Mike is the cash receipts clerk of DIY Pty Ltd, a large private company, which has a chain of 10 hardware stores in Sydney. Mike is responsible for controlling and accounting for all cash receipts through the 10 stores and banking of cash received.

You have been appointed to perform a fraud vulnerability assessment for DIY, and have documented the internal controls around cash receipts below.

Mike spends most of his afternoons travelling from store to store. He keeps all cash receipts records on the back seat of his company car. A general review of this documentation revealed that there are many mis-filed and missing documents. Mike does not have enough time to keep everything organised.

At each store, Mike collects the cash taken for the day by the cash registers. Each store has sales in excess of $50,000 per day. The store managers count the cash taken in advance of Mike's arrival. Each register produces a record of the day's transactions with separate totals for EFT and cash sales. In most cases, this record is attached to the bag containing the cash. Some managers do not keep this listing, especially when it does not agree to the cash in the register.

When Mike arrives, he checks the differences between the cash counted and the transaction listing. If the difference is less than $1,000, he accepts it as he believes this to be a reasonable variation given the volume of transactions handled. In four of the stores, differences are regularly between $500 and $900. He does not follow up on the missing transaction listings.

Mike does not recount the cash at each store and store managers are not required to sign as evidence of the accuracy of the count. Mike arrives at the last store just before closing time. He has just enough time to collect the cash and get home for dinner. The cash is held overnight in a safe in Mike's house.

Each morning, Mike goes to Head Office where he records the EFT and cash receipts for the prior day. He banks the cash at a nearby branch by 11.00 am.

Mike receives monthly bank statements but has them filed by his secretary. He does not have time to prepare bank reconciliations.

At times when Mike needs stationery, he uses some of the cash to purchase the required items. He does not complete petty cash vouchers for these items because they are small.

Mike's supervisor, Mary, leaves the cash control function to Mike who she believes works well independently. She checks monthly that the cash receipts have been processed regularly.

a.What fraud method is the greatest risk for DIY? Who could be committing fraud? How could they be doing this?

(2 marks)

Answer

Fraud method?

(.5 mark)

By whom, and how?

(1.5 marks)

b.Give 2 reasons why there are opportunities to commit fraud in this case?

(2 marks)

#

Reasons for Opportunities

1

2

Question 2 continued next page

Question 2 (contin.)

c.What 2 signs could signal a possible fraud?

(2 marks)

#

Signs of fraud

1

2

d.What 4 control procedures could reduce the opportunities for fraud?

(4 marks)

#

Recommended control procedures

1

2

3

4