The Gardner Company, a client of your firm, has come to you with the following problem. It has three clerical employees who must perform the following functions:
Maintain the general ledger
Maintain the accounts payable ledger
Maintain the accounts receivable ledger
Prepare checks for signature
Maintain the cash disbursements journal
Issue credits on returns and allowances
Reconcile the bank account
Handle and deposit cash receipts
Assuming equal abilities among the three employees, the company asks you to assign the eight functions to them to maximize internal control. Assume that these employees will perform no accounting functions other than the ones listed.
a. List four possible unsatisfactory pairings of the functions
All five of the unsatisfactory pairings below involve custody of cash and a recording function that would allow a fraud perpetrator to conceal a theft.
1. General ledger - cash receipts. With custody to cash, this person could steal cash receipts and conceal the theft by recording a fictitious entry in the General Ledger to credit (reduce) the balance of the cash account by the amount stolen.
2. Accounts receivable ledger - cash receipts. With custody to cash, this person could steal cash receipts and conceal the theft by recording a fictitious entry in the Accounts Receivable Subsidiary Ledger to reduce a customer’s accounts receivable balance by the amount stolen.
3. Bank reconciliation - cash receipts. With custody to cash, this person could steal cash receipts and conceal the theft by falsifying (recording) the bank reconciliation.
4. Credits on returns and allowances - cash receipts. This person could authorize (authorization) or record false credit memos (recording) to customers who are making a payment and steal the customer payments (custody).
5. Accounts payable ledger - prepare checks for signature. A person with both of these responsibilities could create fictitious payables (recording) and then write and cash checks to pay them (custody).
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