Question

CH8 HW2

Case Study:

Management discovers that a supervisor at one of their restaurant locations removes excess cash and resets sales totals throughout the day on the point of sale (POS) system. At closing the supervisor deposits cash equal to the recorded sales on the POS system and keeps the rest.

The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank deposit slip to the company’s revenue accounting department. The revenue accounting department records the sales and the cash for the location in the general ledger and verifies the deposit slip to the bank statement. Any differences between sales and deposits are recorded in an over/short account and, if necessary, followed up with the location supervisor. The customer food order checks are serially numbered, and it is the supervisor’s responsibility to see that they are accounted for at the end of each day. Customer checks and the transaction journal tapes from the POS system are kept by the supervisor for one week at the location and then destroyed.

Questions:

1. What control procedures in the above case allowed the fraud to occur?
2. What audit procedures would have detected the fraud?

Answer 1

1. This situation tells that the supervisor remove the excess cash and reset sales total through out the day on point of sale system. And make all the necessary arrangements.this is a fraudulent Activity conducted by the supervisor and he bring changes in the financial statements also .

Cash and Internal Control

Since cash is the most liquid of all assets, a business cannot survive and prosper if it does not have adequate control over its cash. Cash is the asset that has the greatest chance of “going missing” and this is why we must ensure that we have strong internal controls build around the cash process. Since many business transactions involve cash, it is a vital factor in the operation of a business. Of all the company’s assets, cash is the most easily mishandled either through theft or carelessness. To control and manage its cash, a company should:

• Account for all cash transactions accurately so that correct information is available regarding cash flows and balances.
• Make certain that enough cash is available to pay bills as they come due.
• Avoid holding too much idle cash because excess cash could be invested to generate income, such as interest.
• Prevent loss of cash due to theft or fraud.

The need to control cash is clearly evident and has many aspects. Without the proper timing of cash flows and the protection of idle cash, a business cannot survive.

Companies protect their assets by (1) segregating employee duties, (2) assigning specific duties to each employee, (3) rotating employee job assignments, and (4) using mechanical devices. This video highlights the problems and controls needed when dealing with cash

Although businesses vary their specific procedures for controlling cash receipts, they usually observe the following principles:

• Prepare a record of all cash receipts as soon as cash is received. Most thefts of cash occur before a record is made of the receipt. Once a record is made, it is easier to trace a theft.
• Deposit all cash receipts intact as soon as feasible, preferably on the day they are received or on the next business day. Undeposited cash is more susceptible to misappropriation.
• Arrange duties so that the employee who handles cash receipts does not record the receipts in the accounting records. This control feature follows the general principle of segregation of duties given earlier in the chapter, as does the next principle.
• Arrange duties so that the employee who receives the cash does not disburse the cash. This control measure is possible in all but the smallest companies.

Companies also need controls over cash disbursements. Since a company spends most of its cash by check, many of the internal controls for cash disbursements deal with checks and authorizations for cash payments. The basic principle of segregation of duties also applies in controlling cash disbursements. Following are some basic control procedures for cash disbursements:

• Make all disbursements by check or from petty cash. Obtain proper approval for all disbursements and create a permanent record of each disbursement. Many retail stores make refunds for returned merchandise from the cash register. When this practice is followed, clerks should have refund tickets approved by a supervisor before refunding cash.
• Require all checks to be serially numbered and limit access to checks to employees authorized to write checks.
• Require two signatures on each check over a material amount so that one person cannot withdraw funds from the bank account.
• Arrange duties so that the employee who authorizes payment of a bill does not sign checks. Otherwise, the checks could be written to friends in payment of fictitious invoices.
• •equire approved documents to support all checks issued.

2.Having audits does not mean that the company can find out every fraud that occurs in its financial statements. However, auditors from audit firms Johor Bahru are responsible for detecting material misstatements which happen due to error or fraud in those statements. Accordingly, the Malaysian Approved Standards on Auditing (MASA) states that the auditors should prescribe certain audit procedures for the detection of fraud. If you know some of those procedures, you will be able to align the resources for the audits of your company better.

Having Fraud Brainstorming Session

According to the MASA, the audit engagement team must have a fraud brainstorming session before they start performing the audit. The audit partner will lead this session, and this process enables them to think about possible ways for the company to commit fraud. Besides, this brainstorming session helps the auditors in setting a tone of professional scepticism for that audit. Usually, the auditors will need a fraud specialist to join this session to obtain some insights about the frauds that similar industries or companies have committed. Doing so helps them to determine the risk factors of their client, sometimes by doing audit sampling.

Performing Journal Entry Testing

If the company intends to commit material financial statement frauds, it will have to adjust its financial records. For this reason, the auditors will test the journal entries of the company and see if any signs of manipulation exist. Before performing the journal entry testing, the auditors need to understand the procedures and controls of the company (Also see What is a Test of Control?) and select some samples from its journal entries. Usually, they will select entries that the upper management has made, or those that the staff has posted late in that particular accounting period, or those that carry large values. As soon as the auditors have selected the samples, they will request for supporting documents which validate the double entries posting.

Inspecting Accounting Estimates

There is a higher probability for frauds to happen in accounting estimates. As the estimates are subjective, it is easier for the management to influence them to manipulate the company’s financial statements. The auditors may use two methods to determine whether any fraud has occurred in the accounting estimates. Firstly, they can perform a pattern analysis procedure and identify whether the company has implemented a different method to complete the accounting estimates. This is because the alterations in the methods used may indicate that there is manipulation. Secondly, the auditors may assess the fluctuation of the accounting estimates. As an instance, if almost all the estimates in the previous year show a decrease in the company’s revenue, while most of the estimates of the current year show the opposite, the auditors may consider the possibility where the company has transferred its revenue from a period to another.

Checking for Significant Unusual Transaction

According to recent revisions in the MASA principles, the auditors need to complete certain audit procedures to assess significant unusual transactions which are irrelevant to the normal operation of the business. In this process, the company needs to explain to the auditors about the business rationales and the purposes of the transaction. As soon as the auditors get the explanation from the management of the company, they need to corroborate the response of the management with the information they have received when they perform the audit.

So we must cross check the each and every unusual transaction conducted by the the person in the organisation.

thank you. I hope this answer is correct if you have any doubts please ask. Sorry for any mistakes.