Question

Identify which control activity is violated in each of the following situations and explain how the situation creates an opportunity for a fraud.

1. The person with primary responsibility for reconciling the bank account is also the company’s accountant and makes all bank deposits.

2. Ironwill Company’s treasurer received an award for distinguished service because he had not taken a vacation in 30 years.

3. In order to save money on order slips, and to reduce time spent keeping track of order slips, a local bar/restaurant does not buy pre-numbered order slips.

Answer 1

1. Segregation of duties control activity is violated in this situation. In an accounting department, the segregation of duties in serves as the main defence against internal fraud. More than one person is required to monitor the record keeping and physical custody. As a consequence, the person can embezzle cash and make journal entries in the books of account to hide the fraud.

2. Human resources control activity is violated in this situation. The Human resource policies are the formal guidelines and rules that businesses must comply with. It is vital that the key employees take vacations. In the absence of it, the treasurer who manages cash, might embezzle cash and may use his position to remove evidence before anyone else sees it.

3. The documentation procedures control activity is violated in this situation. When pre-numbered documents are not used it is extremely difficult to account for the documents. As a consequence a person could write up a lunch sale, take cash from customer, and then throw away the slip of order and keep the cash.