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QUESTION 
Internal control systems
 
The Midas Mail Order Company operates a central warehouse from which all merchandise is distributed 
by post or carrier to the company's 10,000 customers. An outline description of the sales and cash 
collection system is set out below. 
Sales and cash collection system 
 
Stage 
Department/ 
staff responsible 
 
Documentation 
1 Customer 
orders 
merchandise 
(orders by phone or 
through the postal 
system) 
Sales dept
Sales assistants 
Multiple copy order form (with date, quantities, price 
marked on them) 
Copies 1-3 sent to warehouse. Copy 4 sent to accounts 
dept. Copy 5 retained in sales dept 
2 Merchandise 
requested from 
inventory rooms by 
despatch clerks 
Storekeepers 
Copies 1-3 handed to storekeepers. Forms marked as 
merchandise taken from inventory. (Note. If 
merchandise is not in inventories held, the 
storekeepers retain copies 1-3 until inventory room is 
refilled). 
Copies 1-2 handed to despatch clerks. Copy 3 retained 
by storekeepers. 
3 Merchandise 
despatched 
Despatch bay 
Despatch clerks 
Copy 2 marked when goods despatched and sent to 
accounts department
 EXAM FOCUS POINT 
You may be examined on the accountability of the internal auditor. 
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PART C: ACCOUNTING AND REPORTING SYSTEMS, CONTROLS AND COMPLIANCE 
 
246
 
 
Stage 
Department/ 
staff responsible 
 
Documentation 
4 
Customers invoiced Accounts dept: 
receivables 
ledger clerks 
2-copy invoice prepared from invoiced details on copy 
2 of order form received from despatch bay 
Copy 1 of invoice sent to customer. Copy 2 retained by 
accounts dept and posted to receivables ledger 
5 Cash 
received 
(as 
cheques, bank giro 
credit, or cash) 
Accounts dept: 
cashier 
2-copy cash receipt list 
Copy 1 of cash receipt list retained by cashier 
Copy 2 passed to receivables ledger clerk 
(a) 
State four objectives of an internal control system. 
(b) 
For the Midas Mail Order Company list four major controls which you would expect to find in the 
operation of the accounting system described above, and explain the objective of each of these 
controls. 
(c) 
For each of the four controls identified above, describe briefly two tests which you would expect 
an internal auditor to carry out to determine whether the control was operating satisfactorily.