An employee of JHT Holdings, Inc., a trucking company, was responsible for resolving roadway accident claims under $25,000. The employee created fake accident claims and wrote settlement checks of between $5,000 and $25,000 to friends or acquaintances acting as phony “victims.” One friend recruited subordinates at his place of work to cash some of the checks. Beyond this, the JHT employee also recruited lawyers, who he paid to represent both the trucking company and the fake victims in the bogus accident settlements. When the lawyers cashed the checks, they allegedly split the money with the corrupt JHT employee. This fraud went undetected for two years.
Why would it take so long to discover such a fraud?
Answer:
This is an example of a fraud with significant collusion. Frauds that are perpetrated with multiple parties in different positions of control make detecting fraud more
difficult. In this case, the fraud began with an employee responsible for authorizing claim payments. This is a sensitive position because his decisions would initiate payments. However, claims would need to be authorized and verified before payment would be made. Knowing this, the employee made sure each claim had a phony “victim.” Thus, there was a verifiable story behind each claim. Only by tracking physical evidence of the accident could it be discovered that the claim was fictitious. However, the very nature of the process was to resolve small claims quickly without excessive control. Lastly, corrupt lawyers were brought into the fraud to act as attorneys for the claimants. This gave the claims even more credibility. In actuality, the lawyers had done legitimate business with the trucking company, so all appeared normal. This fraud was discovered when the fraudulent employee’s bank noticed irregularities in his bank account and notified authorities. As the saying goes, “Follow the money!” As a side note, the corrupt claims
administrator fell into this behavior due to gambling problems.
The mailroom employees send all remittances and remittance advices to the cashier. The cashier deposits the cash in the bank and forwards the remittance advices and duplicate deposit slips to the Accounting Department.
a. Indicate the weak link in internal control in the handling of cash receipts.
b. How can the weakness be corrected?
Answer:
a. The remittance advices should not be sent to the cashier.
b. The remittance advices should be sent directly to the Accounting Department by the mailroom.
Tuesday, October 15, 2019
Sergio Flores works at the drive-through window of Big & Bad Burgers. Occasionally, when a drive-through customer orders
Sergio Flores works at the drive-through window of Big & Bad Burgers. Occasionally, when a drive-through customer orders, Sergio fills the order and pockets the customer’s money. He does not ring up the order on the cash register.
Identify the internal control weaknesses that exist at Big & Bad Burgers, and discuss what can be done to prevent this theft.
Answer:
Big & Bad Burgers suffers from a failure to separate responsibilities for related operations.
Big & Bad Burgers could stop this theft by limiting the drive-through clerk to taking customer orders, entering them on the cash register, accepting the customers’ payments, returning customers’ change, and handing customers their orders that another employee has assembled. By making another employee responsible for assembling orders, the drive-through clerk must enter the orders on the cash register. This will produce a printed receipt or an entry on a computer screen at the food bin area, specifying the items that must be assembled to fill each order. Once the drive-through clerk has entered the sale on the cash register, the clerk cannot steal the customer’s payment because the clerk’s cash drawer will not balance at the end of the shift. This change also makes the drive-through more efficient and could reduce the time it takes to service a drive-through customer.
If another employee cannot be added, the weakness in internal control could be improved with more thorough supervision. The restaurant manager should be directed to keep a watchful eye on the drive-through area in order to detect when a clerk takes an order without ringing up the sale.
Another option is for Big & Bad Burgers to implement a policy that any customer who does not receive a receipt is entitled to a free burger, and advertise this policy at the cash register and drive-in window. This approach uses the customer as an internal control.
Identify the internal control weaknesses that exist at Big & Bad Burgers, and discuss what can be done to prevent this theft.
Answer:
Big & Bad Burgers suffers from a failure to separate responsibilities for related operations.
Big & Bad Burgers could stop this theft by limiting the drive-through clerk to taking customer orders, entering them on the cash register, accepting the customers’ payments, returning customers’ change, and handing customers their orders that another employee has assembled. By making another employee responsible for assembling orders, the drive-through clerk must enter the orders on the cash register. This will produce a printed receipt or an entry on a computer screen at the food bin area, specifying the items that must be assembled to fill each order. Once the drive-through clerk has entered the sale on the cash register, the clerk cannot steal the customer’s payment because the clerk’s cash drawer will not balance at the end of the shift. This change also makes the drive-through more efficient and could reduce the time it takes to service a drive-through customer.
