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 would be option C: The owner reviews credit memos before they are recorded.

Step-by-step explanation:

In this scenario, the most effective control to offset the weakness would be option C: The owner reviews credit memos before they are recorded. By having the owner review credit memos, it provides an additional level of oversight to ensure that credit memos are being properly approved and recorded.

Option A is not as effective because it only focuses on reviewing errors in billings and postings, but it doesn't address the specific issue of credit memos being approved by the accounts receivable clerk with access to cash.

Option B is also not as effective because it addresses the reconciliation of the checking accounts, but it doesn't directly address the issue of credit memos and access to cash.

Option D is focused on reconciling the accounts receivable accounts, but it doesn't directly address the issue of credit memos and access to cash.