Question

During a review of a small business entity's internal control system, 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) A controller receives the monthly bank statement directly and reconciles the checking accounts.
C) The owner reviews credit memos before they are recorded.
D) The controller reconciles the total of the detailed accounts receivable accounts to the amount shown in the ledger.

Answer 1

The most effective control to offset the weakness of the accounts receivable clerk having access to cash and approving credit memos would be the owner reviewing credit memos before they are recorded. Therefore, the correct option is C.

Step-by-step explanation:

The most effective control to offset the weakness of the accounts receivable clerk having access to cash and approving credit memos would be Option C) The owner reviews credit memos before they are recorded. This control ensures that the owner, who has a higher level of authority, reviews and approves credit memos before they are recorded in the accounting system. By involving the owner in the credit memo approval process, there is an additional layer of oversight and reduces the risk of fraudulent activities by the accounts receivable clerk.

Alternatively, Option A) The owner reviews errors in billings to customers and postings to the subsidiary ledger can also be an effective control as it allows the owner to identify and rectify any errors or discrepancies in the billing process.