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Internal Control

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The size of an entity can affect the components of internal control. Segregation of duties is a control activity that is important for adequate control. The following example presents a scenario where the auditor can provide assistance to the entity in establishing proper segregation of duties.

TameBird Industries produces meals for airlines and nursing homes. For the prior two audit engagements, your firm has written a management letter recommending that TameBird establish better segregation of duties in the accounts receivable and accounts payable functions. Tom Tuffnut, controller for TameBird, has received authorization to hire an additional clerk to work in the accounting area. Tom now has three accounting clerks available, and he has asked you to provide advice on how to best assign the following functions:

1. Responsibility for petty cash fund.

2. Opening of mail and listing of cash receipts.

3. Depositing cash receipts in bank.

4. Maintaining accounts receivable subsidiary records.

5. Determining which accounts receivable are uncollectible.

6. Maintaining cash disbursements journal.

7. Preparing checks for signature.

8. Reconciling bank statements.

Required:

Prepare a recommendation to Tom Tuffnut on how best to distribute the various functions among the three accounting clerks. Please choose only one clerk for each function. Indicate your choices on the grid below.
Duty Clerk 1 Clerk 2 Clerk 3
1. Responsibility for petty cash fund x
2. Opening of mail and listing cash receipts x
3. Depositing cash receipts in bank
4. Maintaining accounts receivable subsidiary records x
5. Determining which accounts receivable are uncollectible
6. Maintaining cash disbursements journal
7. Preparing checks for signature
8. Reconciling bank statement x

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The solution discusses internal control for a business

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This can be a difficult assignment. To achieve total internal control, the person who receives the money should never be the person to post the money. The person to post the money should never be the person to deposit the money. Why? Stealing can come into play when ...

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