Question

In: Accounting

Scenario 1 Kerry owns and operates a small community pharmacy. John is the pharmacist and he...

Scenario 1

Kerry owns and operates a small community pharmacy. John is the pharmacist and he employees a clerk to assist with collecting, reconciling and depositing the proceeds collected each week. Kerry leaves all the cash handling procedures to the clerk and simply confirms that cash was deposited at the end of the week.

Scenario 2

Alex is also an entrepreneur who owns a business. Alex ensures that the employee who accepts payments and issues receipts is not the same person to prepare the deposits. Deposits are prepared and reconciled by another (more senior) employee who confirms the amount of cash collected based on the cash totals (from the register, receipt book or AIS).

Required:

Compare and contrast the controls applied by the two scenarios. What improvements would you recommend?

Solutions

Expert Solution

Under the first scenario

There is a lack of appropriate segregation of duties for the business. Where all the cash handling activities including collecting, reconciling and depositing are being done by one person only i.e. the Cashier. This involves a lot of risks as cash is the major component for business success and letting one person manage all the cash and related activities increase the risk of fraud and misappropriation of fraud.

Recommendations:

Considering the small nature of the business, I would suggest that proper segregation of duties should be there and the owner should himself approve and reconfirm all the reconciliation and deposits to the bank. Prepare separate records for all the deposits and withdrawals and daily cash collections.

Under the second scenario

Proper cash controls and segregation of duties are present in the entrepreneur's business. Proper reconciliations are made and deposits are made by senior staff after proper approvals. This shows proper structure within the business and makes it difficult to do frauds and appropriately mitigates all the risks related to the cash.


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