Rufus was the Controller at Hemel Hempstead Enterprises (HHE), a publicly traded sales support company. He started the job six months ago and after observing the activities in his area, he determined that the accounts receivables procedures needed to be tightened up. He approached Marion, the Accounts Receivable Clerk, requesting her assistance in documenting the procedures related to new customer approvals, credit limits, and cash receipts. Marion indicated that there were no formal procedures for approving new customers. She received names and billing addresses from the sales representatives, Warren, Arthur, and Howard. When the information was passed on from the sales representatives, Marion performed file maintenance to add the new customers to the customer master file without putting a customer file together for review. Marion then told Rufus that the credit limit was set at whatever level the related sales representative told her to give the customer. As for cash receipts, Marion prepared the deposits and took the deposits to the bank, reconciling the bank statement on a monthly basis. Marion also entered the cash receipts into the system.
Rufus was troubled, because, according to the sales representatives and Marion, previous controllers and some of the executive-level management had never felt having formal authorisation and review procedures for accounts receivable was important. Rufus noted that this “tone at the top,” which was lackadaisical (at best), could lead to the perpetration of fraud throughout the organisation. Rufusrealised that the combination of a lack of control procedures and a lax control environment could cause HHE to have problems with the Financial Conduct Authority due to lack of compliance with the UK Corporate Governance Code. He needed to get controls in place quickly, especially since the external auditors were due to arrive in less than three months.
Acting as the lead Internal Control Consultant to HHE, prepare a report to the Controller, Rufus in which you address the following:
1. Defineinternal controlsand discuss the Management’s responsibilitieswith regard to the internal control systems of a company.(30 marks)
2. Identify weaknesses in the current accounts receivable process (to include potential fraudulent activity) due to the lack of formalised procedures in the accounts receivables process.(30 marks)
3. Discuss your recommendations to improve the control environment and the procedures in the accounts receivables process (30 Marks)
· In writing your report, you need to make reference to the relevant International Standards on Auditing (ISAs), where applicable.
· 10 marks are available for report structure and writing style.
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