Question

Everyday Supplies Pty Ltd is a single-store retailer that sells a variety of tools, garden supplies,

timber, small appliances, and electrical fixtures to the public, although about half of Everyday

Supplies’ sales are to construction contractors on account.

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 supervisor to set

up the receivable.

The accounts receivable supervisor independently verifies the pricing and other details on the

charge form by reference to a management - authorised price list, corrects any errors, prepares

the invoice, and supervises a part-time employee who mails the invoice to the contractor. The

accounts receivable supervisor electronically posts the details of the invoice in the accounts

receivable subsidiary ledger; simultaneously, the transaction’s details are transmitted to the

bookkeeper. The accounts receivable supervisor also prepares a monthly computer-generated

accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control

account and a monthly report of overdue accounts.

4

The cash receipts functions are performed by the cashier, who also supervises the cash register

clerks. The cashier opens the mail, compares each cheque with the enclosed remittance advice,

stamps each cheque “for deposit only”, and lists cheques for deposit. The cashier then gives the

remittance advices to the bookkeeper for recording. The cashier deposits the cheques 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 accounts receivable supervisor and

the cashier for journalising and positing to the general ledger. After recording the remittance

advices received from the cashier, the bookkeeper electronically transmits the remittance

information to the accounts receivable 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 accounts receivable supervisor. The bookkeeper authorises the

accounts receivable 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.

Required:

Describe five (5) internal control weaknesses in Everyday Supplies’ internal control for the cash

receipts and billing functions and explain why they are weaknesses for two (2) that you

have identified.

(please provide answer of Minimum of 550 words. Maximum of 600 words with unique writing than other)

Answer 1

Following are five internal control weaknesses in the cash receipt and billing process is as follows-

(a) No background check of credit worthiness of the contractor is being done and no process or policy exists.

(b) Lack of control around review of the sales entry being recorded in accounts receiavable ledger by Accounts receivable supervisor

(c) Lack of control over reconciliation of receivable subsidiary ledger with accounts receivable control account

(d) Lack of control around follow up of accounts receivable due from customer

(e) Lack of control around reconciliation of daily cash count and reconciliation with books

Controls with reason for weakness is as follows-

(a) No background check of credit worthiness of the contractor is being done and no process or policy exists.

The Company gives credit merely on basis of familiarity of manager with contractors credit worthiness leaves a possibility of manager colluding with the contractors. Also, lack of independent review could lead to believing on rumours rather than facts

(b) Lack of control around follow up of accounts receivable due from customer

Accounts receivale team sends customers a reminder to pay but no follow up is being done. After 6 months amounts are written off and no credit is extended however, manager could collude with the contractor in these 6 months to commit fraud against the company.