Brown Company provides office services for more than 100 small clients including:
A. Supplying temporary personnel
B. Providing monthly bookkeeping services
C. Designing and printing small brochures
D. Copying and reproduction services
E. Preparing tax reports
Some clients pay cash for these services, some have a 30-day charge account, and some have contracts with quarterly payments.
When you reviewed their operations, you noted the following:
a) Contracts were written by the account executives and then passed to the accounts receivable department where they were filed. Contracts had a limitation on the types of services and the amounts. Contracts were payable quarterly in advance.
b) Clients' periodic payments on contracts were identified to the contract and a payment receipt was placed in the contract file. Accounting records showed Debit: Cash; Credit: Revenue.
c) Periodically a clerk reviewed the contract files to determine their status.
d) Monthly bookkeeping services and tax services were usually paid for when the work was complete. In not paid, a copy of the invoice marked "Unpaid $____" was put into a cash pending file. It was removed when the cash was received. Accounting records showed Debit: Cash; Credit: Revenue.
e) 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, accounting records showed Debit: Cash; Credit: Credit Revenue.
f) Cash from cash sales was deposited daily. Cash from receipts on account or quarterly payments on contracts were deposited after being matched with evidence of the receivable.
g) Bank reconciliations were performed using the deposit slips as original data for the deposits on the bank statements.
h) A cash log was maintained of all cash received in the mail. This log was retained and used for reference purposes when a payment was disputed.
i) 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.
Required: Discuss at least 4 examples of poor internal control and 2 examples of good internal control.
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Below are my answers.
Anna Liza Gaspar
First, internal control is a system designed to safeguard the assets of an organization and reduce risk, and at the same time cost effective. An effective internal control system tries to minimize the opportunity for fraud.
Second, four examples of poor internal control of Brown Company are as follows:
1. Issuance of receipts for contract payments should be ...
This solution answers various questions regarding internal control in a company.