Case study: Substantive procedures for cash balances

You have been asked by the financial controller, Harry Rowling, 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 Ltd 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 30 June 2015, and that Alfred left the day on which it was discovered. Harry has asked you to carry out the investigation, rather than the company's auditor. He is not happy with the auditor because he believes he should have found the fraud earlier or at least warned that there were control weaknesses.

Harry says that Alfred was responsible for;

1. Receiving cash from customers for both credit and cash sales

2. Making all payments, including purchase ledger payments and sundry payments

3. Drawing the cash for wages

4. Recording all receipts and payments in the cash book and preparing a bank reconciliation

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

The computerised sales and purchase ledgers are maintained by the staff in the sales and purchases accounting departments who post all transactions to these ledgers. Alfred used to send the sales ledger 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 purchase ledger controller would inform Alfred of the payment she wished to make, and Alfred would then prepared the cheques, which Harry signed. A remittance advice was attached to the payment that was sent to the supplier. Alfred would prepared 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 raises a sales order, which is sent to the dispatch department which, in turn, raises a dispatch note. The first copy of the dispatch note is given to the customer, the second copy is sent to the sales accounting department and the third copy is retained in the dispatch department. The sales 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 analysed cash book, and the months cash sales were posted from the total in the cash book to the nominal 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 wage packets and pays the wages to employees. Alfred would retain any wages not given to employees.

Harry is the authorised signatory for cheques; however, Alfred was the signatory when Harry was on holiday.

Required

Describe what checks you would conduct to (a) determine whether a fraud has actually taken place and (b) quantify the loss. Consider

1. Bank Reconciliations

2. Cash Receipts

3. Cash Payment

4. Petty Cash