Question

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 EverydaySupplies’ 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 accountsreceivable subsidiary ledger; simultaneously, the transaction’s details are transmitted to thebookkeeper. 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.

3

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 theremittance 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 cashreceipts and billing functions and explain why they are weaknesses for two (2) that you have identified.

Answer 1

The weakness are:-

1) Account Receivable (AR) Supervisor prepares the invoice and also posts the same in the system. This is usually considered a fraud since a single person is not allowed to perform 2 activities. Basically the supervisor can prepare invoices for incorrect amounts and enter different amounts in the system.

2) No reconciliation with AR control account. This account is used as a control to keep track of all receivables. However if this is not matched with outstanding receivables then there is no way of ascertaining the right balance of outstanding AR.

3) No control on Overdue accounts. If overdue accounts are not reviewed then the company effectively cannot manage allowances for bad debts and will show the entire AR as receivable which is not a right practice.

4) Opening of checks and comparing need to be performed by 2 different people. In this case the cashier can miss certain checks or not record certain checks which will ensure that the books are not appropriately updated.

I have answered 4 weakness and given the explanation as per policy.