Question

Choose one of the items listed below (you may not choose an item someone else has responded to unless all of them have been addressed.) Include the number of the item in the subject line of your posting. Indicate whether there are any Internal Control violations in the item. If there are, make a suggestion of how to improve the process.

Select Company is a retail company that sells plumbing supplies. It has both cash sales and sales on account. The procedures Select uses to handle cash and checks received for payments on account are described below:

# The checks themselves are sent to the controller’s office. The controller’s office creates the journal entry to update the accounts receivable and record the cash receipts.

# The controller prepares the deposit slip and sends the deposit to the bank. The controller then makes a journal entry to record the cash sales.

# When the bank statement is received, it is sent to the controller, who prepares the bank reconciliation.

Answer 1

# The checks themselves are sent to the controller’s office. The controller’s office creates the journal entry to update the accounts receivable and record the cash receipts.

Yes, there is an internal control violation in that, the cheques are banked, receipted and accounted by the same person.

The suggestion is to have the treasurer's office to receive the cheques and prepare the receipts. The journal and the ledger entries should be made by the controller's office.

# The controller prepares the deposit slip and sends the deposit to the bank. The controller then makes a journal entry to record the cash sales.

Yes, there is an internal control violation in that all records relating to cash sales are prepared and maintained by the controller's office.

Suggestion:

The cash should be collected by the treasurer's office who should prepare the deposit slip and bank it. The controller's office should make the journal entry.

# When the bank statement is received, it is sent to the controller, who prepares the bank reconciliation.

There is no internal control violation as the treasurer would be making checks and depositing money into the bank after making deposit slips and the controller would be preparing the bank reconciliation. The persons handling cash and bank transactions are not doing the bank reconciliation, which is an internal check.