If another employee cannot be added, the weakness in internal control could be improved with more thorough supervision. The restaurant manager should be directed to keep a watchful eye on the drive-through area in order to detect when a clerk takes an order without ringing up the sale.
Another option is for Big & Bad Burgers to implement a policy that any customer who does not receive a receipt is entitled to a free burger, and advertise this policy at the cash register and drive-in window. This approach uses the customer as an internal control.
The actual cash received from cash sales was $114,850, and the amount indicated by the cash register total
The actual cash received from cash sales was $114,850, and the amount indicated by the cash register total was $114,975. Journalize the entry to record the cash receipts and cash sales.
Answer:
Cash 114,850
Cash Short or Over 125
Sales 114,975
The actual cash received from cash sales was $32,730, and the amount indicated by the cash register total was $32,690. Journalize the entry to record the cash receipts and cash sales.
Answer:
Cash 32,730
Sales 32,690
Cash Short or Over 40
Answer:
Cash 114,850
Cash Short or Over 125
Sales 114,975
The actual cash received from cash sales was $32,730, and the amount indicated by the cash register total was $32,690. Journalize the entry to record the cash receipts and cash sales.
Answer:
Cash 32,730
Sales 32,690
Cash Short or Over 40
Abbe Co. is a small merchandising company with a manual accounting system. An investigation revealed that
Abbe Co. is a small merchandising company with a manual accounting system. An investigation revealed that in spite of a sufficient bank balance, a significant amount of available cash discounts had been lost because of failure to make timely payments. In addition, it was discovered that the invoices for several purchases had been paid twice.
Outline procedures for the payment of vendors’ invoices, so that the possibilities of losing available cash discounts and of paying an invoice a second time will be minimized.
Answer:
The use of the voucher system is appropriate, the essentials of which are outlined below. (Although invoices could be used instead of vouchers, the latter more satisfactorily provide for account distribution, signatures, and other significant data.)
1. Each voucher should be approved for payment by a designated official only after completion of the following verifications: (a) that prices, quantities, terms, etc., on the invoice are in accordance with the provisions of the purchase order, (b) that all quantities billed have been received in good condition, as indicated on a receiving report, and (c) that all arithmetic details are correct.
2. The file for unpaid vouchers should be composed of 31 compartments, one for each day of the month. Each voucher should be filed in the compartment representing the last day of the discount period or the due date if the invoice is not subject to a cash discount.
3. Each day, the vouchers should be removed from the appropriate section of the file and checks issued by the disbursing official. If the bank balance is insufficient to pay all of the vouchers, those that remain unpaid should be refiled according to the date when payment should next be considered.
4. At the time of payment, all vouchers and supporting documents should be stamped or perforated “Paid” to prevent their resubmission for payment. They should then be filed in numerical sequence for future reference. The implementation and use of a computerized system would also reduce the chance that any available cash discounts are missed. For example, when invoices are received and approved for payment, they would automatically be scheduled for payment within the discount period. However, even in a computerized system, the use of an approval process that requires supporting documents and indicating “paid” on these supporting documents is an important control for avoiding duplicate payments.
Outline procedures for the payment of vendors’ invoices, so that the possibilities of losing available cash discounts and of paying an invoice a second time will be minimized.
Answer:
The use of the voucher system is appropriate, the essentials of which are outlined below. (Although invoices could be used instead of vouchers, the latter more satisfactorily provide for account distribution, signatures, and other significant data.)
1. Each voucher should be approved for payment by a designated official only after completion of the following verifications: (a) that prices, quantities, terms, etc., on the invoice are in accordance with the provisions of the purchase order, (b) that all quantities billed have been received in good condition, as indicated on a receiving report, and (c) that all arithmetic details are correct.
2. The file for unpaid vouchers should be composed of 31 compartments, one for each day of the month. Each voucher should be filed in the compartment representing the last day of the discount period or the due date if the invoice is not subject to a cash discount.
3. Each day, the vouchers should be removed from the appropriate section of the file and checks issued by the disbursing official. If the bank balance is insufficient to pay all of the vouchers, those that remain unpaid should be refiled according to the date when payment should next be considered.
4. At the time of payment, all vouchers and supporting documents should be stamped or perforated “Paid” to prevent their resubmission for payment. They should then be filed in numerical sequence for future reference. The implementation and use of a computerized system would also reduce the chance that any available cash discounts are missed. For example, when invoices are received and approved for payment, they would automatically be scheduled for payment within the discount period. However, even in a computerized system, the use of an approval process that requires supporting documents and indicating “paid” on these supporting documents is an important control for avoiding duplicate payments.
