Accounting, Canadian Ninth Edition, Horngren, Harrison, Johnston, Meissner, Norw

Question

Accounting, Canadian Ninth Edition, Horngren, Harrison, Johnston, Meissner, Norwood,

Johnston, Volume One Pearson Canada 2014

Calibre Interiors makes all sales on credit. Cash receipts arrive by mail, usually within 30 days of sale. Sarah Romano opens envelopes and separates the cheques from the accompanying remittance advices. Romano forwards the cheques to another employee, who makes the daily bank deposit but has no access to the accounting records. Romano sends the remittance advices, which show the amount of cash received, to the accounting department for entry in the accounts. Her only other duty is to grant sales allowances to customers. {Recall that a sales allowance decreases the amount that the customer must pay.) When she receives a customer cheque for less than the full amount of the invoice, she records the sales allowance and forwards the document to the accounting department. Required You are a new management employee of Calibre Interiors. Write a memo to the company president, Mary Briscall, identifying the internal control weakness in this situation. State how to correct the weakness. Identifying internal control weakness in cash receipts

Explanation / Answer

Hi,

Please find the answer as follows:

Weaknesses:

In this case, Romano is responsible for opening the envelopes and forwarding the remmitance advices to the accounting department. Further, she is entitiled to allow sales allowances to the customer. Here, we observe 2 internal control weaknesses. One is segregation of duties and the other one is conflict of interest. Segregation of duties is violated as Romano is handling 2 functions (opening envelopes and creating and forwarding remmitance advices) which infact should be handled by 2 independent executives. Conflict of interest occurs as Romano has the authority to provide sales allowances to customers which can make her provide favorable allowances to some customers. Since, she is responsible for receiving payments, preparing remmitance list and allowing sales allowances, she can offer favorable terms to customers.

Recommendations:

2 independent executives should be made responsible, one for opening the envelopes and the other one for preparing remmitance list plus forwarding remittance advices. This will help in ensuring proper segregation of duties. Also, the authority to provide sales allowances should be given to executives responsible for sales/or someone in the accounting department (depending on the availability of staff). Further, sales allowances should be authorized by management (if possible) to ensure receipt of complete payments.

Thanks.

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