SALES SYSTEM EXERCISE

The Cake House Sdn. Bhd. is the main supplier of bakery supplies to cafe and confectionery
shops in the northern region of Malaysia. The manager is assisted by a sales clerk, an account
clerk, and two warehouse assistants. Sales are made by phone, for later pickup. When a
customer places an order, an unnumbered sales order is prepared by the sales clerk. It lists the
descriptions of the ordered items, the quantities ordered, and the unit prices, as well as a
notion of whether the sale is for cash or credit. The credit sales will be approved by the sales
clerk herself, on the basis of familiarity with the customers. Those customers who are active
in purchasing from The Cake House Sdn. Bhd. within the past three months are commonly
granted credit sales.

One copy of sales order is filed in the office, and the second copy is taken to the warehouse,
where materials are stored. Dry raw materials such as flour, assorted cakes mix, and sugar are
kept on the open rack for easy handling. Cold materials including butter, milk and frozen
items are stored in the refrigerator beside the main door. Based on the second copy sales
order, one of the warehouse assistants packs the ordered items and pastes the copy of the
sales order to the box containing the packed order. The materials record is updated by the
warehouse assistant.

When a customer arrives to pick up an order, if the sale is cash and carry, the customer first
stops in the office and pays. Otherwise, the customer goes directly to the warehouse and
picks up the order. Whether the sale is for cash or on credit, the customer receives the second
copy of the sales order together with the box.

Each morning, the account clerk opens the mail and segregates the remittance advice from
customers. The account clerk removes the sales order from the open orders file against which
remittances have been received and files them in closed orders file. The account clerk then
prepares a deposit slip, listing cash received both from credit sales and from yesterday’s cash
sales. Then, the clerk carries the deposit to the bank.

At the end of each month, the account clerk prepares monthly statements from the open credit
sales orders and mails them to the customers. The account clerk also prepares the bank
reconciliation.

(a) Explain SIX (6) control weaknesses of physical control that currently exist in the
sales orders and cash receipts systems of The Cake House Sdn. Bhd.

(b) Explain the potential risk exposure for EACH weakness identified in (a).

(c) For each weakness, suggest ONE (1) improvement in the internal control procedures
to minimize the risk. Assume that the company is unable to hire an additional
employee.

(d) State the function of TWO (2) input documents that exist in the above case.