Posted: January 13th, 2023

Internal Control Case Study Company Background Bucks Phyz is a medium sized company

Internal Control Case StudyCompany BackgroundBucks Phyz is a medium sized company with turnover of $2.5m per annum.The main responsibility over the company’s accounting and financial reportingis in the hands of the company’s Finance Director, Lucinda. Lucinda and theHead of Operations report directly to the CEO.CEOOrganisation ChartNote not all position are shownFinanceDirectorAccountsReceivableManagerAR Specialistx3Head of SalesMaster DataSpecialist x2SalesManagers x5Head ofOperationsFinancialAccountantGeneralAccountingTeam x 5Over the past two years the company has undergone a restructuring programwithin its sales team due to major changes within the company’s operatingenvironment. Another considerable change Bucks Phyz had faced recently wasrelated to the turnover of key personnel. Changes in important positions arebound to have an impact on an organization as important silent informationmight be lost and the new employees inevitably take some time to adapt tonew circumstances and organizational practices. Furthermore, as a result ofthe restructuring programs, some redundancies had taken place and variousemployees were assigned new tasks, which in some cases may have led toblurred responsibilities over some sub-processes. Bucks Phyz had also beenfaced by an instance of fraudulent behaviour in the company’s accountingdepartment some years before.2Considering the history of fraud, wide-ranging organizational changes and thechallenging operating environment, Bucks Phyz is interested in evaluating therisks and the current state of internal controls in its sales process. They couldnot afford any unpleasant surprises or revenue leakage under the currentcircumstances.Modified Organisation ChartCEOFinanceDirectorLucindaHead of OperationsAccountsReceivableManagerHead ofSalesBarryMarySales Manager George+ 4 othersAR SpecialistsMaster DataSpecialistsPlease click on the photos to read their interview3Finance Director - LucindaLucinda joined Bucks Phyz in June lastyear. She has three direct reports,including you the Financial Accountant.She has overall responsibility for theSales and Finance functions of BucksPhyz. Lucinda works closely with theHead of Operations to ensure thatstrategic goals of Bucks Phyz arerealised.4Back to Organisation ChartMaster DataSpecialistsThe Master Data Team consists of 2 master data specialists Alfred and Joy. Theirresponsibilities include implementing new customers into company’s operativesystems. These responsibilities also cover making changes to the existing masterdata. Joy provided the following overview of customer master maintenance atBucks Phyz.“The basic customer data is derived from the sales contracts (Business ID, paymentmethod, address, contacts etc.) and entered into the billing system as a newcustomer profile. After this, a pricing template is created (if the customer pricesdiffer from the standard price list) and linked to the customer profile. Creation ofthe price template is probably the riskiest phase of the customer data set-up sincea lot of high detail data is manually entered into the system. Also, the system viewis pretty “heavy”, making it easy to accidentally misplace data.”At present, the data is not reviewed after the initial input unless a specific reasonoccurs… Going through all the data would probably be irrational in terms of cost –benefit ratio.” Inquiries were also made about the responsibilities anddocumentation of the customer set-up process. According to the Joy, the set-upprocess is centralized to her, Alfred and Mary, the AR manager, no others areauthorized to create new customer profiles.5Back to Organisation ChartMaster DataSpecialistsJoy was asked about changes to master data and average users’ access rights,especially with respect to modification of price lists. Her response was as follows:“I think that basically everyone with an access to the ERP system is capable ofchanging the basic information, such as billing address, contact information etc.However, I believe that the access rights are restricted so that only selected peoplecan alter the price lists and reference structures… There is an official policy withrespect to changes to customer data, and it’s been communicated to everyone.Whenever a person recognizes a need to update master data, they inform usthrough email and we make the changes… Emails are not archived in a specificmanner.”As a final point, Alfred was asked whether the billing system was utilizing anyautomatic data quality tools. His comments were: “There is a standard format inwhich the customer data is entered into system, but not all active fields arerelevant. The person entering the data has to be aware of the irrelevant fields asthe system really doesn’t provide any guidance for the user... An automatic audittool exists to prevent duplicate customer entries.”6Back to Organisation ChartAR Manager - MaryThe responsibility of accounts receivable is divided betweenthe Finance Director and the Accounts Receivable Manager,who supervises a team of 3 AR Specialists. The FinanceDirector’s main responsibility is to ensure that no creditlosses occur, and deal with urgent matters. The AR Manageroversees the AR process in general and the AR Specialistshandle the everyday routines for the most part.Marysends the Finance Director an age-distributed list of creditcustomers' open receivables at the end of every quarter.Lucinda reviews the customer-specific balances and decideswhether any immediate actions are required. For example:If a small customer has a large amount of unpaid purchases,it may be necessary to contact the customer in order toavoid excessive credit risk exposure (due to credit limitissues) and possibly set credit hold until the existingbalance has been paid off. If a customer has overduepayments that haven’t been paid regardless of reminders itmay be necessary to call the customer and inquire aboutpossible issues. Mary is responsible for following up thesecustomers, and the outcome of these calls is a possiblecredit hold.The AR team independently sends out reminders tocustomers about due invoices once a month. If invoices stillremain unpaid after the first reminder, Mary is consulted asto whether another reminder will be sent or if personalcontact should be made by either phone or email. OftenMary is the one personally following up with customers.NEXT: Mary meets with Lucinda7Back to Organisation ChartMary and LucindaIn regards to potential uncollectable amounts, the discussions with Lucindarevealed that in the context of Bucks Phyz “properly approved” means havingFinance Director’s authorization for any write-offs that are taking place inaccounts receivable When questioned about how she perceived the