Required:

1. Comment on the efficacy or otherwise of internal control systems of NPD relating to its cash receipts?

2. How efficient was the companys HR department?

3. Was it the weakness of the system or failure by managers to follow the system properly that led to the fraud. Justify your answer?

4. List the records that must be inspected by Bashir Orakzai in the process of completing his investigation?

5. Keeping in view the context of Audit Reports, which type of report is expected if the situation is not sorted out before audit? What recommendations should Bashir Orakzai make in his Investigation report?

6. List various lapses of internal control that had taken place in case of Gul Khans work?

CASE STUDY The case of a missing cashier The Company Northern Pharma Distributors Ltd (NPD) is one of the larger companies located in KPK, dealing with wholesale trade in pharmaceutical. surgical and other medical products. They represent a number of major foreign and Pakistani pharmaceutical manufacturing companies in KPK. Their clients list comprises of over 4,000 small scale retailers and pharmacies spread all over the KPK province. Their annual turnover is well is excess of Rs five hundred million. A large number of their clients pay them in cash. Many deposit their dues through on-line banking. In addition, NPD's 16 travelling salesmen also collect monies from customers on a regular basis. The company's cash office has a designated cashier who collects cash and cheques from all payers. According to the procedure prescribed for receipts, the cashier must issue a formal receipt for every amount received. Receipt books are pre-numbered. Unused receipt books are held in lock and key by the chief accountant. The procedure states that whenever the cashier finishes with a receipt book, he must show the fully used up receipt book to the chief accountant who should initial on the back of the copy of the last receipt retained in the book and then issue a fresh receipt book to the cashier. The Cashier The company's cashier is Gul Khan, a quiet person who is quite efficient and amiable. None of the customers or travelling salesmen has ever complained of any rude or uncooperative behavior from Gul Khan. His work is usually up to date; there has never been any discrepancy in his daily cash receipt summary and bank deposit sheets, or during any of the surprise cash checks carried out in compliance with the internal control procedures. His reputation as a honest person is well established - in fact the chief accountant now carries out surprise cash checks only rarely. However, very few people are really close to Gul Khan who prefers to keep his own company. Not many persons in the company really know anything about his personal life. He was appointed some six years ago through the recommendation of a former chief accountant who has now left the company. Another important He is never late on duty and hasnever taken any type of leave feature of Gul Khan is his punctuality and regular attendance not even annual leave. His life Style 5 Simple, he wears ordinary clothes, has a second hand motor bike and apparently hobbies other than, waschis inclish movies at television He seldom invites any of his office mates to his little one bedroomed flat located some five miles away from company's main offices. One day Gul Khan simply did not turn up for duty, Greatly surprised, the chief accountant, Shahnawaz Khattak. called his mobile number. It was switched off. No one knew his home land line number. The key to cashier's safe was left in the company safe every night. So, to cope with the day's work, Shahnawaz Khattak asked another senior accounts clerk to handle the cash for the day. Everyone was quite worried. mainly because they did not have any information about him at all. No one knew how to contact him, where was his ancestral home, who were his relatives, etc. A quick examination of his personal file revealed that all such information was not even there. He had been hired on the basis of a sketchily written job application and an interview conducted by former chief accountant and the General Manager Finance. His quiet demeanor and recommendation of the chief accountant resulted in his appointment. Missing Receipt Book Gul Khan did not turn up the following day either. At the end of the second day, the receipt book under use got finished and the acting cashier, Musa Jaan, asked for a new book. When the chief cashier issued the new book, Musa Jaan complained that their numbers did not match. The last receipt issued by him was numbered 67200 whereas the new book issued to him started with number 67301. Clearly a book containing receipts numbered 67201 to 67300 was missing. The chief accountant checked his records - such a receipt book had not been issued. Shrugged it off, thinking he will attend to it later in the week. an agitated assistant Marketing Managercalled a dhe shier accountant to complain that a customer who had deposited Rs 45.000 in cash seven days ago had not yet been delivered his goods. Chief accountant asked for the receipt number so that he could trace the order in the Shocked Shahnawaz Khattak. This receipt was clearly from the The following evening. external auditors for launching an investigation. missing receipt book. There was no record of copy of this department has not been communicated this receipt number receipt anywhere in the accounting system. The stores to the General Manager Finance who promptly called in his for processing the order. Panic struck. The matter was reported The external audit firm nominated one of its senior managers was issued with a receipt of Rs 21.200 and another of RS 40,000. Again, on 7 June yet another customer (let us call 18.800 on the following day. making up a total order of Rs him C) was issued with a receipt of Rs. 5.400 and on 8 June another receipt of Rs 18.800 was also issued to C. making Bashir Orakzai. as the investigating officer. Bashir started is work. by systematically collecting evidence. He took copies of previously used up receipt book had no signature of chle accountant on the back of the last receipt. On Bashir's inquiry Shahnawaz Khattak said that Gul Khan was such a trusted and old employee, that Khattak frequently took his (Gul's) word for it and issued him a new receipt book without bothering to inspect or sign the last used receipt book. He also disclosed that in many cases, he used to simply give the key to the safe where unused receipt books were kept) to Gul Kahn, allowing him to take a fresh receipt book and record the issue on the relevant register. By carefully examining the copies of receipts issued by Gul Khan over the last one month. Bashir discovered the following incidents: a. The copies of receipts issued were generally in order and had been correctly reported in the daily cash summary which tallied with the daily deposit slips. cash book and bank statements. However, the takings of the day prior to Gul Khan's disappearance had not been banked. b. in three cases he noted receipt of identical amounts from different customers. On 5 June. a customer (let us call hima A) was issued a receipt for Rs 34.200. On 6 June A was issued another receipt of Rs 18.800 and instructions were sent to the Stores to supply him stock of total value of RS 53.000. Also on 6 June, another customer (let us call him ? up a total order of Rs 24,200. c. Over the two weeks following Gul Khan's disappearance, seventeen receipts for different amounts varying from RS 25,200 to Rs 56,000, all issued against cash, from the missing receipt book were brought to the notice of the company by disappointed customers travelling salesmen. or d. Total cash misappropriated by Gul Khan appeared to be well in excess of a million rupees. The Director Finance of the company refused to file an FIR with police as he thought this will tarnish the reputation of the company. The loss was written off as miscellaneous expenses. One month later, it was learned that Gul Khan was now working in Dubai