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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Internal control of cash payments

Abbe Co. is a small merchandising company with a manual accounting system. An investigation revealed that in spite of a sufficient bank balance, a significant amount of available cash discounts had been lost because of failure to make timely payments. In addition, it was discovered that the invoices for several purchases had been paid twice.

Outline procedures for the payment of vendors’ invoices so that the possibilities of losing available cash discounts and of paying an invoice a second time will be minimized

To determine

Internal Control: Internal control refers to the policies, and plans of the business organization along with other measures with a view to safeguard its assets, encourage the employees to adhere to the plans, to improve on the operational efficiency, and to ensure correct and reliable accounting information.

Five elements of internal control are as below:

  • Control Environment: Control Environment refers to the attitude of top brass of the company or the corporate culture. The top brass of the company must set the tone to improve the morale for rest of the employees of the business.
  • Risk assessment: The business must be able identify the risk associated with it, and accordingly use the internal control to safeguard its assets and ensures fairness in presentation in accounting information.
  • Control procedures: The objective of setting the control procedure is to ensure that the business achieves its objectives.
  • Monitoring controls: The internal control used in the business is being monitored by the internal auditors who are hired by the business, to ensure that the employees are adhering to the policies of the business and running the operations efficiently. The external auditors on the other hand ensure that the business accounting records are being maintained in accordance with the Generally Accepted Accounting Principles (GAAP).
  • Information and communication: Information and communication system is important for a business and hence only authorized persons should be allowed the access to the confidential accounting information. Approvals are also should be made mandatory for the transactions by the control system.

To describe: The procedures for the payment of the vendors’ invoices towards possibilities of losing available cash discounts and of paying an invoice a second time will be minimized.

Explanation

Solution:

The procedures for the payment of the vendors’ invoices:

Firstly, voucher system is appropriate and the essentials of the voucher system are outlined below:

  1. 1. Vouchers need to be approved for making payment for designated official and completion of the following verification:
    1. a. Price, Quantities, and Terms on the invoice towards provision for the purchase order.
    1. b. All the quantities have been billed and received in better condition and show receiving report.
    1. c.   Correctness of arithmetic details.
  2. 2. The unpaid vouchers are composed of 31 compartments for each day of the month. The vouchers are filed in the compartment and represent the last day towards discount period or the due date when the invoice is not subject to cash discount...

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