Question

9. Which functions in the revenue cycle should be segregated for maximum internal control? What possible problems could exist in the financial statements if any two of these functions was not segregated? (Analyze each pair of functions independently.) What should an auditor do if he/she encounters a situation where incompatible duties exist in a client organization?

Answer 1

The revenue cycle should be segregated for following for the maximum internal control:

a) Executing sales – cash & credit sales

b) Managing credit facilities

c) Collection of credit provided.

If the credit facilities are not separately managed, then the level of credit facilities provided and the cost of providing the credit facilities will become difficult to put in the financial statements.

On the other hand, if the Collection of credit provided to clients are not segregated separately, then it would not possible to tell the amount collected of the total credit sales and at which level the credit is being provided to the clients.

An auditor has to report the mal-function of duties executed by the employees in the client organization while providing the suggestions to improve on the incompatible duties so executed by the employees. This will improve upon the future performance and improvement in the accounting work performed by these employees and smoothen the audit work.

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