Identify each of the following reconciling items as: Bank service charges, $30
Identify each of the following reconciling items as: (a) an addition to the cash balance according to the bank statement, (b) a deduction from the cash balance according to the bank statement, (c) an addition to the cash balance according to the company’s records, or (d) a deduction from the cash balance according to the company’s records. (None of the transactions reported by bank debit and credit memos have been recorded by the company.)
1. Bank service charges, $30.
2. Check of a customer returned by bank to company because of insufficient funds, $1,750.
3. Check for $390 incorrectly recorded by the company as $930.
4. Check for $50 incorrectly charged by bank as $500.
5. Deposit in transit, $9,700.
6. Outstanding checks, $33,110.
7. Note collected by bank, $24,600.
Answer:
a. Addition to the balance per bank: (4), (5)
b. Deduction from the balance per bank: (6)
c. Addition to the balance per company’s records: (3), (7)
d. Deduction from the balance per company’s records: (1), (2)
Which of the reconciling items listed in Exercise 8-16 require an entry in the company’s accounts?
Answer:
(1), (2), (3), (7)
The preceding additions and deductions to the cash balance according to the company’s records require journal entries in the company’s records. Additions and deductions to the cash balance according to the bank’s records do not require the company to record journal entries.
1. Bank service charges, $30.
2. Check of a customer returned by bank to company because of insufficient funds, $1,750.
3. Check for $390 incorrectly recorded by the company as $930.
4. Check for $50 incorrectly charged by bank as $500.
5. Deposit in transit, $9,700.
6. Outstanding checks, $33,110.
7. Note collected by bank, $24,600.
Answer:
a. Addition to the balance per bank: (4), (5)
b. Deduction from the balance per bank: (6)
c. Addition to the balance per company’s records: (3), (7)
d. Deduction from the balance per company’s records: (1), (2)
Which of the reconciling items listed in Exercise 8-16 require an entry in the company’s accounts?
Answer:
(1), (2), (3), (7)
The preceding additions and deductions to the cash balance according to the company’s records require journal entries in the company’s records. Additions and deductions to the cash balance according to the bank’s records do not require the company to record journal entries.
Paragon Tech Company, a communications equipment manufacturer, recently fell victim to a fraud scheme
Paragon Tech Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Paragon Tech’s procedures for the purchase of services.
The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Paragon Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.
The fraud scheme involves Mae Jansma, the manager of plant and facilities. Mae arranged for her uncle’s company, Radiate Systems, to be placed on Paragon Tech’s approved vendor list. Mae did not disclose the family relationship.
On several occasions, Mae would submit a requisition for services to be provided by Radiate Systems. However, the service requested was really not needed, and it was never performed. Radiate Systems would bill Paragon Tech for the service and then split the cash payment with Mae.
Explain what changes should be made to Paragon Tech’s procedures for ordering and paying for services in order to prevent such occurrences in the future.
Answer:
To prevent the fraud scheme described, Paragon Tech must separate responsibilities for related operations. As in the past, all service requisitions should be submitted to the Purchasing Department. After receiving the service request, Purchasing should complete a Service Verification form, stating what service has been ordered and the name of the company that will provide the service. This form should be delivered via intercompany mail to the person responsible for verifying that the service was performed. This person should be someone who has firsthand knowledge of whether the service has been performed. This person, who must be someone other than the manager requesting the service, should fill in the date and time the service was received and sign the form. In addition, the vendor providing the service should sign the form before leaving the premises. When completed, the Service Verification form should be forwarded to the Accounting Department. Accounting will authorize payment of the vendor’s invoice after the Service Verification form has been compared with the invoice.
Using the data presented in Exercise 8-18, journalize the entry or entries that should be made by the company.
Answer:
Cash 630
Accounts Payable 630
Miscellaneous Expense 40
Cash 40
The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Paragon Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.
The fraud scheme involves Mae Jansma, the manager of plant and facilities. Mae arranged for her uncle’s company, Radiate Systems, to be placed on Paragon Tech’s approved vendor list. Mae did not disclose the family relationship.
On several occasions, Mae would submit a requisition for services to be provided by Radiate Systems. However, the service requested was really not needed, and it was never performed. Radiate Systems would bill Paragon Tech for the service and then split the cash payment with Mae.
