Question

ACC 430

Case 2

• Muhanad is a new hire in the accounting department of Jawwal. One of your responsibilities is the reconciliation of the operating account. After the end of the month he is given a copy of the bank statement and listing of checks paid during the month, and is instructed to perform bank reconciliation. He notices that there are some faint markings on a portion of the bank statement that could be alterations.

What steps would you advise him to take in performing the reconciliation?

• Hassan Ali works for Paltel Group as the customer service supervisor. When Nadia was hired into is department, he listed her start date as one month before she actually began work. Accordingly, the payroll department generated an extra paycheck for Nadia, which Hassan intercepted and cashed.

What type of fraud is this? What steps should Paltel take to prevent or detect such cases

Answer 1

1.

To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business.

Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank.

Similarly, the bank too keeps an account for every customer. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals.

Sometimes these balances do not match. The business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match.

To do this, a reconciliation statement known as the bank reconciliation statement is prepared.

Bank Reconciliation: A Step-by-Step Guide

You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as for account servicing fees.

Once you’ve received it, follow these steps to reconcile a bank statement:

1. COMPARE THE DEPOSITS

Match the deposits in the business records with those in the bank statement. Compare the amount of each deposit recorded in the debit side of the bank column of the cashbook with credit side of the bank statement and credit side of the bank column with the debit side of the bank statement. Mark the items appearing in both the records.

2. ADJUST THE BANK STATEMENTS

Adjust the balance on the bank statements to the corrected balance. For doing this, you must add deposits in transit, deduct outstanding checks and add/deduct bank errors.

Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. They must be added to the bank statement.

Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account. They need to be deducted from the bank balance. This often happens when the checks are written in the last few days of the month.

Bank errors are mistakes made by the bank while creating the bank statement. Common errors include entering an incorrect amount or omitting an amount from the bank statement. Compare the cash account’s general ledger to the bank statement to spot the errors.

3. ADJUST THE CASH ACCOUNT

The next step is to adjust the cash balance in the business account.

Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees.

To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting.

• Bank charges are service charges and fees deducted for the bank’s processing of the business’ checking account activity. This can include monthly charges or charges from overdrawing your account. They must be deducted from your cash account. If you’ve earned any interest on your bank account balance, they must be added to the cash account.
• An NSF (not sufficient funds) check is a check that has not been honored by the bank due to insufficient funds in the entity’s bank accounts. This means that the check amount has not been deposited in your bank account and hence needs to be deducted from your cash account records.
• Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the records. The correction of the error will increase or decrease the cash account in the books.

4. COMPARE THE BALANCES

After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation again.

Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per books.

2).

PAYROLL FRAUD

Payroll fraud can manifest in a variety of ways. An employee could lie about their productivity, sales or hours worked to get a higher pay. Some may request for a pay advance without any intention of paying it back. Others may even take it a step further by enlisting a co-worker to manipulate their attendance records by clocking in and out for them.

According to most studies, payroll fraud disproportionately affects small businesses because they are less likely to have anti-fraud measures and systems.

How to avoid it:

Do background checks on every potential employee. Have managers closely monitor time sheets and use secure automated payroll services.

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