In a medium size trading organization, the accountant was given additional responsibility of making recoveries from the debtors. On one occasion, when an insurance claim of Rs. 25,000 was received, he credited the same to the account of a debtor and misappropriated the cash which he had recovered from the said debtor. Pinpoint weaknesses in the internal control system which led to this situation. Give your comments on the above situation.

Auditing and Assurance Revision Questions and Answers

Following two essential features of internal control are relevant here :
 Breaking the chain of the work in a manner so that no single person can handle a transaction from the beginning to the end and

 Segregation of accounting and custodial functions.
Weakness in internal control system in the instant case:

 The accountant is receiving cash and also passing the entries in the books. The accountant should not have been allowed to effect recoveries.

 It also appears that system for issuing receipts for amount received – whether cash or cheque is also lacking.

 In a small and to some extent medium size organization, the supervision of the owner offsets the deficiencies in internal control system. But in this case, it appears, that supervision and personal control is also lacking.

Thus, in the given case, the main weakness of the system is that it is ignoring the basic requirements of a good internal control system.

Leave a Reply

Your email address will not be published. Required fields are marked *