Identifying internal control weakness in cash receipts

Pendley Productions makes all sales on credit. Cash receipts arrive by mail. Larry

Chipello, the mailroom clerk, opens envelopes and separates the checks from the

accompanying remittance advices. Chipello forwards the checks to another employee,

who makes the daily bank deposit but has no access to the accounting records.

Chipello sends the remittance advices, which show cash received, to the accounting

department for entry in the accounts. Chipello’s only other duty is to grant sales

allowances to customers. (A sales allowancedecreases the customer’s account receivable.)

When Chipello receives a customer check for \(575 less a \)45 allowance, he records the

sales allowance and forwards the document to the accounting department.

Requirements

1. Identify the internal control weakness in this situation.

2. Who should record sales allowances?

3. What is the amount that should be shown in the ledger for cash receipts?

Step by step solution

01

Definition of internal

Internal controls are those controls that affect the internal environment of the company. Internal controls enhance the smooth working of the company.

02

Missing internal control

In the given situation, the missing internal control is the segregation of duties because the duties between the accounting department and clerk are not followed. The lack of duties leads to weakness in internal control.

03

Recording of the sale allowance

The accountant must record the sale allowances, and all the duties of the accountant are clearly defined by the company. Good internal control on the segregation of duties leads to fewer chances of fraud and reduces risks for the company.

04

Amount is shown in the ledger of cash receipt

Cash Receipt	$575
Less: Allowance	-($45)
The amount is shown in the cash ledger	$530

Hence, the amount of cash shown in the ledger of cash receipt is $530.

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