Greenleaf Co. is a small merchandising company with a manual accounting system. An investigation revealed that in spite of a sufficient bank balance, a significant amount of available cash discounts had been lost because of failure to make timely payments. In addition, it was discovered that the invoices for several purchases had been paid twice.
Indicate whether the procedures listed below for the payment of vendors' invoices, so that the possibilities of losing available cash discounts and of paying an invoice a second time will be minimized.
Each voucher should be approved for payment by a designated official before the price, quantities, and terms are verified.
Answer: No
Recommendation: Revise the procedure to: "Each voucher should be verified for price, quantities, and terms before being approved for payment by a designated official."
Each voucher should be filed by the last day of the discount period or the due date if the invoice is not subject to a cash discount.
Recommendation: Maintain this procedure. Additionally, using a tickler file system or an automated reminder system can help keep track of due dates to ensure timely payments.
At the time of payment, all vouchers and supporting documents should be stamped "Paid."
Each voucher should be filed by the last day of the discount period or the due date if the invoice is not subject to a cash discount.
Answer: Yes
At the time of payment, all vouchers and supporting documents should be stamped "Paid."
Answer: Yes
Expert Explanation
To address the issues Greenleaf Co. is facing with missing cash discounts and duplicate payments, it's essential to implement robust internal controls for cash payments. Let's evaluate the procedures listed and their effectiveness in minimizing these problems:
Each voucher should be approved for payment by a designated official before the price, quantities, and terms are verified.Evaluation: This procedure seems reversed. It would be more effective if the price, quantities, and terms are verified before approval for payment. Verification ensures that all details are correct and match the purchase order and receiving report, preventing errors. Approval should then confirm that the verification is complete and the payment is authorized.
Answer: Yes
Expert Explanation
To address the issues Greenleaf Co. is facing with missing cash discounts and duplicate payments, it's essential to implement robust internal controls for cash payments. Let's evaluate the procedures listed and their effectiveness in minimizing these problems:
Each voucher should be approved for payment by a designated official before the price, quantities, and terms are verified.Evaluation: This procedure seems reversed. It would be more effective if the price, quantities, and terms are verified before approval for payment. Verification ensures that all details are correct and match the purchase order and receiving report, preventing errors. Approval should then confirm that the verification is complete and the payment is authorized.
Recommendation: Revise the procedure to: "Each voucher should be verified for price, quantities, and terms before being approved for payment by a designated official."
Each voucher should be filed by the last day of the discount period or the due date if the invoice is not subject to a cash discount.
Evaluation: This procedure is effective for ensuring that invoices are paid on time, thus avoiding lost cash discounts. Filing vouchers by the last day of the discount period or due date ensures that they are processed timely.
Recommendation: Maintain this procedure. Additionally, using a tickler file system or an automated reminder system can help keep track of due dates to ensure timely payments.
At the time of payment, all vouchers and supporting documents should be stamped "Paid."
Evaluation: This is an excellent control to prevent duplicate payments. Stamping documents "Paid" provides a visual confirmation that the invoice has already been processed and paid, reducing the risk of it being paid again.
Recommendation: Continue this practice and ensure that the stamp includes the date of payment and the check number for further traceability.
Additional Recommendations for Improving Internal Control:
Segregation of Duties: Separate the duties of authorizing payments, processing payments, and reconciling bank statements. This reduces the risk of errors and fraud.
Three-Way Match: Implement a three-way match system where the purchase order, receiving report, and vendor invoice are matched before payment approval. This ensures that the goods ordered were received as requested and at the agreed-upon price.
Automated Payment System: Consider adopting an automated accounts payable system. Such systems can automatically track discount periods and due dates, ensuring timely payments and reducing human error.
Regular Audits: Conduct periodic internal audits of the accounts payable process to identify and rectify any discrepancies or control weaknesses.
Vendor Statements Reconciliation: Regularly reconcile vendor statements with the company's records to identify any discrepancies, such as missing invoices or duplicate payments, early on.
By refining these procedures and incorporating additional controls, Greenleaf Co. can significantly reduce the risk of missing cash discounts and making duplicate payments, thereby improving its cash management and operational efficiency.
Additional Recommendations for Improving Internal Control:
Segregation of Duties: Separate the duties of authorizing payments, processing payments, and reconciling bank statements. This reduces the risk of errors and fraud.
Three-Way Match: Implement a three-way match system where the purchase order, receiving report, and vendor invoice are matched before payment approval. This ensures that the goods ordered were received as requested and at the agreed-upon price.
Automated Payment System: Consider adopting an automated accounts payable system. Such systems can automatically track discount periods and due dates, ensuring timely payments and reducing human error.
Regular Audits: Conduct periodic internal audits of the accounts payable process to identify and rectify any discrepancies or control weaknesses.
Vendor Statements Reconciliation: Regularly reconcile vendor statements with the company's records to identify any discrepancies, such as missing invoices or duplicate payments, early on.
By refining these procedures and incorporating additional controls, Greenleaf Co. can significantly reduce the risk of missing cash discounts and making duplicate payments, thereby improving its cash management and operational efficiency.
