After careful analysis of USA Cycle Companys system, the team finds access

controls to be the most prominent problem to be addressed. The absence of a

central Accounting Department allows several departments to perform recording
functions and direct access to the books of the entity. Lack of control in this aspect
may result to financial records that erroneous and more susceptible to fraudulence
and misrepresentation. As such, the team primary recommendation is the
establishment of an Accounting Department function to perform the central
recording responsibility.
Additionally, as per SAS 78 the team has identified the following internal
control weaknesses and has presented corresponding recommendations:
A. Segregation of Duties
Internal Control
Receivable account

Weakness:

Billing

Department

updates

Accounts

(1) Since a separate accounting department will be created to handle the

journals and G/L of the company, billing department will no longer update
A/R since this responsibility will now be transferred to the accounting
department.
Internal Control Weakness: Warehouse workers handle both custody and
recording functions (updating inventory levels).
For REGULAR jobs:
(1) After sending the ordered goods to the third-party carrier, two copies of
the shipping notice must be prepared by the warehouse department. A
copy shall be sent to the Accounting Department and the other will be
filed in the Warehouse Departments permanent records.
(2) Upon receipt of shipping notice and bill of lading documents, the
accounting department will update the general ledger.
For CUSTOM jobs:
(1) After issuance/release of the inventory, the warehouse worker will make
two copies of materials issuance report. One copy will be sent to
accounting department while the other copy will be stored in the
warehouse departments records.
(2) Upon receipt of the materials issuance report, the accounting department
will update the general ledger.
Internal Control Weakness: The cash receipts department handles both
custody and recording functions
(1) The new Accounting Department will now have sole control over the cash
receipts journal and general ledger.
(2) The cash receipts department will make two copies of the remittance
advice and remittance lists. The first copies of the two will go to the billing
department for them to issue an official receipt to the customer.

(3) The second set of copies would be forwarded to the Accounting

department for the updating of the cash receipts journal and posting of
the transaction to G/L.

B. Transaction Authorization
Internal Control Weakness: Warehouse worker has discretion to ship goods
without authorization.
(1) Prior to sending the goods to the third-party carrier, the warehouse worker
must first seek authorization from a warehouse supervisor.
C. Accounting Records
Internal Control Weakness: No issuance of official receipt to represent
customers payment.
(1) The cash receipts department, upon verification of the remittance advice
and deposits, sends out the official receipt to the customer.