Question

You are the senior accounting manager of the Causeway Bay branch of Rita Leung Wholesalers Limited. It is a reputable toys wholesaler. The branch is the largest single outlet of the company and has substantial annual sales turnover that are invoiced by the branch. Cash is collected at the branch by one of three methods: (1) sales direct to customers who collect the goods from the branch and pay cash for the goods immediately, (2) cash collected on delivery of goods to customers, (3) cash received through the post from credit customers.

1. There are two sets of invoice at the branch which are used for cash sales, and credit sales respectively. When the cashier receives the payment for cash sales, a copy of the invoice is stamped as paid and will be filed in alphabetical order by him whilst the other copy of the invoice is given to the customer. Reimbursement of petty cash is made on a weekly basis out of cash sales.

2. Regarding credit sales, customer will receive the invoice when payment is received. The copy invoice is stamped as paid and filed alphabetically with the cash sale invoices. Mail is opened by the secretary to the credit controller and she passes any cash remittances to the credit controller for his detail review, without recording the amounts received. The credit controller passes the cash remittances to the cashier by depositing them in a tray only in the cashier’s desk. The cashier will then prepare a list of the cash remittances that is used by the credit controller for the purpose of posting to the sales ledger.
3. Both the cheques from credit customers and cash sales receipts will be banked by the cashier on a daily basis. Posting of the cash remittances to the sales ledger will be done by the credit controller with the aid of a microcomputer accounting system, and then verifies the cash discount allowable.
4. Approval should be obtained by the credit controller from the head office of Rita Leung Wholesalers Limited to write off bad debts and any cash remittances received regarding these amounts are credited to ‘miscellaneous income’ if they are received after the bad debts have been written off.

As a senior accounting manager, the head office has requested you to review the system of control over cash collection and remittances as it suspects that fraud and irregularities are taking place.

Required:

1. Describe the potential fraud and irregularities which could occur under the existing accounting system for cash collection and remittances through the post.

2. Give suggestions to improve the system of internal control which could prevent any potential fraud and irregularities in the collection of cash and remittances.

Answer 1

Ans a.

There are some loopholes in the cash collection and remittance management system of the Causeway Bay branch of Rita Leung Wholesalers Limited.

Giving below the points;

1. While receiving cash sales payment , the cashier puts receipt stamp on one invoice copy, gives back one un stamped copy to the customer and keeps the stamped copy in file alphabetically. There is no system of reconciling made regarding the amount of cash sales happening in a day. This is a risk as the exact collection amount tracing is difficult and may lead to fraud.

2. The imprest cash is paid directly from sales collection. This is not correct as the whole transaction is internal without any banking records. There is chance of irregularity here.

3. The remittance mail is opened by the assistant to Credit Controller ,but the details of the customer wise collections are not entered by the assistant. The collections passes through credit controller and cashier before getting entered into accounting system,. This is a weak process and may lead to manipulation of amounts accounted.

4. The cashier deposits the cash and credit collections to bank. This is a conflict of interest. There is chance of fraus when collection of money and depoit of mney to bank are done by same person.

5. The reversal of bad debts when written off bad debts are collected are posted as Misc Income. This is a potential area for fraud, theproper accounting system is not followed in this aspect.

Ans b.

Given below are some suggestions to improve the internal control system which can prevent potential fraud and irregularities;

1. While receiving cash sales payment , the cashier should put receipt stamp on both invoice copies, give back one tamped copy to the customer and keep the stamped copy in file chronologically.At any point of time the details of cash payments should be available from the chronological invoice file. At the day end the cashier need to make a statement of cash receipts reconciled with the stamped Invoices to show the invoice details and cash collected and get it validated by the approver as per approval matrix of the company.

2. The imprest cash must not be drawn from cash collected. The imprest amount should be drawn from the checking bank account only. This leaves a clear train of transactions and no chance of internal fraud is there. The cash withdrawal needs to be done by an independent person.

3. There must be record of incoming remittances by mail as soon as the envelope is opened with the customer details and check amount etc.This is vital for any reconciliation. The credit sale remittance list prepared by cashier needs to be reconciled with the mail details to ensure that there is no gap and all incoming checks are getting considered. The reconciliation need to be validated by the designated authority.

4. The cash and check collected on any day should be deposited to bank by an independent person not involved in collection process. The details of cash/check to be deposited is to be prepared by cashier, validated by an authority and handed over to the person depositing to the bank. The stamped bank receipt along with the list of deposits need to be filed for accounting entry by another independent person other the the cashier or controller.

5. The bad debts written off may be collected later, in such case the bad debt should be credited and Accounts Receivable with customer subledger debited to show the recovery at customer level. Then it should be Cash debit and AR credit to reflect the payment.

This process ensures correct amount is reflected with credit effect to the specific customer instead of showing a Misc Income and not correctly reflecting the recovery.