Island Trading Company

How do you assign the following functions to three clerks in such a

manner as to achieve the highest degree of internal control?
1.Maintain General Ledger.
2.Maintain Accounts Payable Ledger.
3.Maintain Accounts Receivable Ledger.
4.Maintain cash disbursements journal and prepare checks for signature.
5.Issue credit memos for sales returns and allowances.
6.Reconcile the bank account.
7.Handle and deposit cash receipts.

Assume that:
i.There is no problem as to the ability of any of the employees.
ii.The employees will perform no other accounting functions than the
ones listed above.
iii.Accounting functions not listed on the above will be performed by
persons other than these three employees.
iv.With the exception of the nominal jobs of the bank reconciliation and
the issuance of credits on sales returns and allowances, all functions
require and equal amount of time.
9-2
Assignment of functions…

Employee No. 1:

??

Employee No. 2:

??

Employee No. 3:

??

9-3
Segregation of duties related to a transaction (Recap..)

A transaction may be considered to pass through four phases:

1. Authorisation — the initial authorisation or approval for
the transaction to be carried out.
2. Execution — the act that commits the entity to the
transaction (such as placing an order).
3. Custody — the physical act of accepting, delivering
or maintaining the asset involved in the transaction.
4. Recording — the entry of the transaction data into
the accounting system. (GL vs. subsidiary ledger level)
Ideally
– all the four phases should be kept separate and handled by
different employees.
– GL function is separated from subsidiary ledger functions
 Segregation of duties related to a transaction (Recap..)

Let’s assume you have to assign the following activities to your

staff:

1. Maintain General Ledger.

2. Maintain Accounts Payable Ledger.
3. Maintain Accounts Receivable Ledger.
4. Maintain cash disbursements journal and prepare
checks for signature.
5. Issue credit memos for sales returns and allowances.
6. Reconcile the bank account.
7. Handle and deposit cash receipts.

Are the following combinations (next slide) acceptable?

 Segregation of duties related to a transaction

X 1. Cash receipts and accounts receivable

X 2. Cash receipts and credit memos on sales returns and
allowances
X 3. Cash disbursements and accounts payable.
X 4. Cash receipts and bank reconciliation
X 5. Cash disbursements and bank reconciliation
X 6. General ledger and cash receipts
X 7. Accounts receivable and credit memos on sales returns
and allowances
_/8. Cash receipts and cash disbursement
_/9. Accounts receivable and accounts payable
_/10. Credit memos on sales returns and allowances and bank
reconciliation
(a) Undesirable combinations (1/2 each. Max: 3)

(1) Cash receipts and accounts receivable

(2) Cash receipts and credit memos on sales returns and
allowances
(3) Cash disbursements and accounts payable.
(4) Cash receipts and bank reconciliation
(5) Cash disbursements and bank reconciliation
(6) General ledger and cash receipts
(7) Accounts receivable and credit memos on sales returns and
allowances

9-7
Assignment of functions…

GL

Starting with recording functions…

9-8
Assignment of functions…

GL
AP

Starting with recording functions…

9-9
 Assignment of functions…

GL
AP
AR

Starting with recording functions…

It’s better to separate out between GL and subsidiary
functions. So…

9-10
Assignment of functions…

GL AP

9-11
Assignment of functions…

GL AP
AR

Cash disbursement

Cannot be with AP. So..

9-12
Assignment of functions…

GL AP Cash disbursement
AR

9-13
 Assignment of functions…

GL AP Cash disbursement
AR

Credit memos Nominal (easy)

Recon duties
Handle and deposit cash

Normal duty Custody function.

Cannot combine with ledger function. 9-14
 Assignment of functions…

GL AP Cash disbursement
AR Handle and deposit cash

Credit memos Nominal (easy)

Recon duties
Handle and deposit cash

Normal duty Custody function.

Cannot combine with ledger function. 9-15
 Assignment of functions…

GL AP Cash disbursement
Credit memos AR Handle and deposit cash

Credit memos Nominal (easy)

Recon duties
Handle and deposit cash

Normal duty Custody function.

Cannot combine with ledger function. 9-16
 Assignment of functions…

GL AP Cash disbursement
Credit memos AR Handle and deposit cash
Recon

Credit memos Nominal (easy)

Recon duties
Handle and deposit cash

Normal duty Custody function.

Cannot combine with ledger function. 9-17
Assignment of functions…

Employee No. 1:
(1) Maintain general ledger
(2) Issue credit memos on sales returns and allowances
(6)Reconcile bank account

Employee No. 2:
(4) Maintain cash disbursements journal and prepare checks for
signature
(7)Handle and deposit cash receipts

Employee No. 3:
(2) Maintain accounts payable ledger
(3) Maintain accounts receivable ledger
9-18
 10

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