Question

1. The Kernow Company, a client of your firm, has come to you with the following problem. It has three clerical employees who must perform these functions:

            i)          Maintain general ledger

            ii)        Maintain purchase (creditors) ledger

            Iii)       Maintain sales (debtors) ledger

            iv)        Prepare cheques for signature (including checking supporting documentation)

            v)         Maintain expenses journal (recording expenses paid)

            vi)        Issue sales credit notes

            vii)      Reconcile bank statement

            viii)     Handle and bank cash receipts.

            The directors wish to achieve the highest degree of internal control.

            Required:

            a)         How would you distribute the above functions among the three employees?

            b)         Suggest a possible satisfactory combination of the functions listed above.

            Assume that there is no problem with the competence of any of the employees and that the three employees perform no other accounting function except for those above.

Answer 1

Answer:-

To achieve the highest degree of internal control duties are to be seperated between employees in such a way that no single person can handle the complete trasaction area.By seperation of duties it is much more difficult to commit fraud.

a.i.Maintain General Ledger:-Clerk 1

ii.Maintain purchase(creditors) ledger:- Clerk 2

iii.Maintain sales(Debtors) ledger:- Clerk 3

iv.Preparing Checks for signature(Including checking supporting documentation):-Clerk 1

v.Maintain Expenses journal(recording expenses paid):-Clerk 3

vi.Issue sales credit notes:-Clerk 2

vii.Reconcile Bank Statement:-Clerk 2

viii.Handle and Bank Cash receipts:-Clerk 1

b.Explanation :-Clerk 1 is given tasks of maintaining general ledger,preparing checks for signature and handling bank cash receipts.By giving these functions to him, we have seggregated duties as he will be checking debtors before receiving any cash/bank receipts and while making any check he will check the purchases and expense ledger.Also, issuance of credit notes is given to Clerk 2 since he will be checking the sales entries and Debtors made by Clerk 3.Reconciling bank statements is given to Clerk 2 where he can check the receipts and collection maintained by Clerk 1. All the tasks are allocated in such a way that task of one clerk is checked by another clerk.