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Page 59 BPP practice & revision kit AA problem number 109: Two staffs colluded to divert cash/cheque receipts from the customers to employees’personal accounts by recording cash receipts from different customers to older receivable balances to hide the earlier sum stole. The question ask for the control to reduce risk of fraud occuring and explain. In the answer, there is a control: “The receivable ledger should be reconciled to the receivable control account on at least a monthly basic. The reconciliation should be reviewed by a responsible official and anomalies investigated”. The answer explain:”This will increase the chance of discovering errors in the receivable balances and help to create a strong control environment likely to deter fraud”
I think that by this way it is impossible to detect a fraud as cash/cheque receipts will be recorded against the older receivable balances and by double-entry bookkeeping the receivable control account is always equal to the sum of balances of personal accounts in receivable ledger.Can you explain more about this control measure?
Welcome to my forum! I suggest you forget this explanation because the whole notion of control a/c reconciliations for receivables (and payables) is being phased out of the syllabus (since the underpinning financial accounting exams assume that sales and purchases systems are computerised and integrated in the general ledger).
The fraud is commonly called “teeming and lading” and is usually prevented by segretation of duties –
separating the responsibilities for handling cash and recording receipts. Here the problem is that employees are colluding. A control that might help prevent the fraud is a mandatory vacation policy for all employees – that the irregularity may be discovered if they have to take time off might act as a deterrent.A control that might detect this fraudulent activity (again a deterrent as perpetrators might be prosecuted) is “suprise audit” by internal audit or senior management to check on a day’s receipts and postings.
Also, the credit controller should be trained to recognise the traits of such a fraud – customers are likely to complain if they are being chased for debts that they know they have paid.
And, if it were to be very serious (there have been real-world cases), the financial accountant might see a deterioration in the average collection period.
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