Because cash flow is important to a business, the cash balance shown on a company’s balance sheet and bank statement must be accurate to help manage, run, and grow the business. Since the balances between these two records often do not agree, a bank reconciliation is performed at least monthly to identify and explain differences that may result from the timing of posted activities, errors made by the bank or the company, or other issues. However, what happens when an employee uses a bank reconciliation to hide a fraud? Suppose the clerk who prepares the bank reconciliation is stealing cash. To hide the theft, he understates the amount of outstanding cheques on the bank reconciliation by the amount of cash stolen, making the bank reconciliation balance.

Required
1. What is the result of these actions on the company’s book balance and bank balance?
2. What can be done to detect this fraud and prevent it from happening in the first place?