of invoices and credit memos are forwarded to Accounts Receivable for entry into the accounts receivable master file by customer account. An aging report is prepared at the end of each month and forwarded to the credit manager. The general accounting office staff access the accounts receivable master file that reflects total charges and credits processed through the accounts receivable system for each cycle. General accounting runs a query to compare this information to the electronic sales and credit memo and posts the changes to the general ledger master file.
Part A: What are the internal control strengths in PEI’s system? Find at least five ways in which PEI’s processes are exhibiting good internal control.
1.
2.
3.
4.
5.
Part B: What are the internal control weaknesses in PEI’s system? Find at least five weaknesses in PEI’s processes and suggest ways to correct them.
Weakness 1:
Correction:
Weakness 2:
Correction:
Weakness 3:
Correction:
Weakness 4:
Correction:
Weakness 5:
Correction:
Explanation / Answer
Part A :
1.PEI’s internal Control system can show the credit rating of the customer at the time of the purchase which will reduce the slow paying customers and defaulters. Before placing the order, system has the capability to show the real-time credit limit.
2.It automatically detects credit limit and creates sales order if customer has sufficient credit score, without any human intervention which reduces cycle time
3.Customer will be paid after the shipment of the order
4.Warehousing personnel will check the inventory levels. If order can be fulfilled with the existing inventory levels or there is any stock out or back orders in the system
5. Entry of shipping and receiving goods by the system and acceptance by the customers is registered the in the accounting module
Part B :
Correction: This should be done fortnightly or weekly basis without any Manual intervention.Predictive analytics can be implemented here which will remove human biasness in the system
2. Weakness: System generates multiple copies of sales order
Correction: Multiple copies may involve more cost to the system. Sales Order should be generated for the specific customer which is going be fulfilled by the sales team
3. Weakness: Customer Inventory returns does not have reason mentioned for return of order.
Correction: System should have the provision to mention the reason of return from the customer to know more information about the faulty product and to understand the customer behavior
4. Weakness: Billing prices all sales orders received, which is done approximately 5 days after the order ships
Correction: Pricing should happen as and when the order ships
5. Weakness: customers are placed in one of six 30-day billing cycles to spread the work effort throughout the month & Account reconciliation doesn’t happen.
Correction: Billings should be realized in the system on accrual basis, i.e. as and when the transaction happens. This will capture the correct picture of the sales order and customer service level will increase.
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