1.

SEGREGATION OF FUNCTIONS

Which, if any, of the following situations represents improper segregation of functions? Explain your
answer.

a. The billing department prepares the customers’ invoices and records the sale in the sales
journal.
Answer:
BILL CUSTOMER. The shipment of goods marks the completion of the economic event and the
point at which the customer should be billed. Billing before shipment encourages inaccurate
record keeping and inefficient operations. When the customer order is originally prepared, some
details such as inventory availability, prices, and shipping charges may not be known with
certainty. In the case of back-orders, for example, suppliers do not typically bill customers for
out-of-stock items. Billing for goods not shipped causes confusion, damages relations with
customers, and requires additional work to make adjustments to the accounting records. To
prevent such problems, the billing function awaits notification from shipping before it bills.
Figure 4-1 shows that upon credit approval, the bill-customer function receives the sales order
(invoice copy) from the receive order task. This document is placed in an S.O. pending file until
receipt of the shipping notice, which describes the products that were actually shipped to the
customer. Upon arrival, the items shipped are reconciled with those ordered and unit prices,
taxes, and freight charges are added to the invoice copy of the sales order. The completed sales
invoice is the customer’s bill, which formally depicts the charges to the customer. In addition,
the billing function performs the following record keeping–related tasks:
1. Records the sale in the sales journal.
2. Forwards the ledger copy of the sales order to the update accounts receivable task.
3. Sends the stock release document to the update inventory records task.

b. Mail room clerk opens cash receipts envelopes from customers and also prepares the
remittance list.
Answer:
OPEN MAIL AND PREPARE REMITTANCE ADVICE. A mail room employee opens envelopes
containing customers’ payments and remittance advices. Remittance advices (see Figure 4-10)
contain information needed to service individual customers’ accounts. This includes payment
date, account number, amount paid, and customer check number. Only the portion above the
perforated line is the remittance advice, which the customer removes and returns with the
payment. In some systems, the lower portion of the document is a customer statement that the
billing department sends out periodically. In other cases, this could be the original customer
invoice, which was described in the sales order procedures. The remittance advice is a form of a
turnaround document, as described in Chapter 2. Its importance is most apparent in firms that
process large volumes of cash receipts daily. For example, processing a check from John Smith
with no supporting details would require a time-consuming and costly search through perhaps
thousands of records to find the correct John Smith. This task is greatly simplified when the
customer provides necessary account number and posting information. Because of the
possibility of transcription errors and omissions, however, sellers do not rely on their customers
 to provide this information directly on their checks. Errors are avoided and operational
efficiency is greatly improved when using remittance advices. Mail room personnel route the
checks and remittance advices to an administrative clerk who endorses the checks ‘‘For Deposit
Only’’ and reconciles the amount on each remittance advice with the corresponding check. The
clerk then records each check on a form called a remittance list (or cash prelist), where all cash
received is logged. In this example, the clerk prepares three copies of the remittance list. The
original copy is sent with the checks to the record and deposit checks function. The second copy
goes with the remittance advices to the update AR function. The third goes to a reconciliation
task.

c. Accounting clerk receives journal vouchers from various departments and also posts to the GL
accounts.
Answer:
By the close of the transaction processing period, the general ledger function has received
journal vouchers from the billing and inventory control tasks and an account summary from the
AR function. This information set serves two purposes. First, the general ledger uses the journal
vouchers to post to the following control accounts.
Because general ledger accounts are used to prepare financial statements, they contain only
summary figures (no supporting detail) and require only summary posting information. Second,
this information supports an important independent verification control. The AR summary,
which the AR function independently provides, is used to verify the accuracy of the journal
vouchers from billing. The AR summary figures should equal the total debits to AR reflected in
the journal vouchers for the transaction period. By reconciling these figures, the general ledger
function can detect many types of errors.

d. The sales department approves sales credit memos as the result of product returns and forwards
these to the AR department, which adjusts the customer accounts to reflect the return.

All are proper segregation of functions except d.

d. The sales department should not be allowed to approve credit memos since it could potentially
overstate sales in one period to meet quotas and boost bonuses and reverse them in a subsequent
period. The receiving report indicating that returned goods have been received by the receiving
department should be the source document for credit memos and it should be authorized by someone
independent of the Sales Department.

The word "functional segregation" refers to a vital physical control. This function is meant to detect
fraud and human errors. It is the assurance that no person is allowed to perform more than one task
within the organization on their own. It is carried out in order to boost functional efficiency and internal
control.

a. The billing department prepares the customer’s invoice and record it in sales journal. This
process requires proper physical control to prevent fraud. Therefore, this situation represents
segregation of function.
b. Mail room clerk prepares the remittance list with the help of cash receipts envelope from
customer. The preparation of remittance list require accurate physical control. Therefore,
preparation of remittance list represents the segregation function.
c. Preparation of voucher and posting it into the GL accounts needed proper control system to
prevent human error and fraud. Therefore, this situation signifies segregation of function.
d. The approval of credit memos is not allowed by sales department to do so. The credit memos
are prepared and approved by different departments. Therefore, this situation does not require
proper segregation of function.

a. The billing department prepares and records the customer's invoice in the sales journal. To prevent
fraud, this process necessitates careful physical control. Therefore, this case demonstrates segregation
of function.

b. With the help of the cash receipts envelope from the customer, the mail room clerk prepares the
remittance list. Remittance list preparation necessarily involves accurate physical control. Therefore,
preparation of remittance list represents the segregation function.

c. Preparing and posting a voucher into GL accounts requires an appropriate control system for

d. Credit memos should not be approved by the sales department because they can overstate sales in
one cycle to fulfill targets and raise bonuses, only to reverse them in the following period. The receiving
report, which indicates that returned products have been obtained by the receiving department, should
be the source document for credit memos, and it should be approved by anyone other than the sales
department. This case therefore does not require proper segregation of function.