For each of the following independent situations, indicate the apparent internal

Question

For each of the following independent situations, indicate the apparent internal control weakness and suggest alternative procedures to eliminate the weaknesses.

1. John Smith is the petty cash custodian. John approves all requests for payments out of the $200 fund, which is replenished at the end of each nonth. At the end of each month, John submits a list of all accounts and amounts to be charged and a check is written to him for the total amount. John is the only person every to tally the fund.

2. All of the company's cash disbursements are made by check. Each check must be supported by an approved voucher, which is in turn supported by the appropriate invoice and, for purchased, a receiving document. The vouchers are approved by Dean Leiser, the chief accountant, after reviewing the supporting documentation. Betty Hanson prepares the checks for Leiser's signatre. Leiser also maintains the company's check register( the cash disbursements journal) and reconciles the ank account at the end of each month.

3. Fran Jones opens the company's mail and makes a listing of al checks and cash received from customers. A copy of he list is sent to Jery McDonald who maintains the general ledger accounts. Fran prepares and makes the daily deposit at the bank. Fran also maintains the subsidiary ledger for accounts receivable, which is used to generate monthly statements to customers.

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

The internal control here would be "Segregation of Duties". John should not be allowed to perform all the parts of the process. A person responsible for handling petty cash should not be involved in activities like writing checks, approving them or in maintaining records related to cash. Additionally, the management should also perform random checks of the funds available.

Part B:

Dean Leiser should not be allowed to sign the checks and maintain the check register at the same time. Here also, implementation of segregation of duites is essential. Further, accounting personnel handling cash or issuing checks should not be allowed to access accounting records. They should also not be involved in the reconcilaition process.

Part C:

Fran should not be made responsible for both the preparation of the daily deposit and maintainence of subsidary ledger. Similarly, Jerry should not be given the task of maintaining general ledger and preparing bank reconciliation. Additional internal control would be rotation of employees from one job to another. Employees should also be given mandatory offs from their jobs, so that their activities can be handled by others.

Thanks.

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