Question

During the consideration of a small business client's internal control, the auditor discovered that the accounts receivable clerk approves credit memos and has

access to cash. Which of the following controls would be most effective in offsetting this weakness?
a. The owner reviews errors in billings to customers and postings to the subsidiary ledger.
b. The controller receives the monthly bank statement directly and reconciles the checking accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger.

Answer 1

The most effective control in offsetting the weakness of the accounts receivable clerk approving credit memos and having access to cash is having the owner review credit memos after they are recorded.

Step-by-step explanation:

The most effective control in offsetting the weakness of the accounts receivable clerk approving credit memos and having access to cash would be option c - The owner reviews credit memos after they are recorded.

This control ensures that a higher-level authority, the owner, reviews and approves the credit memos to minimize the risk of fraudulent or inappropriate approval. Having the owner review the credit memos after they are recorded, it adds an additional layer of oversight and reduces the likelihood of unauthorized or unsupported credit memos.

Furthermore, having the owner involved in the review process increases accountability and promotes a separation of duties, which is an important internal control principle in preventing fraud. The other options listed also provide certain controls, but option c specifically addresses the weakness highlighted in the question.