The Never Sink Canoe (NSC) Company is a smallmanufacturer of high-quality canoes, pontoons, andfishing craft. It sells its products to sporting goodstores throughout the northeast United States andparts of Canada. NSC began as a small familyownedcompany that served a local market. Overthe years, it expanded its market through the useof seasonal sales force employees. The sales staffwork on straight commission and travel extensivelywhile taking orders from customers at sportingoutlets and trade shows during the water sportsand fishing season. All sales are on credit and paymentis due within 30 days after being billed. In latefall when the season ends, the temporary sales personnelare laid off until the following spring.Employee turnover is high with approximately 50percent of the laid-off sales staff returning the followingyear.NSC’s revenue and expense procedures associatedwith its sales force activities are as follows:The salesperson takes an order, reviews the customer’screditworthiness, and submits the approvedorder to the accounting clerk at the main officewho calculates the sales commission to be remittedand promptly writes a check to the salesperson. Theclerk then sets up an accounts receivable for the customer.The clerk also receives cash in payment ofcustomer accounts and updates the related customerAR records.The order is then sent to the billing department,where the sale is recorded and the customer is billed.Finally, the order is sent to the warehouse where theitems are selected, packaged, and shipped to the customer.The warehouse clerk then updates the inventorysubsidiary ledger to reflect the shipment.Sales staff periodically submit travel expensereimbursement claims on hard-copy forms to theaccounting clerk. NSC policy requires sales staff tokeep receipts, but they are not required to submitthem with the reimbursement forms. The clerk preparesan account payable for each salesperson basedon their reimbursement form and twice each monthwrites checks for them for the amount indicated intheir individual AP account.After the end of the past season, and after thetemporary employees had been laid off, NSC financialsshowed a substantial rise in sales compared toprevious years. These increases were, however, offsetto a great extent by a high rate of product returns.Furthermore, travel expenses were disproportionatelyhigh compared with previous years.Requireda. Using the COSO internal control model for controlactivities (e.g., transaction authorization, andsegregation of duties), identify any potentialinternal control weaknesses in the NSC system.b. For each weakness, discuss the potential forfraud in the system.c. Make recommendations for correcting each identifiedcontrol weakness.
The Never Sink Canoe (NSC) Company is a smallmanufacturer of high-quality canoes, pontoons, andfishing craft. It sells its products to sporting goodstores throughout the northeast United States andparts of Canada. NSC began as a small familyownedcompany that served a local market. Overthe years, it expanded its market through the useof seasonal sales force employees. The sales staffwork on straight commission and travel extensivelywhile taking orders from customers at sportingoutlets and trade shows during the water sportsand fishing season. All sales are on credit and paymentis due within 30 days after being billed. In latefall when the season ends, the temporary sales personnelare laid off until the following spring.Employee turnover is high with approximately 50percent of the laid-off sales staff returning the followingyear.NSC’s revenue and expense procedures associatedwith its sales force activities are as follows:The salesperson takes an order, reviews the customer’screditworthiness, and submits the approvedorder to the accounting clerk at the main officewho calculates the sales commission to be remittedand promptly writes a check to the salesperson. Theclerk then sets up an accounts receivable for the customer.The clerk also receives cash in payment ofcustomer accounts and updates the related customerAR records.The order is then sent to the billing department,where the sale is recorded and the customer is billed.Finally, the order is sent to the warehouse where theitems are selected, packaged, and shipped to the customer.The warehouse clerk then updates the inventorysubsidiary ledger to reflect the shipment.Sales staff periodically submit travel expensereimbursement claims on hard-copy forms to theaccounting clerk. NSC policy requires sales staff tokeep receipts, but they are not required to submitthem with the reimbursement forms. The clerk preparesan account payable for each salesperson basedon their reimbursement form and twice each monthwrites checks for them for the amount indicated intheir individual AP account.After the end of the past season, and after thetemporary employees had been laid off, NSC financialsshowed a substantial rise in sales compared toprevious years. These increases were, however, offsetto a great extent by a high rate of product returns.Furthermore, travel expenses were disproportionatelyhigh compared with previous years.Requireda. Using the COSO internal control model for controlactivities (e.g., transaction authorization, andsegregation of duties), identify any potentialinternal control weaknesses in the NSC system.b. For each weakness, discuss the potential forfraud in the system.c. Make recommendations for correcting each identifiedcontrol weakness.
Chapter15: Retailing, Direct Marketing, And Wholesaling
Section: Chapter Questions
Problem 1SC
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| The Never Sink Canoe (NSC) Company is a small manufacturer of high-quality canoes, pontoons, and fishing craft. It sells its products to sporting good stores throughout the northeast United States and parts of Canada. NSC began as a small familyowned company that served a local market. Over the years, it expanded its market through the use of seasonal sales force employees. The sales staff work on straight commission and travel extensively while taking orders from customers at sporting outlets and trade shows during the water sports and fishing season. All sales are on credit and payment is due within 30 days after being billed. In late fall when the season ends, the temporary sales personnel are laid off until the following spring. Employee turnover is high with approximately 50 percent of the laid-off sales staff returning the following year.NSC’s revenue and expense procedures associated with its sales force activities are as follows: The salesperson takes an order, reviews the customer’s creditworthiness, and submits the approved order to the accounting clerk at the main office who calculates the sales commission to be remitted and promptly writes a check to the salesperson. The clerk then sets up an accounts receivable for the customer. The clerk also receives cash in payment of customer accounts and updates the related customer AR records. The order is then sent to the billing department, where the sale is recorded and the customer is billed. Finally, the order is sent to the warehouse where the items are selected, packaged, and shipped to the customer. The warehouse clerk then updates the inventory subsidiary ledger to reflect the shipment. Sales staff periodically submit travel expense reimbursement claims on hard-copy forms to the accounting clerk. NSC policy requires sales staff to keep receipts, but they are not required to submit them with the reimbursement forms. The clerk prepares an account payable for each salesperson based on their reimbursement form and twice each month writes checks for them for the amount indicated in their individual AP account. After the end of the past season, and after the temporary employees had been laid off, NSC financials showed a substantial rise in sales compared to previous years. These increases were, however, offset to a great extent by a high rate of product returns. Furthermore, travel expenses were disproportionately high compared with previous years. Required a. Using the COSO internal control model for control activities (e.g., transaction authorization, and segregation of duties), identify any potential internal control weaknesses in the NSC system. b. For each weakness, discuss the potential for fraud in the system. c. Make recommendations for correcting each identified control weakness. |
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