Question

Credits on returns and allowances - cash receipts. List 4 possible unsatisfactory pairing of the functions. Using real life examples to support your decision:

Answer 1

Answer to the above question:

Credits on returns and allowances - Cash receipts:

Return and Allowances are two distinct business financial transaction that get recorded on one line of a company income statement. "Returns" is the value of the merchandise customers bring back after purchase and "Allowances" is the amount of discounts you give to dissatisfied customers.

Four possible unsatisfactory pairings of the functions:

All five of the unsatisfactory pairings below involve custody of cash and a recording function that would allow a fraud perpetrator to conceal a theft.

1. General Ledger - Cash Receipts. With custody to cash, this person could steal cash receipts and conceal the theft by recording a fictitious entry in the General Ledger to credit (reduce) the balance of the cash account by the amount stolen .

2. Accounts receivable ledger - cash receipts. With custody to cash, this person could steal cash receipts and conceal the theft by recording a fictitious entry in the Accounts Receivable Subsidary Ledger to reduce a customer's accounts receivable balance by the amount stolen.

3. Bank Reconciliation - Cash Receipts. With custody to cash, this person could steal cash receipts and conceal the heft by falsifying (recording) the bank reconciliation.

4. Credit on return and allowances - Cash receipts. This person could authorize (Authorization) or record false credit memos (recording) to customers who are making a payment and steal the customer payments (custody).

5. Accounts payable ledger - prepare checks for signature. A person with both of the responsibilities could create fictitious payables (recording) and then write and cash checks to pay them (custody).

6. Maintains account receivable - issue credit memos. This combimes authorization and recording. A person with both of the responsibilities could write off accounts for friends.