Question

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to

A) prenumber and account for all credit memorandums.
B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
C) have independent sales and accounts receivable departments.
D) mail monthly statements to customers.

Answer 1

The most effective procedure for preventing fictitious credit memos is requiring receiving reports that provide evidence of returned inventory items to support all credit memos before they are approved.

Step-by-step explanation:

The most effective procedure for preventing the issuance of fictitious credit memos is option B) requiring receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.

By implementing this procedure, the accounts receivable department can ensure that all credit memos are only issued when there is actual evidence of returned goods. This helps to prevent the fraudulent issuance of credit memos to friends or any other unauthorized individuals.

Additionally, prenumbering and accounting for all credit memos (option A) can also be helpful in preventing fraudulent activities by providing a clear record of issued credit memos and helping to detect any discrepancies or irregularities.