A Reconciliations Control Failure in a Small Finance Team
Marlowe Traders has a finance team of four. The bank reconciliation is prepared by the same clerk who records cash receipts and has authority to write off small differences up to $500. Last quarter, 14 write-offs totalling $4,800 were posted to a sundry expense account, all dated on Fridays when the supervisor works remotely. The bank reconciliation has not been reviewed or signed off for five months, and the suspense account carries a $6,200 unexplained debit balance. The external auditor has flagged the issue but the managing director says the amounts are immaterial and the clerk is trusted.
1. Identify the control weaknesses and explain why the MD's materiality argument does not resolve them.
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The core weakness is incompatible duties: the clerk records receipts, prepares the reconciliation and can write off differences, so a single person can both cause and conceal a discrepancy. The $500 write-off limit is not a control if nobody reviews it, and the Friday pattern suggests it is being exploited. The absence of a five-month review removes the detective control, and the $6,200 suspense balance is itself evidence that reconciliations are not clearing. Materiality is a financial reporting concept; it does not excuse a control failure that creates fraud opportunity and could hide larger amounts. The pattern and timing are red flags requiring investigation, not reassurance from trust alone.
2. Recommend a redesigned control set proportionate to a four-person team, and explain how segregation can be achieved with so few staff.
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Separate preparation from approval: the clerk may prepare the reconciliation but a second person (supervisor or MD) must review and sign it monthly, with evidence of review retained. Remove write-off authority from the preparer: write-offs above a low threshold require documented approval with supporting evidence, and all write-offs are listed in a monthly exception report. Clear the suspense account item by item and investigate the $6,200 before any further postings. Where headcount is limited, use compensating controls: mandatory rotation of the reconciliation, bank statements sent directly to the reviewer, and periodic independent sample testing. Segregation does not require more people; it requires that no single person controls a transaction end to end.