The Control Environment and Control Activities

Richie was the Controller at Ralph Malph Enterprises (RME), a publicly-traded sales supported company. He started the job six months ago and after observing the activities in his area, he determined that the accounts receivables procedures needed to be tightened up. He approached Marion, the Accounts Receivable clerk, requesting her assistance in documenting the procedures related to new customer approvals, credit limits, and cash receipts. Marion indicated that there were no formal procedures for approving new customersshe received names and billing addresses from the sales representatives, Warren, Arthur, and Howard. When the information was passed on from the sales representatives, Marion then performed file maintenance to add the new customers to the customer master file without putting a customer file together for review. Marion then told Richie that the credit limit was set at whatever level the related sales representative told her to give the customer. As for cash receipts, Marion prepared the deposits and took the deposits to the bank, reconciling the bank statement on a monthly basis. Marion also entered the cash receipts into the system. Richie was troubled because according to the sales representatives and Marion, previous controllers and some of the executive-level management had never felt having formal authorization and review procedures for accounts receivable was important. Richie noted that this tone at the top, which was lackadaisical at best, could lead to the perpetration of fraud throughout the organization. Richie realized that the combination of a lack of control procedures and a lax control environment could cause RME to have problems with the SEC due to lack of compliance with the Sarbanes-Oxley (SOX) Act. He needed to get controls in place quickly, especially since the external auditors were due to arrive in less than three months.

Discussion Questions:

1. Identify weaknesses in the current accounts receivable process to include potential fraudulent activity due to the lack of formalized procedures in the accounts receivables process.
2. What are your recommendations to improve the control environment and the procedures in the accounts receivables process?