Luxury Homework

Luxury Cosmetics (Luxury) manufactures and sells luxury soaps.
The company’s year end is 31 Dec

2021. Luxury sells products to cosmetic shops online; this represents 70% of revenue. Remaining 30%
revenue is generated by contracts to supply main cosmetic store chains (Sephora, Douglas, Hebe).
Below is a description of the sales system.
Revenue from the chain of cosmetic stores (Chain)
Sale is made to three key customers (Sephora, Douglas, Hebe). Luxury has one sales representative,
Julia, who maintains all aspects of this revenue stream:
-Julia negotiates contracts which are finally signed by the CEO of Luxury Cosmetics,
- Julia receives and books customer orders in the system,
- goods are send to the customers from the Luxury Cosmetics warehouse in Krakow,
- Julia issues sales invoices, when she gets information from when warehouse that goods were sent,
- payments are processed by the accounting department.
When issues invoices, the sales system automatically uses the online trade customer prices for
products. However, each chain customer has contracted prices which are lower than the online
prices and hence Julia manually edits the invoices prior to despatch.
Online revenue to cosmetic shops (online)
New trade customers are set up in the sales ledger master file upon passing suitable credit checks,
and a credit limit is set at this stage by the finance director. Customers place online orders up to their
pre-set credit limit; they receive an email confirmation and the sales order interfaces into the
despatch system. The order number is linked to the customer account number. Goods are
despatched daily with a goods despatched note which is referenced to the sales order number but
are not sequentially numbered. Luxury used to despatch goods via a reliable national courier
company. However, to reduce costs they have changed to a cheaper local courier and some orders
have been delivered to customers late. Trade customers’ sales invoices are automatically generated
by the system on the day the online order is placed. The prices are inserted in accordance with the
website rates. Occasionally Luxury makes special offers or discounts sales; when this occurs the
master file data has to be amended to ensure that the correct prices are used on invoices. This task is
usually performed by a senior sales ledger clerk.
Revenue and receivables records
On a yearly basis receivables reconciliations are sent to all customers. This take place in a November
and refers to customers which owe money to the Luxury Cosmetics at the end of November.
Required:
(i) Identifies and explains deficiencies in the sales system;

(ii) and provides a recommendation to address each of these deficiencies.
(iii) Describe audit procedures the auditor should perform to confirm Luxury Co’s revenue and
receivables.
Answers:
(i)、Deficiencies in the sales system:
1. Manual editing of invoices for chain customers: Julia manually edits the
invoices for chain customers to reflect the contracted prices, which are lower
than the online prices. Manual editing increases the risk of errors or
inconsistencies in the invoicing process.
2. Lack of segregation of duties: Julia, the sales representative, handles all
aspects of the revenue stream for the chain of cosmetic stores. This includes
negotiating contracts, receiving and booking customer orders, issuing sales
invoices, and processing payments. This lack of segregation of duties increases
the risk of errors or fraudulent activities going undetected.
3. Change in courier service affecting timely deliveries: Luxury Cosmetics
switched to a cheaper local courier service to reduce costs, but this has
resulted in some orders being delivered late. Late deliveries can negatively
impact customer satisfaction and may lead to customer complaints or disputes.
(ii)、Recommendations about these deficiencies:

1. Luxury Cosmetics should automate the process of applying contracted prices
to invoices for chain customers. This can be achieved by integrating the
contracted price information into the sales system and automating the invoice
generation process. By eliminating manual editing, the company can reduce the
risk of errors and ensure accuracy in the invoicing process.
2.The company should implement segregation of duties by assigning different
individuals to handle key functions within the sales system. For example,
different individuals should be responsible for negotiating contracts, receiving
orders, issuing invoices, and processing payments. This will help mitigate the
risk of errors and fraud by ensuring that multiple individuals are involved in the
process and can provide independent oversight.
3.It should reassess its choice of courier service and prioritize timely deliveries.
While cost reduction is important, it should not come at the expense of
customer satisfaction. The company should evaluate alternative courier
services that can provide both cost-effectiveness and reliable delivery services.
(iii)、Describe audit procedures the auditor should perform to confirm Luxury Co’s
revenue and receivables：
Number Description of the test
Completeness
Classification
Presentation
Occurence
Acccuracy
Cut off
1.Revenue The auditor should send confirmation
confirmation requests to a sample of customers to
verify the accuracy and completeness
of recorded revenue. This can be done
by directly contacting customers and
requesting them to confirm the amount √ √ √ √
they owe to Luxury Cosmetics as of the
year-end date. And provide financial
data that has already occurred.Any
discrepancies or inconsistencies should
be investigated further.
2.Review of The auditor should review a sample of
sales contracts sales contracts and corresponding
and invoices invoices to ensure that the invoiced
amounts align with the agreed-upon √ √ √
prices and terms. This will help confirm
the accuracy of revenue recognition
and identify any potential discrepancies
or errors.
3.Reconciliatio The auditor should reconcile the
n of accounts receivable balance as of the
receivables year-end date with the general ledger
and supporting documentation. This
includes reviewing receivables aging √ √ √ √ √
reports, customer account statements,
and other relevant records. Any
discrepancies or aged balances should
be investigated to ensure the accuracy
of the recorded receivables.
4.Review of The auditor should review the goods
delivery and dispatched notes, shipping records, and
shipping courier receipts to verify the
documentation completeness and accuracy of revenue √ √ √ √
recognition. This includes confirming
that goods were actually shipped to
customers and matching the
corresponding revenue recognition
with the timing of shipment.
5.Analysis of The auditor should analyze the sales
sales returns returns and allowances recorded by
and allowances Luxury Co. This involves reviewing
supporting documentation, such as
credit memos and customer
communications, to ensure that returns √ √ √
and allowances are properly
authorized, accurately recorded, and
reflected in the financial statements.
6.Analytical The auditor should perform analytical
procedures procedures to assess the
reasonableness of revenue and
receivables balances. This involves √ √ √ √
comparing current year figures to prior
year data, industry benchmarks, and
other relevant metrics. Significant
fluctuations or anomalies should be
investigated and explained.
7

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Luxury Cosmetics (Luxury) manufactures and sells luxury soaps.

The company’s year end is 31 Dec

Revenue from the chain of cosmetic stores (Chain)

Online revenue to cosmetic shops (online)

Revenue and receivables records

(i) Identifies and explains deficiencies in the sales system;

(ii)、Recommendations about these deficiencies:

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