PEI Case Study Summary
P(6-12)
a. Internal control strengths in PEI's system include:
* Automated customer credit limit master file. Allows automated checking of a customer's credit line on a real-time basis before sales orders are filled. * The Credit Manager establishes credit limits for new customers on a daily basis so that credit-worthy customers may have their orders filled in a timely manner. * Real-time customer credit checks before orders are processed. * Aging reports provided to the credit manager allows for rapid detection of overdue and near overdue accounts so that corrective action can be taken. * Customer is not billed until the order has shipped. * Shipping and Receiving accept and inspect returned …show more content…
materials to assure the receipt and identification of damaged materials and to limit credit returns. * Credit manager issues credit memos for returned merchandise. * Warehouse personnel confirm the availability of materials to fill orders and prepare back-orders for sales orders that cannot be filled with current stock. * General Accounting posts changes to the general ledger master file after accessing the accounts receivable master file, electronic sales, and credit memo files.
b Internal control weaknesses in PEI's system, and solutions to those weaknesses include:
Weakness 1: The Credit Department only checks the aging report from Accounts Receivable at month-end, which delays the identification of slow or non-paying customers for potential credit status changes.
Correction: Revise the aging report process to produce an exception report whenever a customer exceeds their credit limit. The exception report should automatically be sent to the credit manager by email so that corrective action can be taken in a timely manner.
Weakness 2 Customer credit requests for sales returns are not compared to materials received, which might result in credits to customer accounts for goods not returned or for returned goods that are damaged.
Correction: Require the credit manager to receive an acknowledgement from Shipping and Receiving that the goods were returned in good condition before issuing a credit memo. In addition, Accounting should not process any credit memos without receiving a report of goods received from Shipping and
Receiving.
Weakness 3 Warehouse personnel have responsibility for updating inventory records for purchases and sales which can lead to inventory shrinkage.
Correction: Create a purchasing function to update the inventory master file for purchases. The update should not take place until Shipping and Receiving notify them that the goods have been received.
Weakness 4 Receiving does not prepare a Returned Goods report.
Correction: Receiving should record all purchase returns and prepare a Returned Goods report. This record should be used to create a daily report which should be sent to General Accounting to compare with the purchase returns put back into the warehouse.
Weakness 5 Warehouse personnel have responsibility for updating inventory records for purchase returns, which can lead to inventory shrinkage.
Correction: Have the warehouse create a daily purchases returned report for all returned goods they receive from Receiving. This report should be sent to General Accounting for comparison with a purchase return report prepared by Receiving.
Weakness 6 Even though a customer's order is checked against an online credit rating website prior to purchase, Marketing does not check the customer's in-house credit limit set by the Credit Department prior to generating the sales order. The online credit rating website is only as good and as up-to-date as the data it receives from its various sources. The primary concern of PEI should be in the customer's payment performance for PEI and not the report from an external website.
Correction: The Marketing Department should also determine whether an order would cause the customer to exceed his credit limit.
a. Internal control strengths in PEI's system include:
* Automated customer credit limit master file. Allows automated checking of a customer's credit line on a real-time basis before sales orders are filled. * The Credit Manager establishes credit limits for new customers on a daily basis so that credit-worthy customers may have their orders filled in a timely manner. * Real-time customer credit checks before orders are processed. * Aging reports provided to the credit manager allows for rapid detection of overdue and near overdue accounts so that corrective action can be taken. * Customer is not billed until the order has shipped. * Shipping and Receiving accept and inspect returned …show more content…
materials to assure the receipt and identification of damaged materials and to limit credit returns. * Credit manager issues credit memos for returned merchandise. * Warehouse personnel confirm the availability of materials to fill orders and prepare back-orders for sales orders that cannot be filled with current stock. * General Accounting posts changes to the general ledger master file after accessing the accounts receivable master file, electronic sales, and credit memo files.
b Internal control weaknesses in PEI's system, and solutions to those weaknesses include:
Weakness 1: The Credit Department only checks the aging report from Accounts Receivable at month-end, which delays the identification of slow or non-paying customers for potential credit status changes.
Correction: Revise the aging report process to produce an exception report whenever a customer exceeds their credit limit. The exception report should automatically be sent to the credit manager by email so that corrective action can be taken in a timely manner.
Weakness 2 Customer credit requests for sales returns are not compared to materials received, which might result in credits to customer accounts for goods not returned or for returned goods that are damaged.
Correction: Require the credit manager to receive an acknowledgement from Shipping and Receiving that the goods were returned in good condition before issuing a credit memo. In addition, Accounting should not process any credit memos without receiving a report of goods received from Shipping and
Receiving.
Weakness 3 Warehouse personnel have responsibility for updating inventory records for purchases and sales which can lead to inventory shrinkage.
Correction: Create a purchasing function to update the inventory master file for purchases. The update should not take place until Shipping and Receiving notify them that the goods have been received.
Weakness 4 Receiving does not prepare a Returned Goods report.
Correction: Receiving should record all purchase returns and prepare a Returned Goods report. This record should be used to create a daily report which should be sent to General Accounting to compare with the purchase returns put back into the warehouse.
Weakness 5 Warehouse personnel have responsibility for updating inventory records for purchase returns, which can lead to inventory shrinkage.
Correction: Have the warehouse create a daily purchases returned report for all returned goods they receive from Receiving. This report should be sent to General Accounting for comparison with a purchase return report prepared by Receiving.
Weakness 6 Even though a customer's order is checked against an online credit rating website prior to purchase, Marketing does not check the customer's in-house credit limit set by the Credit Department prior to generating the sales order. The online credit rating website is only as good and as up-to-date as the data it receives from its various sources. The primary concern of PEI should be in the customer's payment performance for PEI and not the report from an external website.
Correction: The Marketing Department should also determine whether an order would cause the customer to exceed his credit limit.