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Internal control weaknesses

Consider each of the following situations independently:

a) The accounts receivable clerk opens the mail, records the cash receipts, posts the customer accounts, then forwards the cheques received to the cashier for safekeeping until they can be deposited by the assistant controller.

b) All plant employees are required to log in and out of their shifts by punching a time clock. The time cards are collected by the plant manager at the end of each week. He approves them and forwards them to the payroll department.Plant payroll cheques are forwarded bi-weekly to the plant manager for distribution to plant employees.

c) Every Monday, the accounts payable clerk reviews the open invoice file and prepares a list of creditors to be paid, amounts to be paid, and general ledger accounts to be charged. The list is sent to the assistant controller, who prepares the cheques. Cheques are sent directly to the mailroom for distribution and the list is sent to the bookkeeper for posting.

d) Parts used for production are kept in a segregated part of the plant floor close to the production line. The supervisor takes parts as required to ensure a smooth production flow. He keeps a list of the parts taken, and at the end of each month prepares a report to the accounting department identifying the parts taken during the month. The accounting clerk uses this report to make the monthly adjusting journal entry to the parts inventory account.

e) The accounting department maintains a sub-ledger of all of the company's property, plan, and equipment. Any capital asset disposals are recorded on prenumbered forms, and must be approved by the plant manager and the divisional manager.The forms are forwarded to the accounting clerk, who makes the appropriate entries in the sub-ledger. The sub-ledger is reconciled to the general ledger control account annually, and a complete inventory of the capital assets is taken once every five years.

Required:

For each of the above situations, determine whether or not there are any internal control weaknesses. If so, describe the key elements of internal control that are absent, describe the potential effect of the missing elements, and recommend practical procedures to rectify the internal control weaknesses.

Solution Preview

Consider each of the following situations independently:

a) The accounts receivable clerk opens the mail, records the cash receipts, posts the customer accounts, then forwards the cheques received to the cashier for safekeeping until they can be deposited by the assistant controller.
The internal control weakness is segregation of duties. The three tasks of opening and recording mail, recording cash receipts and posting customer accounts should be segregated. The potential effect of missing element is that if a check is misappropriated by the accounts receivable clerk it will be difficult to place responsibility. The practical method of rectify this situation is to have one person open and record the main, another person should record checks received in the cash book, and have a third person post the amount into customer accounts.
b) All plant employees are required to log in and out of their shifts by punching a time clock. The time cards are collected by the plant manager at the end of each week. He approves them and forwards them to the payroll department.Plant payroll cheques are forwarded bi-weekly to the plant manager for distribution to plant employees.
Adequate documents and records are missing. There should be a parallel record generated every day based on the punching of time clock and ...

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