Question

The following is a situation where an error or fraud has occurred. You are to recommend one or more internal controls to prevent or detect error or fraud.

Duncan Fisher, the employee responsible for processing purchases, started a fictitious company and processed a purchase transaction for that company. The cash disbursements processor processed the check to pay the invoice and the controller signed the check and mailed it to fictitious company.

Answer 1

The internal controls towards the prevention of the error or fraud from transactions with a fictitious company are:

a) Introductory information and past history : Before going into any transaction, it would be essential to have information about the owner, its business and past history, which is essential for control/prevention over dealing with any anti-social or fictitious/fraud company.

b) Reference : New dealer or trading company must be picked up with the reference of current dealing company or dealer. This controls the non introduction of the fraudulent activities in business.

c) Tax and trade registration : The control of the fictitious company to enter in the business requires having tax and trade registration of the new incumbent.

d) Payment with crossed instruments: The payment to each vendor should be made through the crossed instruments to keep control over the fictitious dealings.

e) Bargained purchases : All the purchases should be made on the best bargained market price to skip the fraud or fictitious trader because fraud take place to have higher price of the material only.

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