Weakness/ deficiency and explanation:
Analyze the Aged Receivables Analysis for Murray Co. to identify weaknesses and
deficiencies:
1) Negative Balances: There are negative balances in the current and 30-60 days
buckets for some customers (e.g.,Bibs and Balls, Tike Co, Whistlers).
● "Tike Co" (T002) with a balance of -$54,000, split into $0 current and -$54,000
overdue by over 120 days.
● "Whistlers" (W002) with a significant negative current balance of -$654,000.
● "Bibs and Balls" (B001) with a balance of -$24,000.
Negative balances are unusual and could indicate errors in data entry or credit memos
not being properly recorded.
2) Large Balances in Overdue Categories: Some customers have significant balances in
the 60-90 days, 90-120 days, and 120+ days buckets (e.g., Golf is Us, Supermarket,
James Smith Partnership).
● Golf is Us: Significant overdue amounts in the 90-120 days (£100k) and 120 days
(£111k) categories.
● Supermarket: has $73,000 overdue for over 120 days.
● James Smit Partnership: Large amounts are overdue, with £102k in the 30-60
days, £34k in the 60-90 days, and £45k in the 90-120 days categories.
This indicates potential collection issues and risks of bad debts.
3) No Explanation for Negative Balances: There is no explanation for the negative
balances in the current and 30-60 days buckets.
4) Large Outstanding Balances with Extended Aging: Some customers have very high
total balances and a significant portion of those balances in older aging brackets. (e.g.,
Jockeys, Supermarket)
● "Jockeys" (J003) with a total of $419,000, much of which is overdue.
● "Supermarket" (E001) with $235,000 total, including substantial amounts overdue
for over 120 days.
Reason for weakness/Deficiency
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1) Negative Balances:
Reason:
● The customer overpaid the accounts payable
● The accountant worked carelessly, making mistakes during the adjustment of
customer accounts, invoicing, and application of payments
● Debit/credit notes were issued but not properly reconciled.
2) Large Balances in Overdue Categories:
Reason:
● Customers are facing financial issues, which affects their ability to make timely
payments
● The credit terms of Murray Co. are lenient, giving customers the opportunity to
delay payments on receivables and not pay according to the stipulated credit
terms
● The debt collection process is ineffective, lacking necessary actions to recover
debts efficiently, such as contacting customers for reminders and issuing debt
collection notices
3) No Explanation for Negative Balances:
Reason:
● Ineffective working credit, lacking support clauses, and handling of customers
with negative balances, such as notifying them of the reasons or refunding them
● Credit checks are not thorough regarding accounts with negative balances, failing
to identify the reasons and causes for those negative balances
4) Large Outstanding Balances with Extended Aging:
Reason:
● There is no clear credit control policy, no appropriate credit limits set, and no
early intervention to prevent overdue payments
● There is a lack of diversification in the customer base, relying heavily on a core
group of clients
● Inadequate and inaccurate credit checks when granting credit lead to high-risk
customers accumulating short-term balances
Recommended control
1. Negative Balances in Aged Receivables
Recommended Controls
1. Automated System Controls:
○ Set up automated flags for negative balances in the accounting system for
immediate investigation.
2. Credit Memo Review:
○ Implement a policy requiring supervisory approval for issuing and applying
credit memos.
3. Reconciliation Procedures:
○ Regularly reconcile customer accounts to identify and correct mismatched
payments or credit notes.
4. Training:
○ Train staff to properly apply credit memos and record transactions.
2. Large Balances in Overdue Categories
Recommended Controls
1. Automated Aging Report Alerts:
○ Configure aging reports to trigger alerts when balances exceed predefined
thresholds.
2. Escalation Process:
○ Establish a tiered escalation process for overdue accounts:
■ Initial reminder emails or calls at 30 days overdue.
■ Formal notices at 60 days overdue.
■ Legal action or collection agency referrals for balances overdue by
120+ days.
3. Collection Performance Metrics:
○ Monitor collection effectiveness using metrics like Days Sales Outstanding
(DSO) and include them in management reports.
4. Customer Account Reviews:
○ Conduct periodic reviews of customers with high overdue balances to
reassess payment terms and creditworthiness.
3. Lack of Explanations for Negative Balances
Recommended Controls
1. Documentation Requirement:
○ Require detailed explanations for all credit memo applications and
negative balance adjustments, including supporting documentation.
2. Approval Workflow:
○ Implement an approval workflow for adjustments resulting in negative
balances, requiring management sign-off.
3. Audit Trail:
○ Enable system logs to maintain an audit trail of changes to accounts
receivable balances.
4. Monthly Review:
○ Mandate monthly reviews of all accounts with negative balances by the
accounting manager.
4. Large Outstanding Balances with Extended Aging
Recommended Controls
1. Credit Limit Policies:
○ Establish and enforce credit limits based on customers' payment history
and financial health.
2. Customer Aging Monitoring:
○ Use dashboards or reports to monitor aging balances weekly for high-risk
customers.
3. Proactive Customer Engagement:
○ Assign account managers to regularly communicate with customers
having large balances to discuss payment plans.
4. Risk Assessment for High-Value Customers:
○ Require creditworthiness reviews for customers exceeding a certain total
balance threshold before extending additional credit.
TEST OF CONTROL
1. Review Aged Receivables Analysis:
- Action: Analyze the aged receivables report to identify long-outstanding
items and those that may require special attention (e.g., over 120 days).
- Purpose: This helps assess collectibility and the appropriateness of the
reported balances.
2. Follow Up on Non-Responses:
- Action: For customers who do not respond to the confirmation letters
within a specified timeframe (e.g., 2-3 weeks), follow up via phone or
email.
- Purpose: To encourage responses and resolve any potential issues
promptly.
3. Compare with Subsequent Cash Receipts:
- Action: Review cash receipts after year-end to determine if any payments
were received from customers that could indicate the accuracy of
recorded receivables.
- Purpose: This provides additional evidence regarding the collectibility of
the balances.
4. Reconcile with General Ledger:
- Action: Maintain detailed documentation of all confirmations received,
discrepancies noted, follow-up actions taken, and resolutions achieved.
- Purpose: This supports the audit trail and provides evidence of the
procedures performed.
In conclusion, Implementing these test controls will help confirm the accuracy of Murray
Co.’s accounts receivable balance as of December 31, 20x2, and ensure that financial
reporting is reliable. Prompt action and thorough follow-up are key to obtaining accurate
confirmations and resolving any discrepancies.