Question

Identifying internal control weakness in cash receipts Seawind Productions makes all sales on credit. Cash receipts arrive by mail. Justin

Broadway, the mailroom clerk, opens envelopes and separates the checks from the accompanying remittance advices. Broadway forwards the checks to another employee, who makes the daily bank deposit but has no access to the accounting records. Broadway sends the remittance advices, which show cash received, to the accounting department for entry in the accounts. Broadway’s only other duty is to grant sales allowances to customers. (A sales allowance decreases the customer’s account receivable.) When Broadway receives a customer check for $600 less a $30 allowance, he records the sales allowance and forwards the document to the accounting department.

Requirements

1. Identify the internal control weakness in this situation.

2. Who should record sales allowances?

3. What is the amount that should be shown in the ledger for cash receipts?

 

Answer 1

Step 1: Definition of separation of duties

The separation of duties means dividing the responsibilities between two or more employees.

Step 2: Internal control weakness 

In the given situation, the weakness is of separation of the duties because the duties of the employees' responsibilities are not clearly defined. Broadway must grant sales allowance, but he performs other duties also.

Step 3: Record of sales allowance

Broadway has to record sales allowance because this is the duty of Broadway to record sales allowance. 

Step 4: Cash receipt ledger

In the ledger of cash receipts, the cash shown is $570 because the $30 sales allowance is deducted from the sales allowance.

 

In the given situation weakness of internal control is the separation of duties.