Fraud- Improper segregation of duties in handling cash

Misappropriation of cash is one of the common fraud reported in the corporate world.

In Nov 2010, it is reported that Malaysian unit sufferred a loss of RM 1.5million (approximately S$622k) due to the issuance of unauthorised cheque. It's not clear how this had occurred.

In general, one of the possibilities a cash fraud could occur is when certain individual forge the authorised signatories on the cheque. By forging the authorized signatories, the individual is able to direct the fund to his / her bank accounts. How can the internal controls of the Company helps to minimize the risk of cash fraud then?

Possible solutions are:
- to set dual authorized signatories requirement for the Company's cheque facilities
- existence of proper segregation of duties between cheque book-keeper, preparer of cheque, review of cheque amount, approver of cheque
- cash book review be performed by appropriate senior finance personnel
- review the cash movement by bank account on a monthly basis

The existence of above controls and/or procedures can help to mitigate the risk of cash fraud.

#96- Cash audit- internal controls in cash process- cash payment

In our earlies entries in relation to cash audit, we discussed about the audit procedures of auditing unpresented cheques. We will discuss more extensively for audit procedures in auditing cash and bank balances of our audit clients.

Auditors may consider test the internal controls of the client's cash process. For this entry, we will provide an overview of the possible audit procedures to test the internal controls in cash payment process:

(a) select certain number of random samples, and test that payment voucher are properly prepared and authorised

(b) select certain number of random samples, and test that bank reconciliations are properly prepared and reviewed

(c) select certain number of random samples, and test that journal entries are properly posted into General Ledger

(d) select certain number of random samples, and test that payment voucher details match with the corresponding payment details (e.g suppliers' invoices), etc

#86- Unpresented Cheque- Part II

In our previous post #80 Bank Reconciliation Review- Unpresented Cheque, we posted the following example and question:

Susan is the accountant of Company ABC, who has a December year-end. On 31 December 2008, Susan has approved a few cheques payable to their creditors, amounted to US$200k. Account executive has input the payments into the systems after Susan has approved the cheques. However, the cheques payable to their creditors are not delivered to their creditors until after year-end.

Is there any financial impact to the financial of the Company? Yes or No? If yes, what would be the impact then ?

Answer:

Apparently, cheques are dated before 31 December 2008 while the cheques are only delivered to the supplier after year-end. Susan has posted the following entries and recorded in 2008's book:

Dr. Trade Creditors
Cr. Cash

From accounting point of view, cheque should not be deducted from the above cash account until cheques have been delivered to the supplier. In above example, cash and trade creditors balance have been understated. A re-classification entries should be reversed out.

Auditor's Responsibility

We should inquire our clients that there are no cheques not delivered to supplier as at balance sheet date.

#80 Bank Reconciliation Review- Unpresented Cheque

One of the audit procedure we perform while auditing cash account is review of bank reconciliations for year, especially at month end. Auditor need to excel higher level of cautiouness while reviewing year-end bank reconciliation.

In this thread, we would like to highlight to our readers on the potential distortions ( on cash balance) resulted from unpresented cheque. To illustrate with an example:

Susan is the accountant of Company ABC, who has a December year-end. On 31 December 2008, Susan has approved a few cheques payable to their creditors, amounted to US$200k. Account executive has input the payments into the systems after Susan has approved the cheques. However, the cheques payable to their creditors are not delivered to their creditors until after year-end.

Is there any financial impact to the financial of the Company? Yes or No? If yes, what would be the impact then ?