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Revision question on internal control #2

Abraham Kamwala incorporated his company, AK Ltd, in 2016. It provides various medical supplies to the public and private sectors. In 2017, he expects his sales to double and his client base to increase by 50%. Evidence of good service included accessibility at all times to a qualified pharmacist, Dr. Luke Mweemba, good advice, excellent physical and IT

Abraham Kamwala is worried about the poor internal controls in the company, especially in respect of the credit sales system. He is convinced that a lot of drugs are being stolen. Your firm, Ruth Musa Accountants, has been appointed to offer audit services for the year ended 31 March 2017.

The sales system operates as follows:

  1. All new customers are subject to credit checks before orders are accepted.
  2. Existing customers are not subject to credit checks.
  3. All orders are approved by the sales and Marketing Manager.
  4. Orders are signed by a general worker in stores.
  5. Sequentially numbered Goods Dispatch Notes (GDNs) are raised and a copy is matched to the respective orders and filed. A copy of the GDN is sent to accounts.
  6. Customers do not sign on the Good Delivery Note (GDN).
  7. An invoice is raised and a copy is sent to accounts and an accounts clerk matches this to the Good Delivery Note (GDN).
  8. The Accounts Supervisor agrees cash receipt back to the invoice.
  9. Customer statements are sent out on a monthly basis.
  10. Receivable ledger for credit customers is reviewed on a monthly basis

(a) Explain the control objectives for any six (6) controls in the scenario.
(b) State six (6) tests of controls for any of the controls in the scenario.
(c) (i) State two (2) limitations of internal controls.
(ii) Identify and explain the control deficiencies in the sales system of AK Ltd.

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