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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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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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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 ...

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