Question

Sam Smith works in the accounts payable department of Miller Consulting. Sam is responsible for preparing checks, recording cash disbursements and preparing the bank reconciliations for the company. While reconciling the November bank statement, Sam noticed that several checks totaling $1,465 had been outstanding for more than one year. Sam figured that these checks would never be presented for payment, so he decided to write a check for $1,465, payable to himself, forged the treasurer's signature, and cashed the check. Sam made no entry in the accounts for this disbursement and attempted to conceal the theft by destroying the forged check and omitting the long-outstanding checks from the subsequent bank reconciliations.

a. Identify the weaknesses in Miller Consulting's internal control.

b. Explain at least two audit procedures that might disclose the fraudulent disbursement

Answer 1

Answer (a) There are following weakness in Miller Consulting’s internal control-

•             There is lack of periodic reconciliation (monthly or quarterly basis) of outstanding checks, which are not present for payment in bank.

•             There is no internal audit and internal checks system in Miller Consulting’s to detract fraud and errors before finalization of accounts, these are also part of internal control.

•             There are no cross verification of works done by Sam Smith in work procedure and flow of organization, however these are important aspect of internal control.

Answer (b) We can use following audit procedure to disclose/caught fraudulent disbursement from organization by employee.

•             First we should design internal control system in such manner that all works of each employee automatically cross verify by other employee during his works. We should establish a strong internal control system in organization. There should be monthly or quarterly basis reconciliation to be conduct for bank balance of books of accounts with passbook balance.

•             There should conduct internal checks and internal audit by accounts and audit experts, to detract fraud and error before finalization of accounts.