Maintain accounts receivable - issue credit memos – this combines authorization and recording. A person with both of these responsibilities could write off accounts for friends.
State how you would distribute the functions among the three employees. Assume that with the exception of the nominal jobs of the bank reconciliation and the issuance of credits on returns and allowances, all functions require an equal amount of time.
Any distribution that avoids all of the above unsatisfactory combinations and spreads the workload evenly is acceptable. The key is not to have anyone with both custody and a recording function that could be used to conceal a theft. One such combination is:
First employee accounts payable ledger, accounts receivable ledger, bank reconciliations
Second employee general ledger, disbursements journal, credits on returns and allowances
Third employee prepare checks for signature, cash receipts
7.5 During a recent review, ABC Corporation discovered that it has a serious internal control problem. It is estimated that the impact associated with this problem is $1 million and that the likelihood is currently 5%. Two internal control procedures have been proposed to deal with this problem. Procedure A would cost $25,000 and reduce likelihood to 2%; procedure B would cost $30,000 and reduce likelihood to 1%. If both procedures were implemented, likelihood would be reduced to 0.1%.
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