Explain what changes should be made to Paragon Tech’s procedures for ordering and paying for services in order to prevent such occurrences in the future.
Answer:
To prevent the fraud scheme described, Paragon Tech must separate responsibilities for related operations. As in the past, all service requisitions should be submitted to the Purchasing Department. After receiving the service request, Purchasing should complete a Service Verification form, stating what service has been ordered and the name of the company that will provide the service. This form should be delivered via intercompany mail to the person responsible for verifying that the service was performed. This person should be someone who has firsthand knowledge of whether the service has been performed. This person, who must be someone other than the manager requesting the service, should fill in the date and time the service was received and sign the form. In addition, the vendor providing the service should sign the form before leaving the premises. When completed, the Service Verification form should be forwarded to the Accounting Department. Accounting will authorize payment of the vendor’s invoice after the Service Verification form has been compared with the invoice.
Using the data presented in Exercise 8-18, journalize the entry or entries that should be made by the company.
Answer:
Cash 630
Accounts Payable 630
Miscellaneous Expense 40
Cash 40
The following data were accumulated for use in reconciling the bank account of Allenby Co. for August
The following data were accumulated for use in reconciling the bank account of Allenby
Co. for August:
1. Cash balance according to the company’s records at August 31, $31,080.
2. Cash balance according to the bank statement at August 31, $38,280.
3. Checks outstanding, $12,460.
4. Deposit in transit, not recorded by bank, $5,850.
5. A check for $180 in payment of an account was erroneously recorded in the check register as $810.
6. Bank debit memo for service charges, $40.
a. Prepare a bank reconciliation, using the format shown in Exhibit 7.
b. If the balance sheet were prepared for Allenby Co. on August 31, what amount should be reported for cash?
c. Must a bank reconciliation always balance (reconcile)?
Answer:
a.
ALLENBY CO.
Bank Reconciliation
August 31, 20—
Cash balance according to bank statement $38,280
Add deposit in transit, not recorded by bank 5,850
$44,130
Deduct outstanding checks 12,460
Adjusted balance $31,670
Cash balance according to company’s records $31,080
Add error in recording check as $810 instead of $180 630
$31,710
Deduct bank service charge 40
Adjusted balance $31,670
b. $31,670; the adjusted balance from the bank reconciliation should be reported on the August 31 balance sheet for Allenby Co.
c. Yes, the bank reconciliation must always balance (reconcile) to an adjusted balance.
Accompanying a bank statement for Borsa Company is a credit memo for $18,200, representing the principal ($17,500) and interest ($700) on a note that had been collected by the bank. The company had been notified by the bank at the time of the collection, but had made no entries. Journalize the entry that should be made by the company to bring the accounting records up to date.
Answer:
Cash 18,200
Notes Receivable 17,500
Interest Revenue 700
Co. for August:
1. Cash balance according to the company’s records at August 31, $31,080.
2. Cash balance according to the bank statement at August 31, $38,280.
3. Checks outstanding, $12,460.
4. Deposit in transit, not recorded by bank, $5,850.
5. A check for $180 in payment of an account was erroneously recorded in the check register as $810.
6. Bank debit memo for service charges, $40.
a. Prepare a bank reconciliation, using the format shown in Exhibit 7.
b. If the balance sheet were prepared for Allenby Co. on August 31, what amount should be reported for cash?
c. Must a bank reconciliation always balance (reconcile)?
Answer:
a.
ALLENBY CO.
Bank Reconciliation
August 31, 20—
Cash balance according to bank statement $38,280
Add deposit in transit, not recorded by bank 5,850
$44,130
Deduct outstanding checks 12,460
Adjusted balance $31,670
Cash balance according to company’s records $31,080
Add error in recording check as $810 instead of $180 630
$31,710
Deduct bank service charge 40
Adjusted balance $31,670
b. $31,670; the adjusted balance from the bank reconciliation should be reported on the August 31 balance sheet for Allenby Co.
c. Yes, the bank reconciliation must always balance (reconcile) to an adjusted balance.
Accompanying a bank statement for Borsa Company is a credit memo for $18,200, representing the principal ($17,500) and interest ($700) on a note that had been collected by the bank. The company had been notified by the bank at the time of the collection, but had made no entries. Journalize the entry that should be made by the company to bring the accounting records up to date.
Answer:
Cash 18,200
Notes Receivable 17,500
Interest Revenue 700
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