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5-61 (Internal Controls-Office Service Client)

5-61 (Internal Controls-Office Service Client) Brown Company provides the following office support services for more than 100 small clients:

1. Supplying temporary personnel
2. Providing monthly bookkeeping services
3. Designing and printing small brochures
4. Copying and reproduction services
5. Preparing tax reports

Some clients pay for these services on a cash basis, some use 30-day charge accounts, and others operate on a contractual basis with quarterly payments. Brown's new office manager was concerned about the effectiveness of control
procedures over sales and cash flow. At the manager's request, the process was reviewed and the following facts were disclosed:

a. Contracts were written by account executives and then passed to the accounts receivable department, where they were filed. Contracts had a limitation (ceiling) on the types of services and the amount of work covered. Contracts were payable quarterly in advance.

b. Client periodic payments on contracts were identified on the contract, and a payment receipt was placed in the contract file. Accounting records showed Credit Revenue; Debit Cash.

c. Periodically, a clerk reviewed the contract files to determine their status.

d. Work orders relating to contract services were placed in the contract file. Accounting records showed Debit Cost of Services; Credit Cash or Accounts Payable or Accrued Payroll.

e. Monthly bookkeeping services were usually paid for when the work was complete. If not paid in cash, a copy of the invoice (marked "Unpaid $ _________ ") was put into a cash-pending file. It was removed when cash was received, and accounting records showed Debit Cash; Credit Revenue.

f. Design and printing work was handled like bookkeeping's work. However, a design and printing order form was used to accumulate costs and compute the charge to be made to the client. A copy of the order form served as a billing to the client and, when cash was received, as a remittance advice.

g. Reproduction (copy) work was generally a cash transaction that was rung up on a cash register and balanced at the end of the day. Some reproduction work was charged to open accounts. A billing form was given to the client with the work, and a copy was put in an open file. It was removed when paid. In both cases, when cash was received, the accounting entry was Debit Cash; Credit Revenue.

h. Tax work was handled like the bookkeeping services.

i. Cash from cash sales was deposited daily. Cash from receipts on account or quarterly payments on contracts was deposited after being matched with evidence of the receivable.

j. Bank reconciliations were performed using the deposit slips as original data for the deposits on the bank statements.

k. A cash log of all cash received in the mail was maintained and used for reference purposes when payment was disputed.

l. Monthly comparisons were made of the costs and revenues of printing, design, bookkeeping, and tax service. Unusual variations between revenues and costs were investigated. However, the handling of deferred payments made this analysis difficult.


a. List the eight elements of poor internal control that are evident.

b. List six elements of good internal control that are in effect.

Solution Preview

//In this section, elements of poor internal control is assessed. These elements provide an overview of the factor, which hinders the performance of internal control process. Proper assessment of these factors enables the company to keep a check on such factors. //

Sole responsibility of accounts department

It is evident from the accounts receivables management of the Brown Company that responsibility of contract preparation lies only with accounts executes and accounts receivables department. Accounts are prepared by the accounts executives and then forwarded to the accounts receivable department, which is responsible for filing and maintaining accounts receivables.

Negligible role of other departments

Process of contract preparation flows from accounts executives to accounts receivables department. Other departments like marketing department has no role in preparing contracts and forwarding contracts, which eliminates the role of the marketing department in contract preparation.

It is necessary to involve the marketing department in the contract preparation task in order to implement an effective internal control system. Since the marketing department plays an important role in sourcing and approaching prospects, they should also assign responsibility of contract preparation (Chorafas, 2001). The process of contract preparation should flow from the marketing department to accounts executive, and then accounts receivables department.

Periodic review of contract files by clerical personnel

Brown Company follows the practice of reviewing the contract files by clerical personnel. Clerical personnel review the contract files in order to determine the actual status of the contract accounts. Clerical staff do not possess adequate knowledge about accounting terminologies and practices, which lead to many loopholes in the internal control system. Contract files should be ...

Solution Summary

The response addresses the queries posted in 1,051 words with 4 references. It includes a section on elements of poor internal control and another section on positive elements of internal control and how they contribute to the overall efficiency of the internal control process.