PROBLEMS
1. System Description and Internal Controls
a. Prepare a flowchart of the cash receipts procedures described
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b. Describe the risks, if any,that are inherent in the current system configuration.
1) Risk of Cash misappropriation in mailroom fraud (skimming)
c. Describe the controls, if any, that are needed to reduce or eliminate the risks
identified in (b) above.
1) Supervision in the Mailroom is inadequate with one supervisor overseeing 40 clerks.
This span of control can be reduced by having customers submit their payment
to a separate POX address. The US mail service will then pre-sort and separate
2) A remittance list should be prepared under supervision in the mailroom.
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2. INTERNAL CONTROLS AND FLOWCHART ANALYSIS
No credit check is performed.
Billing clerk should not record sales in the Sales Journal before the economic event
(shipping the goods) has occurred.
IT Controls for a centralized integrated system should include:
3. FLOWCHART ANALYSIS
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4. SEGREGATION OF FUNCTIONS
All are proper segregation of functions except b. The sales department should not be
allowed to approve credit memos since it could potentially overstate sales in one
RISKS AND INTERNAL CONTROLS
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Misappropriation of inventory
Mailroom span of control is wide (32
employees) for a single supervisor. This
inhibits close supervision. The mailroom
clerks, with access to the cash and
remittance advices, have an opportunity to
commit mailroom fraud.
Warehouse / shipping are combined allowing
for no reconciliation between what is picked
6. INTERNAL CONTROL EVALUATION
A) Sales clerk should not record sales in the Sales Journal before the
economic event (shipping the goods) has occurred. Billing should
perform this role.
B)
The IT controls in a basic technology system such as this include the following:
7. STEWARDSHIP
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d. Cash receipts journal Cash Receipts
e. Inventory subsidiary ledger Inventory Control
8. CONTROL WEAKNESSES
a. Elaine performs many incompatible tasks. She opens the mail, deposits all
cash and check receipts, and keeps the accounts receivable records. She
could easily keep checks and alter the accounts receivable to cover her theft.
b. Close supervision is needed for the employee working in the receiving,
stocking, and shipping department. This employee needs to be kept from
stealing inventory. Close supervision should help this aspect. Prenumbered
Employee 1 Employee 2
record point of sale receipts prepare the daily cash deposits and
reconcile to daily cash sales
update the accounts receivable account
records
open the mail and make a list of all
incoming checks; prepare deposit
prepare the bills for accounts receivable accounts payable
inventory general ledger
purchasing
payroll