Question 1:                                                                                                                (25 marks)

You have been assigned as the audit senior for SH Ltd – a family owned business which specialises in the manufacture and distribution of industrial chemicals. The company has been trading in the market for over 30 years and their balance date is the 30th of September 2017. The company receives orders from customers through two channels. The first channel involves customers placing orders through mail. This has been the traditional approach for the company and the company generates approximately 30% of its revenue through mail orders. The second channel involves customers placing orders through the company’s website. This channel has been very popular and the number of customers placing orders online has been increasing since the company offered this option in 2012. It is estimated that 70% of the company’s revenue comes from online orders. The following information has been gathered by the audit junior on the company’s sales system:

Revenue from mail orders:

Mail order is preferred by seven large customers which have been trading with SH Ltd since the company’s inception. SH Ltd has one sales clerk, Stacy, who maintains all aspects of this revenue stream; Stacy receives customer orders, raises sales invoices and processes payments. In raising invoices, the sales system automatically inserts the online trade customer prices for products. However, each of the seven large customer has contracted prices which are lower than the online prices and hence Stacy manually edits the invoices prior to despatch.

Revenue from online orders:

New trade customers are set up in the sales ledger master file upon passing suitable credit checks, and a credit limit is set at this stage by the finance director. Customers place online orders up to their pre-set credit limit; they receive an email confirmation and the sales order interfaces into the despatch system. The order number is linked to the customer account number. Goods are despatched daily with a goods despatched note which is referenced to the sales order number but are not sequentially numbered. SH Ltd used to despatch goods via a reliable national courier company. However, to reduce costs they have changed to a cheaper local courier and some orders have been delivered to customers late.

Trade customers’ sales invoices are automatically generated by the system on the day the online order is placed. The prices are inserted in accordance with the website rates. Occasionally SH Ltd makes special offers or discounts sales; when this occurs the master file data has to be amended to ensure that the correct prices are used on invoices.

This task is usually performed by a senior sales ledger clerk.

Revenue and receivables records:

On a monthly basis statements are sent to the each of the seven large customers; a number of trade customers have been requesting monthly statements and SH Ltd is considering this request. The company only reconciles the sales ledger control account at the end of September in order to verify the year-end balance.