An accountant is responsible for the following activities: (1 ) receiving all cash; (2 ) maintaining the general ledger; (3 ) maintaining the accounts receivable subsidiary ledger that includes the individual records of each customer; (4 ) maintaining

Question

the journals for recording sales, purchases, and cash receipts; and (5 ) preparing monthly statements to be sent to customers. As a service to customers and employees, the company allows the accountant to cash checks of up to $75 with money from the cash receipts. When deposits are made, the checks are included in place of the cash receipts. What weaknesses in internal control exist in this system?

Answer 1

In this case, the principle of separation of duties is violated. Because the accountant collects the cash and keeps the records for accounts receivable, he or she could divert incoming checks from customers and cash the checks out of cash collections. At the end of the month, when statements are mailed to customers, the accountant could destroy the statements to the customers whose checks he or she had embezzled. The customers then would believe that the company had received the payments because they would not receive a subsequent statement. In addition, there is no sign of any outside verification. Furthermore, allowing checks to replace cash receipts does not provide for consistent documentation of the firm's transactions.