Identifying internal control weakness in cash receiptsPendley Productions makes all sales on credit. Cash receipts arrive by mail. Larry Chipcllo, the mailroom clerk, opens envelopes and separates the checks from the accompanying remittance advice. Chipello forwards the checks to another employee, who makes the daily bank deposit but has no access to the accounting records. Chipello sends the remittance advice, which shows cash received, to the accounting department for entry in the accounts. Chipello’s only other duty is to grant sales allowances to customers. (A sales allowance decreases the customer’s account receivable.) When Chipello receives a customer check for $575 less than a $45 allowance, he records the sales allowance and forwards the document to the accounting department.RequirementsIdentify the internal control weakness in this situation.Who should record sales allowances?What is the amount that should be shown in the ledger for cash receipts?

Question
Asked Jan 4, 2020
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Identifying internal control weakness in cash receipts

Pendley Productions makes all sales on credit. Cash receipts arrive by mail. Larry Chipcllo, the mailroom clerk, opens envelopes and separates the checks from the accompanying remittance advice. Chipello forwards the checks to another employee, who makes the daily bank deposit but has no access to the accounting records. Chipello sends the remittance advice, which shows cash received, to the accounting department for entry in the accounts. Chipello’s only other duty is to grant sales allowances to customers. (A sales allowance decreases the customer’s account receivable.) When Chipello receives a customer check for $575 less than a $45 allowance, he records the sales allowance and forwards the document to the accounting department.

Requirements

  1. Identify the internal control weakness in this situation.
  2. Who should record sales allowances?
  3. What is the amount that should be shown in the ledger for cash receipts?
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Expert Answer

Step 1

The internal control weakness is identified when the mailroom clerk receives the customer’s check for an amount of $575 less than a $45 allowance. He further records the sales allowance and then passes the document to the accounting department.

Therefore, under this situation, the internal control principle of segregating duties between the clerk and the accounting department is not being followed.

Step 2

The accounting department should have the authority to record the sales allowance. It is because the clerk can take advantage of recording the wrong amount of sale allowance. The clerk can underst...

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Accounting