Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer.The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned.The most effective procedure for preventing this activity is to:
A)prenumber and account for all credit memorandums.
B)require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
C)have independent sales and accounts receivable departments.
D)mail monthly statements to customers.

Question

Quizplus · Accepted Answer

Requiring receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved is the best option as it ensures that credit memos are issued only for legitimate returns. This process will help prevent any fraudulent activity by the accounts receivable clerk or any other employee. Prenumbering and accounting for all credit memos and having independent sales and accounts receivable departments are also important internal control procedures, but they may not be as effective in preventing fictitious credit memos as requiring supporting documentation for all credit memos. Mailing monthly statements to customers is a standard practice but does not specifically address the issue of fictitious credit memos.

Smith Manufacturing Company's Accounts Receivable Clerk Has a Friend Who