Revenue Cycle - Canny Cashier.doc

Revenue Cycle - Canny Cashier.doc - The Canny Cashier...

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Unformatted text preview: The Canny Cashier Problem D. Bakel was the assistant controller of Sports Equipment, Inc an equipment retailer. SEI maintained accounts receivable for school districts in the region; otherwise, customers received credit by using their own credit cards. As company cashier, Bakel received all incoming mail payments on school accounts, credit card accounts, and cash and checks taken over the counter. He prepared the bank deposit, listing all the checks and currency, and also prepared a remittance worksheet(daily cash report) that showed amounts received, discounts allowed on school accounts, and amounts to credit to the accounts receivable. The remittance worksheet was used by another accountant to post credits to the accounts receivable. Bakel delivered the deposit to the bank and reconciled the bank statement. No one else reviewed the deposits or the bank statements except the independent auditors. Bakel opened a bank account in the name of Sport Equipment Company (SEC), after properly incorporating the company in the secretary of state's office. Over the counter cash, checks, and school district payments were taken from the SEI receipts and deposited in the SEC account. (None of the customers noticed the difference between the rubber stamp endorsements for the two similarly named corporations, and neither did the bank.) SEC kept the money awhile, earning interest, and then Bakel wrote SEC checks to SEI to replace the "borrowed" funds in the meantime taking new SEI receipts for deposit to SEC. Bakel also stole payments made by the school districts, depositing them to SEC. Later Bakel deposited SEC checks in SEI, giving the schools credit, but approved an additional 2 percent discount in the process. Thus, the schools received proper credit later and SEC paid less by the amount of the extra discounts. SEI's bank deposits systematically showed small currency deposits. Bakel was nervous about taking too many checks, so cash was preferred. The deposit slips had to include the SEC checks because bank tellers compare the deposit listing to the checks submitted. The remittance worksheet showed different details: Instead of showing SEC checks, it showed receipts from school districts and currency, but not many over the counter checks from customers. The transactions became complicated enough that Bakel had to use the office computer to keep track of the school districts that needed to receive credit. There were no vacations for 1 this hardworking cashier because the discrepancies might be noticed by a substitute and Bakel needed to give the districts credit later. Over a six year period, Bakel built up a $150,000 average balance in the Sport Equipment Company (SEC) account that earned a total of $67,500 interest that should have been earned by Sports Equipment, Inc. (SEI). By approving the "extra" discounts, Bakel skimmed 2 percent of $1million in annual sales, for a total of $120,000. Since SEI would have had net income before taxes of about $1.6 million over these six years (about 9 percent of sales), Bakel's embezzlement took about 12.5 percent of the income. Audit Approach Authorization related to cash receipts, custody of cash, recording cash transactions, and bank statement reconciliation should be separate duties designed to prevent errors and frauds. Some supervision and detail review of one or more of these duties should be performed as a next level control designed to detect errors and frauds, if they have occurred. For example, someone else should prepare the remittance worksheet, or at least the controller should approve the discounts; someone else should prepare the bank reconciliation. Bakel performed incompatible duties. (While recording was not actually performed, Bakel provided the source document-the remittance worksheet-the other accountant used to make the cash and accounts receivable entries.) According to the company president the "control" was the diligence of "our long time, trusted, hard working assistant controller." Note: A vigilant auditor was "thought like a crook" might have been able to imagine ways Bakel could have committed fraud and thus prevented or detected this cash embezzlement and accounts receivable lapping scheme. Since the "control" purports to be Bakel's honest and diligent performance of the accounting and control activities that might have been performed by two or more people, the test of controls is an audit of cash receipts transactions as they relate to accounts receivable credit. The dual direction samples and procedures are these: Occurrence direction: The auditors selected a sample of customer accounts receivable and vouched payment credits to remittance worksheets and bank deposits, including recalculation of discounts allowed in comparison to sales terms(2 percent), classification (customer name) identification, and correspondence of receipt date to recording date. 2 Completeness direction: The auditors selected a sample of remittance worksheets (or bank deposits) vouched details to bank deposit slips ( trace details to remittance worksheets if the sample is bank deposits), and traced to complete accounting posting in customer accounts receivable. Because there was a control risk of incorrect accounting, accounts receivable were confirmed as of year end using positive confirmations. The sample included all school district accounts. When prompted by notice of an oddity (noted in the discovery summary below), the audit team can use the telephone book, chamber of commerce directory, local crisscross directory, and a visit to the secretary of state's office to determine the location and identity of Sport Equipment Company. Discovery Summary The test of controls samples showed four cases of discrepancy, one of which is shown below. The auditors sent positive confirmations on all 72 school district accounts. Three of the responses stated the districts had paid the balances before the confirmation date. Follow up procedures on their accounts receivable credit in the next period showed they had received credit in remittance reports and the bank deposits had shown no checks from the school districts but had contained a check from Sports Equipment Company. Investigation of SEC revealed the connection of Bakel, who was confronted and then confessed. Bank Deposit Slip Jones 25 Smith 35 Hill District 980 Sport Equipment 1,563 Currency 540 Deposit 3, 143 Cash Remittance Report Name Amount Discount AR Jones 25 0 0 Smith 35 0 0 Hill District 980 20 1,000 Marlin District 480 20 500 Waco District 768 32 800 Currency 855 0 0 Totals 3,143 72 2, 300 Sales 25 35 0 0 0 855 915 3 ...
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  • Spring '14
  • PaulS.Kushel
  • Cheque, Savings account, remittance worksheet, D. Bakel, Bakel

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