The following is the description of cash disbursements system of Two Symbols Limited: Upon receipt of the documents from accounts payable department, the cash disbursements clerk files the documents until their payment due date. On the due date, the clerk prepares a cheque for the invoiced amount, which is sent to the treasurer who signs it and mails back to the supplier. The cash disbursement clerk then updates the cheque register, accounts payable ledger, and accounts payable control account from the clerk’s terminal. Finally, the clerk files the invoice and copy of purchase order, receiving report, cheque in the department. Required: Describe the internal control weakness in Two Symbols’ cash disbursements system and discuss the risk associated with the weakness. (10 marks, maximum 300 words)

The answer is provided below

Explanation:

Internal Control Weakness is the failure in the implementation or effectiveness of the internal controls system. It can be a result of lack of segregation of duties, problems associated with the incorrect recognition of revenue, and noncompliance of accounting policies, etc.

Based on the facts given, clerk of Two Symbols Limited got the documents, makes the cheque of the invoice amount, updates the accounts payable ledger, cheque register, and accounts payable control account from his terminal and then finally files the invoice and the copy of purchase order.

There is no maker and no checker in entire system and therefore prone to multiple risk such as paying a vendor twice on the same invoice if the clerk make some manual mistake in the accounting, or carries out responsibilities that are inconsistent with the management expectations or false payments . The types of risk and weakness involved may include:

1. Segregation of the duties of authorising and processing of cash disbursement: The clerk authorized the liabilities and process payments.

a. Weakness: The clerk authorizes the liability and also writes the check to pay it.

b. Risk: The clerk could possibly create a false vendor, then set up a liability and disburse funds.

c. Control: There should be segregation of duties between the tasks of authorizing liability and the processing the payments.

2. Segregation of Duties at time of Account Keeping: The clerk makes payment and also update the account payable ledger

a. Weakness: The clerk has an access to both vendor ledger and general ledger.

b. Risk: Balancing general ledger control accounts with the corresponding vendor ledgers can help in detecting certain types of irregularities and errors and such as if an invoice is mistakenly booked twice or paid twice but this ability is lost when same individual is in charge of updating both accounts.

c. Control: Segregation of duties as this will mean no financial statement is handled by a single person from beginning to end.

3. Independent verification:

a. Weakness: The clerk sets up a liability that is based solely on vendors invoice.

b. Risk: The company might be paying for things it didn't order, didn't receive or may pay a high price to a person related to the clerk .

c. Control: The clerk should perform three-way-match of purchase order, the receiving report, and the invoice to verify that the liability is correctly stated, legitimate and correctly priced.