Question

Identify the control that is most likely to prevent the concealment of a cash shortage
resulting from the improper write-off of a trade account receivable:
(1) Write-offs must be approved by a responsible offi cial after review of credit department
recommendations and supporting evidence.
(2) Write-offs must be approved by the accounts receivable department.
(3) Write-offs must be authorized by the shipping department.
(4) Write-offs must be supported by an aging schedule showing that only receivables
overdue by several months have been written off.

Answer 1

Answer:

(1) Write-offs must be approved by a responsible official after review of credit department  recommendations and supporting evidence.

Explanation:

The establishment of various levels of approval and strict internal control procedure especially for write-off of receivables will go a long way to control many forms of frauds associated with receivable write-off.

In a standard organization, the credit department are to review the status of long outstanding receivables, identify the bad ones and make necessary recommendations to the approving authorities with the necessary documentations for final action (write-off).