Internal Controls

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Date Submitted: 08/20/2011 03:44 AM

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Separation of Duties

The following tasks should be separated (performed by two different people):

1. Accounting for receivables and collecting receivables. The accountant could steal cash collected from customers and hide the theft by modifying the accounting records.

2. Accounting for receivables and granting credit. The accountant might refrain from writing off uncollectible accounts because that might point to poor judgment in granting credit.

3. Granting credit and sales. A salesperson might overlook poor credit risks in an eagerness to get a sale (and commission).

4. Accounting for the accounts receivable subsidiary ledger and the general ledger. Employees would be unable to check for errors by comparing the total of the customer accounts in the subsidiary ledger to the balance of accounts receivable in the general ledger.

Internal control over collections of cash on account is important.

1. Cash-handling duties should be separate from cash-accounting duties.

2. The bookkeeper should not also handle cash receipts. A lock-box accomplishes the same control over receipts of cash.

3. The person posting the accounts receivable subsidiary ledger should not also handle cash receipts.

4. The credit department should not have access to cash.

5. The credit department is responsible for evaluating and approving new credit customers as well as monitoring the payment history of current customers.

6. Decision guidelines discuss controlling, managing, and accounting for receivables.

7. Selling on credit creates both a benefit (more sales) and a cost (some customers will not pay). Uncollectible-account expense results from charge sales that customers cannot or will not pay.

8. Two methods are used for recording this expense, which is a normal expense for any business that sells on credit:

a. The allowance method – preferred because it matches collection losses with revenues in the period in...