Question

Gloria’s Fabrics is a large fabric provider to the general public. The accounting office has three employees: accounts receivable clerk, accounts payable clerk, and a bookkeeper who manages the accounting function in the company. The accounts receivable clerk creates the sales invoices and records the cash receipts. The accounts payable clerk creates and pays purchase offers. The bookkeeper manages the accounting function, supervises all accounting office employees, and reconciles the checking account. Review the separation of duties for each employee: the accounts receivable clerk, the accounts payable clerk, and the bookkeeper. Identify the accounts and describe the transactions that would be recorded by that assigned job. Evaluate the internal control and the potential for fraud at Gloria’s Fabrics. How would you restructure the job responsibilities of each employee in order to strengthen the internal control of the firm?

Answer 1

The duties of the three employees are:

Accounts Receivable Clerk : The creation of the Sales invoices as per the goods dispatched to the customer. Providing the Invoice to the customers. Collection of the Invoice amount as per the credit period. Making the entries in the system towards the Invoice creation and collection of invoice amount.

Accounts Payable Cleck : The keeping the invoices received towards the purchases made and creating and releasing payment towards the purchase invoices as per the credit period. Recording the payment made.

Book-keeper: The Bookkeeper keeps controls the accounting activities of all accounting employees and reconcile the cash book with the bank statement and undertakes other cash and recording of expenses and making miscellaneous payment.

Internal Control and Potential for fraud: Under the above separation of the duties it is very difficult to execute the Internal control and stop happening of any fraud. Frauds can appear through:

a) Accounts Receivable Clerk: The payment can be held and miss-appropriated for the personal purpose and keeping the Book entries silent.

b) Accounts Payable Clerk : The payment checks of the creditors can be held and money can be misused for the personal purposes. The relevant entries are made appropriately to release any doubt. The payments can be released early to have personal benefits.

c) Bookkeeper : The person to counter checks the cash activities, the Clerk can miss-appropriate the cash for its personal purpose and make the required entries in the books to release any doubt.

In order to maintain the Internal Control and mis-appropriation of cash and frauds in the organization, it is essential to restructure the duties of all Clerks to strengthen the Internal Control in such a way that one clerk’s work is being counter-checked by the other. The amendaments in the works undertaken by each Clerk could be:

a) Accounts Receivable Clerk : The clerk creates the Sales invoices as per the goods dispatched to the customer and make available the Invoice to the customers. The Clerk also do the collection of the Invoice amount as per the credit period. But the entries should be made in the system by the Bookkeeper towards the Invoice creation and collection of invoice amount.

b)Accounts Payable Cleck : The Clerk keep maintaining the invoices received towards the purchases made and make the checks towards the release of payment of creditors, but dispatch of the checks should be performed by the Bookkeeper. The Clerk keep the recording of the entries in the books. The Bank reconciliation work could be undertaken by the Clerk to keep an eye on the Bookkeeper’s activities.

c) Book-keeper: The Bookkeeper keeps controls the accounting activities of all accounting employees and reconcile the cash book with the bank statement and take the job of release of checks to creditors and make entries of cash / checks received from debtors as per the bank statement.

Thus, the inter checking of the work by the Clerks would keeps the Clerks activities under control and frauds will not happen. If any Clerk try to miss-appropriate the cash, the same could be caught by the other Clerk.

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