Question

The procedures manual for XYZ Corporation included the following statements:

    Accounting department employees are encouraged to obtain a professional certification.

    Adjusting entries involving estimates must have those estimates approved by the CFO before they are recorded in the AIS.

    All employees accrue sick time at the rate of one hour per month.

    All purchase orders must be prepared in triplicate, with the original going to the vendor, the blue copy staying in purchasing and the yellow copy returning to the department that initiated the purchase request.

    All transactions must be recorded in the journal, then posted to the ledger.

     Employees are paid twice a month; journal entries for payroll are recorded two days prior to each pay date.

    New account numbers must follow the principles of hierarchical coding; they must be reviewed and approved before becoming part of the AIS.

   XYZ is organized in five major departments: accounting, marketing, human resources, information systems and operations.

   XYZ uses Great Plains Dynamics as its general ledger software. Great Plains will not allow transactions to be recorded unless the equality of debits and credits is maintained.

   XYZ’s accounting information system is audited annually by Dewey, Cheatam and Howe, CPAs.

Which five statements from the procedures manual most directly explain internal controls related to the accounting cycle? Explain why you chose each of these.

Answer 1

1. accounting employees obtaining professional certifications who should be aware of debit and credit items such that transactions gets entered properly in great plain dynamics general ledger software since it wont take the transaction if debit and credit of the same is not provided is an internal control i.e. only professionals are allowed to handle the entry of transactions and due to the software the possibility of error will be very less.

2. before entering in to AIS, adjusting entries of estimates is made by CFO. since estimates should be made based on reasonable basis and high degree of complexity is involved for ascertaining the best estimate it is advisable and best internal control in associating estimating work to CFO.

3. purchase orders prepared in triplicate is the best internal control i.e. the seggregation of duties is the control which should be followed in companies where work should be distributed means one department or one person should not have control over a work. if purchasing and ordering done by same department there might be huge possibility of committing the fraud.

4. it is always a best practice to record the transaction before paying. such that based on information collected and seggregated using journal and through that ledger posting amounts can be paid referring to the transactions. such that paying as much as amounts they required and adjusting the amounts based on that can be avoided.

5. 1hr sick leave in a month for an employee can be used as an internal control since sending a person out of his work on a leave can be helpful for evaluation of his work and through that any error or fraud commited by the employee may be ddetected

all these 5 internal controls makes the company less vulnerable to the frauds and errors.