Question

Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?

a. Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.
b. Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables.
c. Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped.
d. Omission of shipping documents could go undetected, causing an understatement of inventory.

Answer 1

Ineffective internal control policies can lead to employee defalcation, the recording of fictitious transactions, and other issues such as delays in shipment and undetected documentation errors, all of which negatively impact financial accuracy and integrity.

Step-by-step explanation:

The question is about identifying the potential consequences of ineffective internal control policies and procedures within the revenue process of a business. Ineffective internal controls can result in various issues such as unauthorized final authorization of credit memos by sales personnel, leading to possible employee defalcation schemes. Additionally, they could allow for the recording of fictitious transactions, which may cause revenues to be understated and receivables to be overstated. Ineffective controls might also cause delays in goods being shipped due to irregularities in recording transactions in the subsidiary accounts, and they could lead to the omission of shipping documents going undetected, which causes an understatement of inventory. An example illustrating the importance of effective controls is Noel's situation, where they caught a $250,000 overpayment error that others missed, demonstrating proactivity and attentiveness crucial in internal control systems.