February 10, 2012
Santos Alarcon Jr.
CC:Santos Alarcon, Jr.
Re:Apollo Accounting and Control Systems: Revenue and Collection Cycle Details of Control Issues Encountered in the Revenue and Collection Cycle
Objectives: Apollo’s control procedures were tested to obtain control evidence about the validity, authorization, accuracy, and proper period recording of recorded sales. The accuracy of classification of sales postings to individual customer accounts receivable was also tested. Systems tested included authorization, segregation of duties, information processing controls, such as general, application, and controls over the financial reporting process, physical controls, performance reviews, and controls over management discretion in financial reporting. Our objective was to perform enough in-depth auditing to provide assurance about errors and fraud in the accounts. The internal controls were tested for effectiveness using samples of transactions. This was done in accordance with audit standards. Results: The revenue cycle test of controls for year end 2007 resulted in 51 deviations of 120 sample transactions. 15 of those transactions resulted in credit memos for inaccurate pricing or quantities billed. The majority of credit memos were processed in the third quarter and none were processed in the first half of the year. 31 had no credit approval of which 10 are outstanding at the date of this audit. The total outstanding invoices without credit approval total over $27 million. Several bills of lading were missing and a couple arithmetic errors were made. Response: The unreliability of Apollo’s revenue and accounts receivable controls required the audit team to do more extensive testing. Positive or negative confirmations were needed on most accounts. Apollo customers were asked to verify total sales during the year if not current at the date of the audit. The finding that all credit memos processed were in the second half of the year indicate that control procedures were not uniform for the year. Additionally, December deviations are potential cause of misstatement in the financial statements. Management is advised to implement and follow control procedures throughout the year. Credit approval is not being done as required and results in collection issues. Credit approval and timely collection procedures will reduce the financial problems as were seen in the fourth quarter. Missing bills of lading, substantial arithmetic errors with delay in correction, and deviations resulting in credit memos for overcharges only (no undercharge errors found) are red flags for potential fraudulent transactions. The missing bills of lading suggest improperly recorded sales, the lack of mixture of over and under charges, and the lag time between errors and credit memos are suggestive of misstatement and possibly fraudulent activity. Recommendations: Bridge working papers summarize Apollo’s strengths and weaknesses. Apollo is advised to implement and maintain effective control procedures that can be adhered to throughout the year. Some recommendations include:
* Pre-numbered bills of lading with location and explanation of missing BLs determined. * Credit approvals should be done for every transaction regardless of history or size. * Sales orders should be secured properly and numbered reducing the risk missing or altered sales orders. * Create an electronic signature such as a PIN number for telephone orders to ensure that the customer placing the order is responsible for payment. * Payment terms should be indicated to customers at time of purchase. * Collection procedures should be implemented to increase cash flow. * Sales invoices should be checked for error in quantities, prices, extensions and footing, and freight allowances, and checked with customers’ orders to reduce the...