Design a Proposal of Apollo Shoes Casebook - Essay Example

RUNNING HEAD: Apollo Proposal Apollo Proposal for Cash, Accounts Payable and Cash Disbursements in APA Style During the 2007 audit of Apollo Shoes, Inc., several areas of improvements were noted on Apollo’s cash receipts and disbursements systems. These are described in the succeeding paragraphs with recommendations on how to improve these areas. On cash receipts, the proposed recommendation is to conduct a review of the bank reconciliations statement to ensure that all reconciling items are properly accounted for and recorded.

Another proposal, related to advance payments from customers, is for the cashier to attach a copy of the official receipt to the sales order forwarded to the billing department. For cash disbursements, the proposal is for the cash disbursements department to be transferred from the controller’s office to the treasurer’s office to ensure that there is adequate segregation of incompatible duties. Still another proposal is for the company to require a second signatory for checks drawn above certain amounts.

For accounts payable, the first proposed point for improvement is the conduct of review to capture unrecorded liabilities that are paid after the cut-off date. Lastly, the company may also consider moving to the voucher system in accounting for its payables to ensure that all accounts payable are properly monitored and accounted for. General Internal control is “a process to provide reasonable assurance of accomplishing objectives” (Hubbard, 2003). These objectives are related to the company’s assertions that, among others, the financial reports presented by the company are reliable.

Well-placed internal controls also provide assurance that “assets are safeguarded” and “appropriate accounting data are generated” (Eisen, 2000). Among all the assets the internal controls aim to safeguard, none is more susceptible to “improper diversion and use by employees” (Eisen, 2000) as cash. This is the most liquid of all the assets and it is, directly or indirectly, affected by numerous transactions. Thus, it is imperative that cash be “effectively safeguarded” (Eisen, 2000) by the company.

This report shows several proposals or recommendations for the improvements of the internal controls of Apollo Shoes, Inc. on its cash receipts, accounts payable and cash disbursements. These recommendations are based on the 2007 audit of the company’s financial statements. Cash Receipts Since the company is a fairly large entity, personnel handling the cash receipts function should be “segregated from Accounts Receivable, General Accounting, and Billing, since combining cash collection with any of these three other functions provides opportunities to misappropriate cash” (Ricchiute, 2003).

From the review of the cash receipts function, it was noted that there is indeed proper segregation of duties. However, several proposed points for improvements of the internal controls related the cash receipts were noted and are discussed in the following paragraphs. One such point for improvement is the proper review of the bank reconciliation statement to ensure that all reconciling items are adequately explained and adjusted (if needed). The bank reconciliation statement as of December 31, 2007 shows an ‘amount to balance’ which was only explained as ‘Adjustment to Balance Posted to Cash and Controller’s Clearing Account’ (Louwers and Reynolds, 2007, p. 69). There was no other explanation provided.

Since the adjustment shows a material amount, proper explanation should have been provided to ensure that this adjustment was accurately accounted for, and such should have been captured during the review process. Another proposed point for improvement is related to the handling of the advance payments when credit is not approved. It was noted that the advance payments are received by the cashier and only a sales order stamped ‘paid’ is forwarded to the billings department for reference (Louwers and Reynolds, 2007, p. 53). Although this procedure is ordinary, this may be subject to fraudulent acts (such as unauthorized stamping of ‘paid’ on the sales order), thus, it is proposed that the sales order be accompanied by another official document, such as a copy of the official receipt, when transmitted to the billings department to ensure that the sales order is really paid in advance by the customer.

Cash Disbursements First of all, it was noted that the cash disbursements function is under the controller’s office and is done hand in hand with the accounts payable function (Louwers and Reynolds, 2007, p. 12). This shows improper segregation of duties as the cash handling function is handled by the same department handling the recording function. It is, therefore, recommended that the cash disbursements function be separated from the accounts payable function (and from the controller’s office) and transferred to the treasurer’s office.

However, the company should ensure that, within the treasurer’s office, there should still be proper segregation of duties. That is, the personnel handling the cash receipts should not be the same as those handling the cash disbursements. In relation to the first recommendation, it was also noted that blank checks are kept under lock and key in the accounts payable accounting department (Louwers and Reynolds, 2007, p. 34). This creates an opportunity to misappropriate the funds of the company as those who are handling the recording functions may have access to critical documents.

With the transfer of the cash disbursements function to the treasurer’s office, the blank checks should also be accordingly transferred. This will limit access to such important documents to authorized personnel only. Secondly, it was also noted that the treasurer is the only one who signs the checks (Louwers and Reynolds, 2007, p. 34). For a more effective internal control, it is recommended that the company create a policy wherein checks containing amounts that are above specified limits will require two signatures (i.e., the CFO and the treasurer).

This will ensure proper check-and-balance on cash disbursements. Accounts Payable For accounts payable, a proposed point for improvement is for the company to put into place a system to capture unrecorded liabilities or payables. In the search for unrecorded liabilities, it was noted that there was a shipment received on December 31, 2007 that was not recorded as accounts payable as of that date because the receiving report was only transmitted in January 2008. The amount of the shipment was $8.

4 million (Louwers and Reynolds, 2007, p. 121). As a result, the unaudited accounts payable balance at the end of the year was understated by this amount. A system to capture such unrecorded liabilities (which may be included during the review of the accounts) will ensure that such transactions are detected and will raise the signal to record this type of transactions. The last proposed point for improvement relates to the company’s use of a journal entry to record payments for accounts payable (Louwers and Reynolds, 2007, p. 56). Although this may prove adequate for the company’s accounting needs, the company may consider using the voucher system to record its payments and accurately update its accounts payable ledgers.

Such a system will ensure that the individual vendor’s accounts in the sub-ledger are updated in a timely and accurate manner since the system can properly identify the vendor paid by the company at any given point in time. References Eisen, Peter J. (2000). Accounting. New York: Barron’s Educational Series, Inc. Retrieved May 29, 2009 from http://books.google.com.ph/books?id=936J5aUSOXkC&pg=PA211&lpg=PA211&dq= cash+internal+controls&source=bl&ots=bTx85WHAJK&sig=tJgDZeWS1PrUIzA0rFb2Un8QOXk&hl=en&ei=uR8iSrqyKNSTkAXG3N34BA&sa=X&oi=book_result&ct=result&resnum=3#PPA211,M1.

Hubbard, Larry D. (2008). Understanding internal controls: Auditors who can accurately interpret COSOs internal control framework offer great value to management - Back To Basics - Committee of Sponsoring Organizations of The Treadway Commissions Internal Control-Integrated Framework. FindArticles.com. Retrieved May 30, 2009 from http://findarticles.com/p/articles/mi_m4153/is_5_60/ai_110222002. Louwers, Timothy J. and Reynolds, J. Kenneth (2007). Apollo Shoes, Inc.: An Audit Case to Accompany Auditing and Assurance Services.

Retrieved May 28, 2009 from http://highered.mcgraw-hill.com/sites/dl/free/0073128244/347261/2eApolloShoesCase. doc. Ricchiute, David N. (2003). Auditing and Assurance Services. Singapore: Thomson Learning Asia.