27th Edition
WARREN + 5 others
ISBN: 9781337272094




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

Internal control of cash payments

Paragon Tech Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Paragon Tech’s procedures for the purchase of services.

The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, because no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Paragon Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.

The fraud scheme involves Mae Jansma, the manager of plant and facilities. Mae arranged for her uncle’s company, Radiate Systems, to be placed on Paragon Tech’s approved vendor list. Mae did not disclose the family relationship.

On several occasions, Mae would submit a requisition for services to be provided by Radiate Systems. However, the service requested was really not needed, and it was never performed. Radiate Systems would bill Paragon Tech for the service and then split the cash payment with Mae.

Explain what changes should be made to Paragon Tech’s procedures for ordering and paying for services in order to prevent such occurrences in the future.

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:

  • 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 explain:

The changes to be made to PT’s procedures for ordering and paying towards services in order to prevent such occurrences in the future.


For eliminating the fraud schemes, PT separates the responsibilities for other related operations. In the past, services requisitions are submitted to the purchasing department. After receipt of service receipt, Purchases should fulfill the service verification form and thus, stating about the services towards name of the company for providing services...

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