Question

In: Accounting

a) Approval of bad debt write-offs and the reconciliation of accounts receivable subsidiary ledger and the general ledger control account.

 

Explain why each of the following combinations of tasks should or should not be separated to achieve adequate internal control:

a) Approval of bad debt write-offs and the reconciliation of accounts receivable subsidiary ledger and the general ledger control account.

b) Distribution of payroll cheques to employees and approval of employee time cards.

c) Posting of amounts from both the cash receipts and the cash disbursements journals to the general ledger.

d) Writing cheques to suppliers and posting to the cash account. e) Recording cash receipts in the journal and preparing the bank reconciliation.

Solutions

Expert Solution

a) These two combinations should be separated. It is the duty of the manager to write off its bad debt and after that reconciling account receivable subsidiary ledger with the general ledger control account. Therefore, these two activities should be separated.

b) The combination should be separated. If one person is in charge of approving time cards and in charge of distributing payroll checks, there could be a window to fraud. It would be too easy for the person in charge of payroll to collaborate with another to alter the number of hours worked and both could benefit from extra, unearned cash. It is also possible to falsify time cards and cash checks via forged signature.

c) This combination of tasks can be completed by the same employee. This task does not particularly have a chance for fraud since the cash receipts and cash disbursement journals are prepared by others already. This way, if there is an error, it can easily be traced back to the same person.

d) This combination of tasks should be completed with segregated duties. The possibility of fraud by the employee covering both tasks is high. The employee could be falsifying checks to fake vendors and then keeping the proceeds to themselves.

e) This is another combination that should be segregated. The employee could be keeping the cash receipts to themselves and never actually posting the cash receipts to the journal.


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