Question

Describe what is likely to occur if company personnel erroneously recorded a sales transaction for the wrong customer. What if a cash receipt were applied to the wrong customer? Identify internal controls that would detect or prevent this from occurring.

Answer 1

Common internal controls over the sales cycle include numbered sales invoices, purchase order authorization over a certain limit, and authorization over receivables write-offs. The auditor selects a random sample of transactions and examines the related purchase orders, invoices, and customer statements.

One of the most important steps your unit can take to protect cash — and you — is to separate cash handling duties among different people. With the proper separation of duties, no single person has control over the entire cash process.

• A best practice is to have different people:
  • Receive and deposit cash
  • Record cash payments to receivable records
  • Reconcile cash receipts to deposits and the general ledger
  • Bill for goods and services
  • Follow up on the collection of returned checks
  • Distribute payroll or other checks