ASSIGNMENT
The following misstatements are included in the accounting records of the Dillon Manufacturing Company:
1. Cash paid on accounts receivable was stolen by the mail clerk when the mail was opened.
2. A sales invoice was miscalculated by $1,000 as a result of a key-entry mistake.
3. Cash paid on accounts receivable that had been prelisted by a secretary was stolen by the bookkeeper, who records cash receipts and accounts receivable. He failed to record the transactions.
4. A material sale was recorded on the last day of the year even though the goods were not shipped until three days later.
5. Merchandise was shipped to a customer, but no bill of lading was prepared. Because billings are prepared from bills of lading, the customer was not billed.
6. The controller approved a payment to a consulting firm owned by his sister. The consulting firm did not actually perform any services for the company.
7. The shipping clerk included several additional valuable items in a shipment that were not included in the customer’s order and were not invoiced to the customer. The ship- ping clerk has an arrangement with the customer to share the proceeds from sales of the additional items shipped.
a. Identify whether each misstatement is an error or fraud.
b. For each misstatement, list one or more procedures that could be implemented to prevent it from occurring on a continuing basis.
c. For each misstatement, identify evidence the auditor can use to uncover it.
Appliances Repair and Service Company bills all customers rather than collecting in cash when services are provided. All mail is opened by Tom Gyders, treasurer. Gyders, a CPA, is the most qualified person in the company who is in the office daily. Therefore, he can solve problems and respond to customers’ needs quickly.
Upon receipt of cash, he immediately prepares a listing of the cash and a duplicate deposit slip. Cash is deposited daily. Gyders uses the listing to enter the financial transactions in the computerized accounting records. He also contacts customers about uncollected accounts receivable. Because he is so knowledgeable about the business and each customer, he grants credit, authorizes all sales allowances, and charges off uncollectible accounts.
The owner is extremely pleased with the efficiency of the company. He can run the business without spending much time there because of Gyders’ effectiveness.
Imagine the owner’s surprise when he discovers that Gyders has committed a major theft of the company’s cash receipts. He did so by not recording sales, recording improper credits to recorded accounts receivable, and overstating receivables.
a. What weaknesses in the company’s processes might have permitted the fraud?
b. What suggestions do you have for changing the process to reduce the future potential
for fraud?
