An auditor’s working papers include the narrative description below of the cash receipts and billing portions of internal control of Rural Building Supplies, Inc. Rural is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of Rural’s sales are to construction contractors on account.
Rural employs 12 salaried sales associates, a credit manager, three full-time clerical workers, and several part-time cash register clerks and assistant bookkeepers. The full-time clerical workers perform such tasks as cash receipts, billing, and accounting and are adequately bonded. They are referred to in the narrative as “accounts receivable supervisor”, “cashier”, and “bookkeeper”.
Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account if approved by the credit manager based only on the manager’s familiarity with the contractor’s reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable (AR) supervisor to set up the receivable. The AR supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorized price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The AR supervisor electronically posts the details of the invoice in the AR subsidiary ledger; simultaneously, the transaction’s details are transmitted to the bookkeeper. The AR supervisor also prepares a monthly computer-generated AR subsidiary ledger without a reconciliation with the AR control account and a monthly report of overdue accounts.
The cash receipts functions are performed by the cashier who also supervises the cash register clerks. The cashier opens the mail, compares each check with the enclosed remittance advice, stamps each check “for deposit only,” and lists checks for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the checks daily separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers. The bookkeeper receives the details of transactions from the AR supervisor and the cashier for journalizing and posting to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the AR supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the AR supervisor. The bookkeeper authorizes the AR supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.
- Based only on the information in the narrative, describe the internal control weaknesses in Rural’s internal control over the cash receipts and billing functions.
- Organize the weaknesses by employee job function: Credit manager, AR supervisor, Cashier, and Bookkeeper.
- Do not describe how to correct the weaknesses.
Internal control weaknesses in Rural’s cash receipts and billing functions include:
- Ability to approve credit without external credit check or reference to established credit limits.
- Billing without independent manual or computer verification.
- Ability to alter details of charge forms and to use altered details in preparing invoices.
- No check that daily totals of charge forms equal daily totals of invoices.
- May write off accounts because there is no independent verification of the AR subsidiary ledger or reconciliation of it with the control account.
- Long overdue accounts may remain on books and additional credit granted by omitting them from monthly report.
- Incompatible duties of receiving cash receipts, depositing cash, and recording receipts on remittance advices.
- No independent verification of cash receipts with deposit slip or list of checks.
- Reconciling bank statements is incompatible with receiving and depositing cash.
- Authorizes write-offs without investigating reasons for them.
- Established criterion for write-offs is too inflexible and does not prevent granting additional credit at earlier date.
- Can indirectly grant additional credit by not notifying credit manager of write-off.Incompatible duties of authorizing and recording write-offs.
The internal control weaknesses in Rural’s internal control concerning the cash receipts and billing functions include the following:
The credit manager has the ability to approve credit without an external credit check from a rating agency such as Dun & Bradstreet or without reference to established credit limits.
The accounts receivable (AR) supervisor performs the billing process without any independent manual or computer verification. The AR supervisor has the ability to alter the details of the charge forms prepared by the sales associates and use the altered details in preparing invoices. Additionally, there is no control to assure that the daily totals of the charge forms equal the daily totals of the invoices.
The AR supervisor also has the ability to cause accounts to be written off as uncollectible because there is no independent verification of the AR subsidiary ledger and because here is no reconciliation of the AR subsidiary ledger with the AR control account in the general ledger that is maintained by the bookkeeper. The AR supervisor can simply include collectible accounts in the monthly report of overdue accounts to the bookkeeper. Likewise, accounts can remain on the books long after they are overdue and additional credit can be granted if the AR supervisor omits them from the monthly notification to the bookkeeper.
The cashier processes receipts from cash and credit sales by performing three incompatible duties: initially receiving cash receipts, depositing cash in bank, and recording the receipts. Although the bookkeeper actually records the cash receipts, the cashier supplies the information (remittance advices), which may be delayed, altered, or incomplete. Without the verified deposit slip or the list of checks, there is no independent verification of the accuracy or completeness of cash receipts. Additionally, the cashier reconciles the monthly bank statements, which is also incompatible with handling cash receipts and depositing cash in bank.
The bookkeeper authorizes the write-off of uncollectible accounts without an investigation into the reasons and details of each overdue account. The established criterion for writing off overdue accounts (six months) is too inflexible and does not provide for the prevention of granting additional credit at an earlier date, such as when an account first becomes overdue. The bookkeeper also can indirectly grant additional credit by not notifying the credit manager when a contractor’s account has been written off. Additionally, the bookkeeper has the incompatible duties of authorizing write-offs and recording journal entries.