AIRA MAY A.

LABHANAN
BSA3
AUDITING IN CIS ENVIRONMENT ASSIGNMENT 1

PROBLEMS

1. Segregation of Functions
Comment on the specific risks (if any) that are caused by the following combination of tasks.
a. A sales manager, who works on commission based on gross sales, approves credit and
has the authority to write off uncollectible accounts.

Answer: The potential risk that may arise in this situation are the conflict of
interest and fraud. Because the manager has the power and authority to credit and
write off uncollectible accounts that may favor her/his friends or relatives which
results to fraud when he/she do it intentionally. It is in a violation indeed.

b. The warehouse clerk, who has custodial responsibility over inventory in the warehouse,
updates the inventory subsidiary ledger and prepares an inventory summary for the
general ledger department.

Answer: The specific risk that may occur in this situation is fraud risk that is asset
misappropriation because the warehouse clerk has custodial responsibility over
inventory in the warehouse, updates the inventory subsidiary ledger and prepares
an inventory summary for the general ledger department. He/she may steal
inventories and adjust the accounting records in order to hide the stolen inventories
from the warehouse. A situation that is in another violation.

c. The billing clerk bills customers and records sales in the sales journal.

 Answer: This combining situation of the billing clerk has no risk and violation
because as their responsibility, they create and issue invoice and account statements
for customers and updating the records.

d. The shop foreman approves and submits time cards to timekeeping and distributes
paychecks to employees.
 e. Answer: This situation is in a violation also because the foreman approves as well as
submits time cards to timekeeping and distributes paychecks to employees, he has
the power to falsify the time records for a non-existing employee for his own benefits
(for paychecks).

f. The accounting clerk posts to individual account receivable subsidiary accounts and
performs the reconciliation of the subsidiary ledger and the general ledger control
account.

Answer: This action is in a violation because the accounting clerk oversees both
transaction sets, ensuring that the records are accurate and performing
reconciliation to confirm that the two records align. By doing so, there is a risk that
the accounting clerk could hide mistakes or cover up differences caused by stolen
funds.

2. Segregation of Duties
Explain why each of the following combinations of tasks should, or should not, be separated to
achieve adequate internal control.
a. Recording cash receipts in the journal and posting to the account receivable subsidiary
ledger.

Answer: It must be divided to ensure sufficient internal control to reduce the

b. Preparation of accounts payable and distribution of payroll checks to employees

Answer: Because these tasks are independent of one another, it should not be
separated. The accounts payable clerk responsibility only keeps track of a business's
financial records and oversees its financial commitments to creditors and suppliers,
making sure that payments are made on time and accurately. Additionally, he/she do
not prepare the payroll checks so there is no potential risk.
 c. Posting of amounts from both the cash receipts and the cash disbursements journals to
the general ledger.

Answer: Posting of amounts from both the cash receipts and cash disbursement
journals to general ledger have no potential risk because the person who handles the
task do not have access to the assets and only responsible for record-keeping so it
should not be separated.

d. Distribution of payroll checks to employees and approval of time cards.

Answer: Another blend of responsibilities that is ought to be separated because if

e. Approval of bad debt write-offs and the reconciliation of accounts payable subsidiary
ledger and the general ledger control account.

Answer: Approval of bad debt write-offs and accounts payable reconciliation are
separate job duties. Since there are no conflicts between their responsibilities, these
two activities do not need to be separated.

5. Assessing Internal Control

The following describes the cash receipts procedures for a medium-sized online and
catalogue-based retailer.
Customer payments come directly to the general mailroom along with other mail items. The
customer payments mail constitutes about 20 percent of the total mail received each day. The
mailroom clerks sort through the mail, open the customer payment envelopes, remove the customer
checks and remittance advices, and reconcile the two documents. The mail-room supervisor then
sends the reconciled checks and remittance advices to the Accounts Receivable clerk, who posts the
amounts received to the customer AR subsidiary ledger and the cash receipts journal from her
computer terminal. The AR clerk then manually prepares a remittance list of all checks received,
endorses the checks “for deposit only” and sends the checks and remittance list to the Treasurer.
Finally, the clerk files the remittance advices in the AR department.
Once the checks and remittance list arrive at the Treasury department, the treasurer reconciles
the documents , and manually prepares three hard copies of the deposit slip. Next, he sends the
checks and two copies of the deposit slip to the bank. Finally, he files the third copy of the deposit
slip and the remittance in the department.
Required:
a. Identify the internal control weaknesses in the cash receipts process.
1. Customer payments, along with other correspondence, are sent directly to the general
mailroom.
2. Mailroom clerks are responsible for opening envelopes and matching checks with
remittance advices.
3. The accounts receivable (AR) clerk is responsible for endorsing checks and maintaining
records.
4. The treasurer manually prepares deposit slips and reconciles records without any
external verification.
5. The roles of cash handling, record keeping, and reconciliation are not distinctly
separated.

b. For each weakness, describe the associated risks.

1. Collecting payments in the public mailroom poses a risk of theft or loss before they are
processed.
2. When mailroom staff handle reconciliation, there is a risk of theft or failure to correctly
match payments with remittance instructions.
3. There is a potential for fraud when an accounts receivable clerk is responsible for both
record-keeping and endorsing checks, as they have access to both financial records and
physical checks.
4. If the treasurer prepares deposit slips and reconciles paperwork manually, it carries the
risk of errors, fraud, or intentional misstatements occurring without oversight.
5. Having a single individual responsible for multiple tasks increases the likelihood of
unnoticed fraud or errors due to a lack of divided responsibilities.

c. For each weakness provide a possible control activity.

1. The bank should implement a lockbox system that directs client payments directly to the
bank, thereby reducing the risk associated with internal handling. Payments must be
received in a secure and specified location.
2. Instead of handling reconciliation, mailroom clerks should create a separate team or use
automated scanning technology to match checks with remittance advices before passing
them on.
3. It's important to keep the responsibilities of the accounts receivable clerk separate.
Ensure that different individuals are responsible for recording transactions and signing
checks.
4. Implement independent deposit verification by requiring that the treasurer's work be
validated by a separate department, such as internal audit, through dual review.
5. Enhance job segregation by assigning different people to the tasks of recording
transactions, reconciling bank deposits, and managing cash receipts.