Question

What errors or abuses may occur in each of the following scenarios and what control is needed on each case:

         1. Clara has responsibility for collecting cash & for recording the cash receipts in the accounting records.

         2. John prepares & signs all checks and then records them in the accounting records. When the monthly bank statement comes, he does the bank reconciliation.

         3. The XYZ company receives a monthly bank statement with canceled checks. It does not bother to reconcile the bank statement with its books.

         4. Each day the XZY company makes 70 journal entries. It does not take a total of all debit & credit entries.

         5. The XYZ company has an account with CITI limousine service to provide transportation for its employees in the daily conduct of their work. Each employee has a voucher book which he/she can use to provide the transportation needed.

         6. XYZ company keeps a petty cash fund with $300 to meet everyday business needs. The fund is kept in the supply cabinet & may be accessed by anyone who needs cash for firm expenses.

         7. XYZ company requires any individual who needs a check to be disbursed, to fill out & sign a check request form. When this is done the cash disbursement department cuts a check to the payee listed.

         8. The XYZ company holds bearer securities that are waiting instructions from its owners as to final location. The company keeps these securities in a file cabinet that has a $ 9.99 combination lock on it.

         9. The assistant to the controller calculates weekly the interest accrued & to be posted for each debt security. His /her calculations are used to send weekly updates to clients on their interest earned.

Answer 1

What errors or abuses may occur in each of the following scenarios and what control is needed on each case:

Answers

The most important control which is required in each of the transactions below is Segregation of duties. This means, no person should be responsible to carry out one full transactions from start to end. This ensure reduction in the chances of Fraud or errors.

1. Clara has responsibility for collecting cash & for recording the cash receipts in the accounting records.

As Clara is responsible for collecting cash and recording receipts in accounting records she has full control over the transaction and she can embezzle the cash receipts and use for her own personal usage. As there is no one involved in checking her duties the embezzlement is not likely to be known easily.

The responsibility of collections of cash should be designated with another person, whereas after collection of cash its final usage should be documented (Like who will deposit in bank account, keeping cash with cashier). The accountant who records the cash transactions should be different and he/she should not be responsible for handling cash.

2. John prepares & signs all checks and then records them in the accounting records. When the monthly bank statement comes, he does the bank reconciliation.

Check preparer and signitory should be different person.Accountant should be responsible for accounting only and he should not be authorised signitory. this should ensure proper control.

3. The XYZ company receives a monthly bank statement with canceled checks. It does not bother to reconcile the bank statement with its books.

Bank statement should always be reconciled with books. Bank reconciliation statement ensures all the transactions recorded in bank statement are accounted in our books. It also ensures any wrong debits or credits in out account by bank which should be resolved immidiately otherwise this can be loss to XYZ company.

Reconcilation also is important document for auditors auditing company.

4. Each day the XZY company makes 70 journal entries. It does not take a total of all debit & credit entries.

The most important thing XYZ Company should do is give unique number for each and every journal entry including debit and credit entries. This will ensure that if any entry is deleted or added after the day ended the same can be immidiately known and it can provide as audit documents. This unique numbering ensurs detection of fraud for auditors and company.

5. The XYZ company has an account with CITI limousine service to provide transportation for its employees in the daily conduct of their work. Each employee has a voucher book which he/she can use to provide the transportation needed.

Employees should also be given employee card and information of the employees should be provided with the CITI Limousine company so that only authorised employees travel and if any unauthorised persons are discouraged from travelling. Company should also keep the track of number of vouchers provided and payments made to the CITI Limousine for transportation.

6. XYZ company keeps a petty cash fund with $300 to meet everyday business needs. The fund is kept in the supply cabinet & may be accessed by anyone who needs cash for firm expenses.

XYZ company should have a disignated petty cashier who is responsible for all the payments from this fund. No other person should be directly allowed to use this without petty cashier's authorisation. The Usage of the fund and limit allowed to petty cashier should also be documented. any amount having more that given limit petty casher need to take the permission from higher authority. This will ensure proper utilisation of funds.

7. XYZ company requires any individual who needs a check to be disbursed, to fill out & sign a check request form. When this is done the cash disbursement department cuts a check to the payee listed.

Cash disburesement and check disbursement department should be different. The payments for each day should be authorised by the proper authorised person. Only form fill and signed does not ensure proper control. The authorisation of payments also should be given to various persons depending on the designation.

8. The XYZ company holds bearer securities that are waiting instructions from its owners as to final location. The company keeps these securities in a file cabinet that has a $ 9.99 combination lock on it.

The bearer securities are high risk as they can be cashed by anyone and they should be kept with utmost care.

The combination lock may not be suffient for keeping this securities. This securities should be kept with authorised person and Two keys lock which are kept with different authorised person, The double Keys lock ensurs proper security.

9. The assistant to the controller calculates weekly the interest accrued & to be posted for each debt security. His /her calculations are used to send weekly updates to clients on their interest earned.

The calculation by the assistant should be again checked by another disignated person. It should be accountant and not by the assistant itself. The updates to the clients should be sent by another responsible person and clients ledgers should be taken periodically to match with our accounts.