Advanced Radio Repairs Make All Sales On Account Cash Receip

Advanced Radio Repairs Make All Sales On Account Cash Receipts Arrive

Advanced Radio Repairs makes all sales on account. Cash receipts arrive by mail. James opens the envelopes and separates the cheques from the accompanying remittance advices. James forwards cheques to another employee, who makes the daily bank deposit but has no access to the accounting records. James sends the remittance advices, which show the cash received, to the accounting department for entry into the accounts. James’s other duty is to grant sales allowances to customers when he receives a customer’s cheque for less than the full amount of the invoice; he records the sales allowance and forwards the document to the accounting department.

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The given scenario outlines the accounting and internal control procedures of Advanced Radio Repairs, which conducts all sales on credit. The process begins with the receipt of cash payments by mail, where James plays a central role. His responsibilities include opening the mail, separating checks from remittance advices, and forwarding the checks to an employee responsible for banking deposits—an employee who does not have access to the company's accounting records, thereby reducing the risk of internal fraud. This segregation of duties—handling cash, deposits, and recording transactions—embodies key internal control principles such as separation of duties and physical controls.

The remittance advices, which detail each payment received, are sent to the accounting department for updating the accounts receivable records. This separation of duties further helps prevent misappropriation or errors. Additionally, James handles sales allowances when customers remit less than the invoice amount, recording the allowance and transmitting relevant documents to the accounting department. This process ensures that accounts receivable are accurately adjusted to reflect actual cash collections and sales discounts.

In an effective control environment, these procedures reduce opportunities for theft, errors, or fraud. Segregating the duties of handling cash, depositing funds, and maintaining accounting records minimizes the potential for collusion or misappropriation. The physical separation of cash handling from accounting functions aligns with best practices recommended by the Committee of Sponsoring Organizations (COSO) for internal controls (COSO, 2013).

However, the system can be further strengthened by implementing additional controls such as regular bank reconciliations, independent review of accounts receivable adjustments, and automated systems for recording payments. For instance, reconciling the bank statements with deposit records can promptly detect discrepancies, a fundamental aspect of internal controls (Rubin, 2014). Also, timely reviews and managerial oversight act as deterrents for potential misappropriation or errors within the system.

Furthermore, the procedure for handling sales allowances should incorporate specific criteria and documentation to ensure that such adjustments are authorized and accurately recorded. Establishing clear policies and documenting the approval process aligns with sound internal control practices, promoting transparency and accuracy (Graham et al., 2018). Employees involved must also be trained to understand the importance of these controls and value integrity in recording transactions.

From a technological perspective, utilizing accounting software integrated with bank feeds can automate the recording of cash receipts and reduce manual entry errors. Modern systems often include role-based access controls that restrict user permissions, thereby enhancing security (Brown & Saini, 2019). Audit trails generated by such systems provide accountability, enabling auditors and management to review transactions efficiently.

Nevertheless, challenges remain in maintaining effective controls in small organizations or those with limited resources. Management must continuously evaluate control procedures to adapt to changes, such as increased transaction volume or new sales channels. An ongoing internal audit function can facilitate this process, providing independent assessments of internal controls (Hammersley, 2015).

In conclusion, the procedures at Advanced Radio Repairs demonstrate a sound foundation of internal control principles through segregation of duties and physical controls. To further improve their control environment, the company should incorporate independent reconciliations, enforce policies on sales allowances, utilize automated accounting systems with audit trails, and foster a culture of accountability. These measures will significantly reduce the risk of fraud, errors, and misstatements, safeguarding the company's assets and ensuring accurate financial reporting.

References

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