The following is a COSO framework for Double M Merchants’ sales and debtors internal control system.
Control objectives
The control objectives include; only credit worth clients are supposed to receive credits, accounts that are unsettled should be followed up promptly, no goods should be released without a well-documented invoice, proper control of receipts from cash sales should be ensured, and lastly, any unauthorized credit should not be entered to debtors account balances.
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Risk sources
The risk sources include doubtful debts, invoiced sales but not recorded, selling of merchandise to bad credit risk, and dispatching of goods without involving all parties.
Risk assessment
The assessment of risks is conducted on both the inherent and residual basis. This entails figuring out the probability as well as the impact of the risks stated above to the organization by using tools, for example, fault tree estimation, maximum loss estimation, and qualitative risk analysis (Wahab, n.d.). After conducting a risk assessment, prioritization of the risks is done depending on the risk rating and severity.
Risk response
The subsequent step after determining, assessing, and prioritizing the risks facing the internal control system over sales and debtors is the formulation of effective risk response. The response entails procedure aimed at avoiding, accepting, sharing or reducing the risk. For instance, the response to risk such as selling merchandise to bad credit risk is avoiding the client. On the other hand, a risk that cannot be avoided like doubtful debts requires transferring them to a factoring organization.
Control activities
Firstly, before granting any credit, customers must be vetted and approved. The vetting is done to determine the customer’s capability to repay. The information is sought from credit reference bureaus and bank suppliers. Secondly, dispatching of goods is only validated against a genuine and confirmed sales order. Thirdly, accurate recording of goods dispatched as well as return inwards. Fourthly, accurate preparation of invoices and credit notes against an authorized price list as well as properly approving all price deduction and discounts. Moreover, any adjustments, as well as creditor notes, are prepared against appropriate documents such as validated return inwards. Also, all bad debts written off should be authorized and recorded properly. Notably, the individual involved in the initial authorization and granting of credit should not be part of the validation team.
Result communication method
The standard ways of communicating risk-related information include websites and mail to the concerned person in the organization, reports (both risk and internal audit), notice boards, and newsletters.
Process of monitoring the information
The process used to monitor information includes ongoing evaluations and management process that encompass tools such as Risk Audits, Reserve Analysis, and Technical Performance Measurement (“Risk Monitoring Control: Inputs & Outputs,” n.d.). Additionally, another way to monitor the information is by creating a risk management department for risk policies, governance, and procedures drafting and implementation.
References
Risk Monitoring Control: Inputs & Outputs. Retrieved from https://alumni.northeastern.edu/wp-content/uploads/2017/02/Week-2-Risk-Monitoring-Control-Process.pdf
Wahab, M.( n.d.). Risk Assessment. Retrieved from http://ocw.utm.my/pluginfile.php/1817/mod_resource/content/0/N10_risk_assessment.pdf
