You have been asked by the financial controller, Walid Hossain, of Potter Ltd. to carry out an investigation of a suspected fraud by the company’s cashier. The cashier, Alfred Blyton, has left the firm without notice. Potter is a small company, and there were few controls and checks over Alfred’s work because the company had employed him for a number of years. You are aware that the auditor found a discrepancy in the bank reconciliation for the company’s year end of December 31, 2020, and that Alfred left the day on which it was discovered. Walid has asked you, rather than the company’s auditor, to carry out the investigation. He is not happy with the auditor because he believes he should have found the fraud earlier or at least warned him that there were control weaknesses.

Walid says that Alfred was responsible for:

• Receiving cash from customers for both credit and cash sales

• Making all payments, including purchase journal and sundry payments

• Drawing the cash for wages

• Recording all cash receipts and payments and preparing a bank reconciliation

• Making and approving petty cash payments and recording these transactions in the petty cash book

The computerized sales and purchase ledgers are maintained by the staff in the accounting department, who post all transactions to these ledgers. Alfred used to send the sales clerk a schedule showing the cash he had received. The remittance advices from customers were attached to this schedule, and they showed the invoices that were being paid.

The purchases clerk would inform Alfred of the payments she wished to make, and Alfred would then prepare the cheques, which Walid signed. A remittance advice was attached to the payment that was sent to the supplier. Alfred would prepare the purchases and sales ledger control accounts each month and the reconciliation of these balances to the total balances on the respective ledgers.

For cash sales, the sales department creates a sales order, which is sent to the shipping department, which, in turn, creates a shipping note. The first copy of the shipping note is given to the customer, the second copy is sent to the accounting department, and the third copy is retained in the shipping department. The accounting department then prices the invoice. The customer would pay the cash to Alfred, who retained a copy of the invoice for his records. Alfred would record the sales details in his analyzed cash book, and the month’s cash sales were posted from the total in the cash book to the ledger.

The payroll department calculates the wages. Alfred would draw the cheque to pay the wages and receive the cash. The payroll department makes up the payroll and pays the wages to employees. Alfred would retain any wages not given to employees.

Walid is the authorized signatory for cheques; however, Alfred was the signatory when Walid was on holiday.

Required

Describe what checks you would conduct to:

a. Determine whether a fraud has actually taken place.

b. Quantify the loss. Consider:

i. Bank reconciliations
ii. Cash receipts

iii. Cash payments

iv. Petty cash