Chapter 8, Problem 1QC

To determine

Internal control over cash

Internal control over cash is an important function as cash being liquid is most vulnerable item to be pilferage and hence need to be safeguarded by a strong control system in place.

To Identify: The functions that a person who handles cash can also do with a good internal control.

Explanation of Solution

a. Account for cash payment: If the person who handles cash, controls accounts for cash payment, he can make manipulate accounts and will embezzle the cash. Hence, this function should not be done by the person who handles cash.

b. Account for cash receipt from customer: If the person who handles cash accounts is allowed to receive cash from customer, he can pocket the cash, and show the customer’s account as uncollectible. Hence, this function should not be done by the person who handles cash.

c. Issue credit to customer: If the person who handles cash will be in charge of issuing credit to the customers for sales return he may grant credit to differentcustomers, and can pocket cash from the debtor in association with him. Hence, this function should not be done by the person who handles cash.

d. None of the above: If the above three powers will be vested in the hands of the person who handles cash, then there is the possibility of manipulation of cash, because that person can misuse the cash for his personal gain.

For good internal control in the organization, the person who handles cash should not have the access to the above functions to safeguard the assets of the business.

Conclusion

Therefore, the correct answer is option d.