Q1SE - Horngren'S Financial And Managerial Accounting

Question

Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?

Step-by-Step Solution

Answer

Internal controls are the systems used by an organization to manage risk and diminish the occurrence of fraud.

Step 1: Segregation of Duties- Job must be withheld from a company’s credit department

The company should proper segregate the duties to credit appraisal department and treasury department.

The credit department should not have access to cash collection in order to safeguard the cash.

Step 2: Consequence on the company is credit department perform cash collection

1. Since the credit department has access to cash and can authorize written-off, this may have a chance that credit department employees, could pocket money received from a customer. 
2. The employee could then label the customer’s account as uncollectible, and the company would stop billing that customer. 
3. In this scenario, the employee may have covered his or her theft.