Internal Control Weaknesses in Sales and Receivables Management

The assignment critically analyzes internal control systems related to the management of sales and accounts receivables within a company's financial framework. The focus is on identifying weaknesses that could lead to material misstatements in financial reports, evaluating the risks associated with these controls, and assessing how they influence auditors' ability to obtain sufficient audit evidence. Through referencing established auditing standards and practices, the paper discusses methods for detecting discrepancies, the role of auditor judgments, and strategies for improving internal control mechanisms. Key findings highlight the importance of robust controls in safeguarding financial integrity and ensuring accurate reporting.

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Part I: Internal Controls...................................................................................................................4
Question 1........................................................................................................................................4
Responsibility of the client management in relation to internal controls........................................4
Responsibility of the company directors in relation to internal controls.........................................4
Responsibility of the auditors in relation to internal controls..........................................................4
Question 2........................................................................................................................................5
Defining effect of the auditor understanding of internal controls on the audit approach................5
Part II: “Strengths and Weaknesses of an Internal Control System”...............................................5
Question 1........................................................................................................................................5
“Internal control activities in Caroma’s sales and accounts receivable areas”................................5
Question 2........................................................................................................................................6
Explain how the control prevents or detects material misstatements..............................................6
Question 3........................................................................................................................................6
Identifying key assertions addressed by each of the controls..........................................................6
Question 4........................................................................................................................................7
“Internal control weaknesses in the processing of transactions of Caroma’s sales and accounts
receivable area”...............................................................................................................................7
Question 5........................................................................................................................................7
Identify one account balance at risk of material misstatement........................................................7

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Question 6........................................................................................................................................8
Identify key financial report assertion at risk..................................................................................8
Reference List..................................................................................................................................9

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Part I: Internal Controls
Question 1
Responsibility of the client management in relation to internal controls
The responsibility of the client management is to safeguard the university assets by
designing internal controls as well as protecting assets from any types of accidental loss or loss
from fraud (Soh and Martinov-Bennie 2015).
Responsibility of the company directors in relation to internal controls
The responsibility of the directors is to accomplish certain goals as well as objectives on
matters relating to internal controls. In addition, internal controls ensure that directors has
accurate as well as timely and complete information that takes into account accounting records
for monitoring and reporting business operations (Simnett, Carson and Vanstraelen 2016).
Responsibility of the auditors in relation to internal controls
The responsibility of the auditors is to promoting efficient as well as effective operations
on matters relating to internal controls. In addition, internal controls aims at providing an
environment where the managers as well as staff members can maximize the efficiency and
effectiveness of given business enterprise

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Question 2
Defining effect of the auditor understanding of internal controls on the audit approach
The auditor needs to consider internal control at the time of planning as well as
performing audit activities. The components of internal control needs to be explained about how
an auditor should consider internal control after determining nature, timing as well as extent of
tests to be tested. The auditor should have proper understanding about internal control that is
sufficient to plan audit functions as well as determining whether they have been placed in
business operations in proper way. The auditor needs to consider the fact where they have to be
involved in safeguarding the control that is limited to those relevant to the reliability of financial
reporting (Moroney and Trotman 2016).
Part II: “Strengths and Weaknesses of an Internal Control System”
Question 1
“Internal control activities in Caroma’s sales and accounts receivable areas”
1. One of the internal control activities in Caroma’s sales and accounts receivable area is to
establish credit limits for customers. It is even needed to look at the nature of the business
entity.
2. Most of the time, it is noted that the accounts receivable accounts are highly overstated as
well as auditors need to test more transactions for determining the true balance

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3. One of the internal control activities in Caroma’s sales and accounts receivable areas is to
involve in credit approval prior to shipment. It is even needed to look at the applicable
legal as well as regulatory requirements.
Question 2
Explain how the control prevents or detects material misstatements
It happens many times when there is problem with collecting accounts receivable in case
the order is shipped to a customer with a bad credit rating. In that case, it needs the signed
approval of the credit section on all sales orders over a certain dollar amount. Several items make
the basic accounts receivable controls. Furthermore, Caroma’s with a particular receivables
scheme require implementing additional controls or may not need some of the items for future
analysis purpose (Knechel and Salterio 2016). Auditor need to understand the entity as well as
environment that takes into account assessing the risk material misstatement because of fraud
and error at the financial statement and declaration stage.
Question 3
Identifying key assertions addressed by each of the controls
There are several key assertions aligned to address each of the above-mentioned internal
controls. The internal audit members should review a assortment of products in order to confirm
purpose. It is even needed to match billings with the shipping log of this company. In order to
detect the scenario, it is important to have the internal audit staff members to comparing billings
to the shipping log as well as examine any types of differences (Junior, Best and Cotter 2014).

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Test of control need to be performed for assessing the operating efficiency of controls at the
financial declaration as well as statement stage. It is essential to authenticate the expectation of
an auditor to look at the operating efficiency of controls as well as performing at substantive
tests. It is not possible to provide sufficient as well as appropriate audit evidence in respect of a
specific assertion.
Question 4
“Internal control weaknesses in the processing of transactions of Caroma’s sales and
accounts receivable area”
However, accounts receivable is shown on the balance sheet of a company, but it may
also happen that company can use it for capital only in case they want their customers to pay
their bills or the company sells the accounts to a financing company (Becker, Stead and Stead
2016). The internal control weaknesses takes place in the processing of transactions for the
company where only a few employees available to manage company finances
Question 5
Identify one account balance at risk of material misstatement
It may happen that some customers are not paying their debt; here the company may be
able to write off bad debts on their income tax returns. Furthermore, accounts receivable systems
mainly bring out problem for company to manage the finances in an effective way. Auditor need
to obtain sufficient as well as appropriate audit evidence as it has been pertained for all material
financial statement assertions for modifying the audit report. Internal controls that are relevant to

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the audit function are required to detect any of the material misstated figures in the financial
statement assertion (Hardy 2014).
Question 6
Identify key financial report assertion at risk
It is essential for the managers to prepare financial statement from Caroma records based
on standard accounting procedures for making assertions about the data in the statements. The
responsibility of the auditor is to undergo regular audits for verifying data in the statements like
balances as presented in the accounts receivable (Carson, Fargher and Zhang 2016). Key
financial report assertion at risk is influenced by both quantitative as well as qualitative
estimation and further judgment that had been conducted by management at the time of
evaluating of cost-benefit relationship of internal controls of an entity.

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Reference List
Becker, L.L., Stead, J.G. and Stead, W.E., 2016. Sustainability Assurance: A Strategic
Opportunity for CPA Firms. Management Accounting Quarterly, 17(3), p.29.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: A
synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Hardy, C.A., 2014. The messy matters of continuous assurance: Findings from exploratory
research in Australia. Journal of Information Systems, 28(2), pp.357-377.
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical
analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Moroney, R. and Trotman, K.T., 2016. Differences in Auditors' Materiality Assessments When
Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research, 33(2), pp.551-575.
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International Archival Auditing and
Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of
Practice & Theory, 35(3), pp.1-32.
Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in
environmental, social and governance assurance and consulting. Managerial Auditing
Journal, 30(1), pp.80-111.