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Internal Control Weaknesses for Cash and Receivables

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For each of the following independent situations, indicate the apparent internal control weaknesses and suggest alternative procedures to eliminate the weaknesses.

1. John Smith is the petty cash custodian. John approves all requests for payment out of the $200 fund, which is replenished at end of each month. At the end of each month, John submits a list of all accounts and amounts to be charged and a check is written to him for the total amount, John is the only person to ever tally the fund.

2. All of the company's cash disbursements are made by check. Each check must be supported by an approved voucher, which is in turn supported by appropriate invoice and, for purchases, a receiving document; the vouchers are approved by Dean Leiser, the chief accountant, after reviewing the supporting documentation. Betty Hanson prepares the checks for Leiser's signature. Leiser also maintains the company's check register (the cash disbursements journal) and reconciles the bank account at the end of each month.

3. Fran Jones opens the company's mail and makes a listing of all checks and cash received from customers. A copy of the list is sent to Jerry McDonald who maintains the general ledger accounts. Fran also maintains the subsidiary ledger for accounts receivable, which is used to generate monthly statements to customers.

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For all three of these situations, the internal control issue is one of segregation of duties. In all three cases, the proper procedures are being performed to comply with good fundamental accounting and bookkeeping procedures but the problem is that basically one person is controlling each entire process.

It is true that in many small businesses, effective segregation of duties can be difficult and even impossible, but that could also explain why white collar crime is rampant in small business. Often it is not even reported because business owners don't want the hassle of ...

Solution Summary

For each situation, the specific controls and procedures are explained following a general discussion of the basic issue of internal control weaknesses. 388 words.

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Identifying internal control deficiencies

Your working papers for an integrated audit being performed under PCAOB Standard No. 5 include the narrative description below of the cash receipts and billing portions of internal control of Slingsdale Building Supplies, Inc. Slingsdale is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of Slingsdale's sales are to construction contractors on account. Slingsdale employs 12 salaried sales associates, a credit manager, three full-time clerical workers, and several part-time cash register clerks and assistant bookkeepers. The full-time clerical workers perform such tasks as cash receipts, billing, and accounting and are adequately bonded. They are referred to in the narrative as "accounts receivable supervisor," "cashier," and "bookkeeper."

Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account if approved by the credit manager, based only on the manager's familiarity with the contractor's reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable (AR) supervisor to set up the receivable.
The AR supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorized price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The AR supervisor electronically posts the details of the invoice in the AR subsidiary ledger; simultaneously, the transaction's details are transmitted to the bookkeeper. The AR supervisor also prepares a monthly computer-generated AR subsidiary ledger (without a reconciliation with the AR control account) and a monthly report of overdue accounts.
The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each check with the enclosed remittance advice, stamps each check "for deposit only," and lists checks for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the checks daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips, to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers.
The bookkeeper receives the details of transactions from the AR supervisor and the cashier for journalizing and posting to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the AR supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the AR supervisor. The bookkeeper authorizes the AR supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

a. Based only on the information in the narrative, describe the internal control deficiencies in Slingsdale's internal control over the cash receipts and billing functions. Organize the weaknesses by employee job function: Credit manager, AR supervisor, Cashier, and Bookkeeper.
b. Assume that you have performed your audit of internal control in conformity with PCAOB standards. Based on your results for part (a), you believe that several of the deficiencies represent material weaknesses. What effect will this have on your report on Slingsdale's inter.al control? Which types of opinions may be appropriate?
c. What communication responsibilities do you have for any weaknesses that represent significant deficiencies?

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