Question

Big State Computers has premises on the main street of a large regional city. The business is owned by Max and Betty Waldup, who purchased it three years ago. Betty has an extensive background in IT and has a talent for diagnosing and solving problems with computers that are brought in for repair. Max also has an IT background and oversees the sales and administration staff. They employ three people: a computer technician who assists Betty, a part-time salesperson, and a part-time bookkeeper. Sally, the bookkeeper, enters transactions into a simple computerized accounting system. Sally is also responsible for issuing invoices and monthly statements to customers who have service contracts with the business. These customers are generally other businesses who ask Betty to visit their premises for routine and emergency repairs and who purchase software and hardware from the business. Max and Betty have worked diligently over the last three years, but they are having cash flow problems. Their bank manager has requested a meeting to discuss the business's poor cash balances. The bank manager asks Max and Betty to prepare for the meeting by analyzing their accounts receivable and customer receipts. Max and Betty review the accounts receivable ledger and find that it is not up to date. They also discover that customer statements have not been printed or mailed to customers for four months. They are unable to identify from the cash receipts journal which clients have paid their accounts.

Required

1) Discuss the attitude and control consciousness of Big State Computers's management.

2) Which duties should be segregated in this business? Recommend an appropriate allocation of duties for the personnel at Big State Computers.

Answer 1

1) In this question The accounts show that the monitoring over sales, debtors and cash receipts are not decent. The accounts are not the latest and client statements have not been delivered for four months. These responsibilities were seemingly the duty of the junior trainee, Sally, under the supervision of Bob. Bob seems to have been ignorant of the problems, signifying that he is not observing the developments very carefully. Overall, this means that the management's approaches towards internal controls in general, and the accounts in precise, are not good. The fact that the bank has asked them to meet to debate their deteriorating cash position also suggests that they are not handling their cash flow sufficiently.

Although Mary is accountable for technical issues, such as repairing computers, rather than the administration side of the business, she is also an owner of the business and as such should be involved in setting the tone of the organisation. Bob and Mary appear to have botched up the process to establish good internal controls and to communicate and implement the prominence of the systems to their staff. There is no confirmation of any unprincipled behaviour by the staff, but they do not appear to have been sufficiently trained and/or suitably selected for the positions they hold. In a small business, such as this, management participation is a standby for a large system of formal controls. This means that Bob and Mary must be personally involved in authorising and supervising transactions to a greater extent than if there were more staff.

2) Segregation of duties should follow the broad principle that the following duties are segregated:

· Authorisation or approval of transactions affecting assets

- Custody of assets

- Recording or reporting of transactions

- Control over processing of a transaction should be separated from recording orreporting a transaction.

Cara is employed to help with administration. The other staff a computer technician and a sales part-timer. This means that Cara and Bob are the only two staff currently with administrative responsibilities. It will be difficult to adequately segregate duties with only two staff in the area.

Therefore, Bob and Mary must perform additional review tasks, such as separately reviewing all transactions over a certain limit, monthly reports of debtor's balances and transactions, bank reconciliations etc.

In addition, if Cara retains the task of banking, she should not be involved in recording transactions, particularly cash receipts.

An alternative would be for Bob to do the banking and leave Cara responsible for transaction processing. Mary could take responsibility for stock control, so that the sales staff are not involved in maintaining stock records as well as having access to the stock for making sales.