write-offprocess (in case credit losses turned up) Mary’s response was short and clear:“We don’t do any write-offs without consulting the Finance Director first.”Mary is the only person with system access to adjust the accounts receivablesub ledger to write off uncollectable amounts. Over the past 2 years there havebeen write offs totalling more than $1m.8Back to Organisation ChartAccounts Receivable SpecialistsCash receipt allocations are processed by the AR specialists under the supervisionof Mary, the AR manager. According to Mary, the majority of bank payments werebeing automatically matched with invoices by the ERP system through referencenumbers. The payments that failed to be automatically allocated for some reasonended up as ‘open items’ in an account called “reference unknown”. Automationfails when a customer doesn’t succeed to input the reference number correctly orthere isn’t one, and for this reason manual investigation is sometimes required.The AR team take this task seriously as there were continuous investigations takingplace. This is definitely an advantage since the accounts receivable balancesremain up-to-date and effective monitoring is enabled. The AR manager statedthat her team was following-up on this account continuously and they weremanually allocating these payments to correct invoices on a daily basis, based onbank statements, customer numbers etc. There is some level of frustration withthe amount of entry required for processing receipts. Customers often short payciting deals with the sales staff that differ to the terms on the invoice.At the end of every day, the AR team was reconciling the payments received, bothreference and unknown, against customer ledger to ensure that allocations weredone correctly that day. Daily reconciliations between bank statements andgeneral the edger were completed by Mary.9Back to Organisation ChartHead of SalesBarryThe sales team consists of the Head of Sales and five Sales Managers. The Head of Salesreports to the Finance Director, Lucinda. Barry joined Bucks Phyz over 25 years ago. Hemet his wife Mary, the AR Manager, while working at Bucks Phyz. Sales staff, includingBarry are paid a small base salary. They are paid a commission on sales, which iscalculated when the invoice is created. Credit notes are not taken into consideration forthe sales commission incentives.During his interview Barry commented: “Recently a new pricing tool was introducedthrough which the sales managers can calculate prices to the offers they are sending out.This new tool considers our cost structure, the workload caused by the potentialcustomer and our EBIT targets which our previous profitability calculation templatewasn’t capable of. Some adjustments to the new tool were required in the beginning butthey have now been addressed… Completed calculations are documented on the salesdepartment’s network drive where they can be later found if need be.”When asked about the authorization policies, the Head of Sales responded as follows:“It’s been agreed that the sales managers can send offers to their own customers, that’sfine from my point of view. There’s a policy that the actual contracts are signed either byme or the Finance Director…In practice there is a standardized process but it just hasn’tbeen mapped. Of course there are times when time and other constraints dictate thatthe standard process isn’t always followed”Barry stated that there is a standard contract template available in the company intranetwhich is to be used. However, he pointed out that he was not completely satisfied withthe current state of legal terms as there had been a few cases where the customers haddemanded rather significant changes to the case company’s contract drafts.10Back to Organisation ChartSales ManagerGeorgeWhen asked about the pricing tool of Bucks Phyz, the George, a new salesmanager commented as follows: “Until recently we (sales managers) havebeen using an “old” profitability calculation template, from 2010 or so, tocalculate prices for our offers. An improved pricing tool was introduced notlong after I started, but there were a few matters which I didn’t quite graspimmediately. I think a few other sales managers felt the same way, so it mightbe a good idea to go through the logic of the new pricing tool with the financeteam once more. Barry provided me with some great training on the oldtemplate when I first started, and for this reason, I still use the old tool fornow… The calculations are saved into customer folders at our network drive.”Next - Barry and Mary provide an overview of the Credit Check process11Back to Organisation ChartBarry and MaryBuck’s Phyz’s initial credit check process is as follows:When either the sales staff or Barry engages in contract negotiations with apotential customer an email is sent to the AR manager to investigate thecreditworthiness of that customer. Mary checks the credit rating of the potentialcustomer from the credit rating agency’s web site (rating available in a fewminutes). If the company’s credit rating is anything else than C (the scale rangesfrom AAA to C), credit can be granted. If the rating is C, another payment methodis to be negotiated. The credit rating report is archived by the finance team as anevidence of the inquiry and stored on the intranet.LucindaThe conversations with the finance directorindicated that the objective of issuing credit linesonly for creditworthy customers was being metrather well in her opinion and established policiesand processes existed. As far as she knew, BucksPhyz hadn’t run into major credit losses duringthe time that Lucinda had been working in thecompany (less than one year).However, even if the process was simple andoperating well for the most part, the Lucindaacknowledged a few recent cases where theprocess had failed due to insufficient instructionsto Sales staff. There had been several instanceswhere credit checks had been performed on newcustomers after the sales contract has beensigned by both parties and invoices had beenissued.12NEXT: assignment questionInternal Controls (40 marks)You have recently started in a new organisation “Bucks Phyz” as afinancial accountant. You have some early concerns over the salesprocesses of the company and have decided to undertake an initialinternal audit of this area of the business. Using the information thatyou have gathered contained in this document, provide a 1,500 wordbusiness report to the Finance Director that addresses the following:1.What are the main risks involved in the Bucks Phyz’s salesprocess?2.How could the internal controls of Bucks Phyz be furtherdeveloped to mitigate the identified risks in its sales process?Back to Organisation Chart13Images: e-learning brothers.com; Bucks Fizz.com

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