Identifying internal control weakness in cash receipts [10-15 min]
Rocking Chair Productions makes all sales on credit. Cash receipts arrive by mail. Larry Padgitt in the mailroom opens envelopes and separates the checks from the accompanying remittance advices.Padgitt forwards the checks to another employee, who makes thedaily bank deposit, but has no access to the accounting records.Padgitt sends the remittance advices, which show cash received, tothe accounting department for entry in the accounts.Padgitt’s only other duty is to grant sales allowances tocustomers. (A sales allowance decreases the amount receivable.) When Padgitt receives a customer check for $300 less a $40 sales 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?
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