12.2 What internal control procedure(s) would provide protection against the fol
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Question
12.2
What internal control procedure(s) would provide protection against the following threats? a. Workers on the shipping dock steal goods, claiming that the inventory shortages reflect errors in the inventory records. b. An employee post the sales amount to the wrong customer account because he incorrectly keys the customer account number into the system. c. An employee makes a credit sale to a customer who is already four months behind in making payments on his account. d. An employee authorizes a credit memo for a sales return when the goods were never actually returned.Explanation / Answer
1. Inventory clerks should count and document goods (on paper or by computer) as they leave inventory storage. Shipping personnel should be required to count and document receipt of goods from the finished goods storeroom to acknowledge responsibility for custody of the goods transferred. Counting goods when they are received and when they are sent to inventory storage as well as when goods leave inventory storage and are sent to shipping helps maintain control over inventory. Reconciling the two sets of counts makes it more difficult for employees to steal inventory as it is received and shipped.
2. If the transactions are being entered online, closed loop verification could be used. The system could respond to the operator entering the account number by retrieving and displaying the customer's name for the operator to review. If the transactions are being entered in batches, redundant data such as the first five characters of the customer's name could be included in each input record; after finding a match on customer account number, the system would also verify that the name characters match before posting the transaction. Note that a validity check would only tell you if a valid customer number was entered, not if the correct valid customer number was entered. Likewise, check digit verification could tell you if the customer number existed, but not if it was the right customer number.
3.Up-to-date credit records must be maintained to control this problem. During the credit approval process, the credit manager should review the accounts receivable aging schedule to identify customer’s with past-due balances to prevent additional sales to those customers. Alternatively, the computer system could be programmed to determine if the customer had any past due balances over a specified length of time (such as 60 days). If not, the sale would be approved. If they had a past-due balance, a notice could be sent to the credit manager who could review the sale and make a decision about extending additional credit.
4.A receiving report should be required before a credit for sales returns is issued. The system should be configured to block issuance of credit memos without the required documentation that the goods have been returned.
5.The problem usually occurs because the same individual writes off accounts and processes cash payments. Therefore, the best control procedure to prevent this problem is to separate the function of authorizing write-offs of uncollectible accounts from the function of handling collections on account.
6. Shipping personnel should be required to record the actual quantity shipped on the order document and/or enter the quantity shipped into the accounting system, in order that bills can be prepared based upon the quantity shipped rather than the quantity ordered. The system should be configured to generate invoices automatically based on the quantity shipped.
7.In order to cover up this theft, the mailroom clerk has to be able to alter the accounts receivable records. Otherwise, a customer who is subsequently notified that they are past due will complain and provide proof that they sent in payment. Therefore, the critical control is to segregate duties so that whoever opens the mail does not have the ability to maintain customer accounts. If accounts receivable updates the records based on a cash receipts pre-list instead of the actual checks, the mailroom clerk could conceivably lap payments. To prevent this, the cash receipts pre-list could be compared to the checks before the list is sent to accounts receivable. The checks should not be sent to accounts receivable as the accounts receivable clerk could perform the lapping.Other deterrents used to deter theft of checks by the mailroom clerk include having two people open the mail, using video cameras to tape the check opening process, and utilizing a bank lockbox.
8.In order to cover up this theft, the cashier has to be able to alter the accounts receivable records. Otherwise, a customer who is subsequently notified that they are past due will complain and provide proof that they sent in payment. Therefore, the critical control is to segregate the duties of handling cash and making deposits from the maintenance of accounts receivable records. One way to control cash receipts is shown below. The mailroom creates a cash prelist, sends a copy to a 3rdparty, and sends the checks to the cashier. The cashier prepares duplicate deposit slips, sends the original to the bank with the checks, and sends a copy to the 3rdparty. When the checks are deposited, the bank sends a copy of the validated deposit slip to the 3rdparty, who compares all three documents to make sure all cash is deposited.
9.In a manual system, all sales tickets should be prenumbered and accounted for so management can detect missing sales tickets.In many restaurant systems, waiters cannot get food out of the kitchen without entering a customer order into the system. The system creates a prenumbered sales document that must be cleared by the waiter that day. This prevents the waiter from destroying sales tickets and giving people free food.
These systems also are capable of some reasonableness tests such as:
Beginning inventory of food
= Ending inventory of food
The ending inventory of food is counted and compared to the projected ending inventory to determine if food items are missing. This check is most frequently used for expensive items of food like steak, shrimp, lobster, etc.
10. To prevent this from occurring deliberately, it is necessary to segregate the shipping and billing functions. To prevent this from happening by accident, the system needs to automatically bill customers for shipments. The system should also be configured to periodically reconcile all shipments with a billing and generate reports of unbilled shipments for management review and corrective action.
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