Question

Question 3

Everyday Supplies Pty Ltd is a single-store retailer that sells a variety of tools, garden supplies, timber, small appliances, and electrical fixtures to the public, although about half of Everyday Supplies’ sales are to construction contractors on account. Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account, if approved by the credit manager based only on the manager’s familiarity with the contractor’s reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable supervisor to set up the receivable. The accounts receivable supervisor independently verifies the pricing and other details on the charge form by reference to a management - authorised price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The accounts receivable supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger; simultaneously, the transaction’s details are transmitted to the bookkeeper. The accounts receivable supervisor also prepares a monthly computer-generated accounts receivable subsidiary ledger without a reconciliation with the accounts receivable control account and a monthly report of overdue accounts. 4 The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each cheque with the enclosed remittance advice, stamps each cheque “for deposit only”, and lists cheques for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the cheques daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers. The bookkeeper receives the details of transactions from the accounts receivable supervisor and the cashier for journalising and positing to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

Required: Describe five (5) internal control weaknesses in Everyday Supplies’ internal control for the cash receipts and billing functions and explain why they are weaknesses for two (2) that you have identified. (Word Limit: Minimum of 550 words. Maximum of 600 words)

Answer 1

Question - Describe 5 internal control weakness in everyday supplies internal control for the cash reciepts and billing functions and explain why they are weakness for 2 that you have identified? Answer - 1--The accounts receivable supervisor-

The accounts receivable supervisor performs the billing process without any independent manual or computer verification. The account receivable supervisor has the ability to alter the details of the charge forms prepared by the sales associates and use the altered details in preparing invoices. Additionally, there is no control to assure that the daily totals of the charge forms equal the daily totals of the invoices. The account receivable supervisor also has the ability to cause accounts to be written off as uncollectible because there is no independent verification of the account receivable subsidiary ledger and because here is no reconciliation of the account receivable subsidiary ledger with the account receivable control account in the general ledger that is maintained by the bookkeeper. The account receivable supervisor can simply include collectible accounts in the monthly report of overdue accounts to the bookkeeper. Likewise, accounts can remain on the books long after they are overdue and additional credit can be granted if the account receivable supervisor omits them from the monthly notification to the bookkeeper.

2- The cashier

The cashier processes receipts from cash and credit sales by performing three incompatible duties: initially receiving cash receipts, depositing cash in bank, and recording the receipts. Although the bookkeeper actually records the cash receipts, the cashier supplies the information (remittance advices), which may be delayed, altered, or incomplete. Without the verified deposit slip or the list of checks, there is no independent verification of the accuracy or completeness of cash receipts. Additionally, the cashier reconciles the monthly bank statements, which is also incompatible with handling cash receipts and depositing cash in bank.

The following are some the internal control weaknesses:

Explanation:

• There is no segregation of duties between the person making invoices, verifying and posting to ledger accounts which are likely to result to unreliable records due to errors.
• The person receiving the mail and remittance should not be the same person making deposits because it exposes the company to fraud
• The pre-listed cheques should be attached to the verified deposit slips from the bank during bank reconciliation by an independent clerk other than the cashier.
• The remittance information transmitted electronically by the bookkeeper should be backed up with the supporting documents, that is the pre-listed cheques and the deposit slips.
• There is no strong credit control system that entails carrying out a comprehensive background check to a credit customer before credit sale is affected which exposes the company to increased uncollectible accounts incidents.