Beyond Imagination

Beyond Imagination is a bicycle manufacturing firm founded in 2000 that currently employs 126 people. The company produces custom bicycles in its factory located near Augusta, Georgia. Each bicycle is tailored to a rider based on a number of different measurements, including height, weight, inseam, and arm length. These measurements are taken at 30 professional bicycle shops around Georgia, which are certified to size. By accepting orders only through licensed dealers, Beyond Imagination ensures that each bike matches its rider precisely. Beyond Imaginations custom bikes are considered extremely high quality, and the company takes pride in using only the best components sourced from around the world. Accordingly, Beyond Imagination purchases from hundreds of suppliers, chosen for their commitment to quality and reliability.

Demand for Beyond Imaginations cycles has grown exponentially in recent years. The surge in demand was somewhat unexpected and the companys factory has been operating at capacity for over a year. As a result, current orders face a production backlog of approximately five to six weeks. The companys operations have been further hampered by severe inefficiencies and control weaknesses attributed to its legacy accounting system. Your firm has been hired as an outside consultant to suggest improvements in the companys accounting procedures. The following paragraphs describe the companys revenue cycle.

Cash Receipts

Customer payments are processed in Beyond Imaginations mail room along with all other mail received by the company. A mail room clerk selects and opens customer remittances envelopes and reviews the checks and remittance advice. Next, the clerk manually prepares three copies of a remittance list.

The first copy of the remittance list is sent, along with the checks, to the cash receipts department. Once the clerk there receives the remittance list, he or she reconciles the checks and remittance list and updates the cash receipts journal from his PC. He then prints two copies of the deposit slip, which are sent along with the checks to the bank.

The second copy of the remittance list, along with the remittance advice, is sent to the billing department. The clerk reconciles these documents and updates the accounts receivable subsidiary account to reflect the payment received.

The third remittance list is sent to the general ledger department, which uses it to update the accounts receivable control and cash accounts.

The internal control problems are:

1) Lack of segregation of duties - custodial and recording updating cash receipts journal

2) Lack of segregation of duties - custodial and recording mail room

3) Lack of independent bank reconciliation - general ledger department needs to perform independent reconciliation for third remittance list

Question:

Explain how each is a critical control problem and a give a recommendation to mitigate each of these problems.