Case Study: Spring Water Space Company
Spring Water Space Company is a 15-store chain in the Midwest that sells hot tubs, accessories and supplies. Each store has a full-time, salaried manager and an assistant manager. The sales workers are paid an hourly wage plus a commission based on sales volume. The company uses electronic cash registers to record each transaction.
The salesperson rings up the order by scanning the item's bar code card, which then displays the item's description and unit price. The salesperson enters the quantity sold as well as his or her employee number. The cash register automatically assigns a consecutive number to each transaction. The cash register prints a sales receipt that shows the total, any discounts, the sales tax, and the grand total.
The sales person then collects payment from the customer, gives the receipt to the customer, and either directs the customer to the warehouse to collect the items purchased or makes arrangements with the shipping department for delivery.
If the customer wishes to purchase on credit, the sales person is also responsible for credit approval on credit card sales and approving sales paid by check. Sales returns are handled in exactly the reverse manner, with the sales person issuing a return slip when necessary.
At the end of each day, the cash registers print a sequentially ordered list of sales receipts and provide totals for cash, credit card, and check sales, as well as, cash and credit card returns. The assistant manager reconciles these totals to the cash register tapes, the total of the consecutively numbered sales invoices, and the return slips. The assistant manager prepares a daily reconciled report for the store manager's review.
Cash sales, check sales, and credit card sales are reviewed by the manager, who prepares the daily bank deposit. The manager actually makes the deposit at the bank and files the validated deposit slip. At the end of the month, the executive performs the bank reconciliation. The cash register tapes, sales invoices, reconciled report and return slips are electronically forwarded daily to corporate headquarters to be processed with files from all the other stores. Corporate headquarters incomes a weekly Sales and Commission Activity Report to each store manager for review.
Required:
Respond to the subsequent questions about Spring Water Space Company's operations based on the preceding narrative.
1. The fourth component of the COSO ERM framework is risk assessment. What risk(s) does Spring Water face?
2. Identify control strengths in Spring Water's sales/cash receipts system.
3. What problems were avoided or risks mitigated by the controls identified in Question #2?
4. How might Spring Water improve its system of controls?