The situation involves a small, non-profit counseling agency; a branch location for the organizations main headquarters. The agency consisted of two full-time therapists, a full-time bookkeeper, and a part-time bookkeeper.

The full-time bookkeeper was responsible for scheduling appointments, billing health insurance companies and clients, making bank deposits, and managing cash receipts. An issue with internal control over cash receipts came to light when several clients attempted to schedule appointments but were denied due to outstanding balances owed to the counseling agency which had been written off as uncollectible. The clients insisted that they had previously paid the balances due in cash.

An internal investigation revealed that the bookkeeper had confiscated cash receipts from clients. At the time a client submitted payment, the bookkeeper prepared a numbered cash receipt in duplicate, provided the client with one copy, and destroyed the duplicate copy. The bookkeeper pocketed the cash and did not post the cash receipt to the clients accounts receivable.

The clients from whom the bookkeeper pocketed the cash were not scheduled to return. They were clients who had completed therapy. The client balance due continued to appear outstanding, although the clients were unaware of this because they no longer received billings. The bookkeeper presented the outstanding balances to the office supervisor as bad debts to be approved for write-off. The supervisor approved the write-offs because it appeared that the account had been billed repeatedly for over six months and the balances were under $500.

Because the clients had paid their bills and no longer received billings, and the accounts were written off, neither the clients nor the agency were aware of the fraudulent activityuntil the clients decided to return for services; something, perhaps, the bookkeeper did not expect.

The bookkeeper performed and recorded bank deposits each week. The receipt numbers covered by the bank deposits were listed on the bank deposit form with the agency copy of each numbered cash receipt attached to the deposit form. Despite that some numbered cash receipts were missing, the bank deposit form did not reveal this information. For example, if Receipt #222 was missing because the bookkeeper had destroyed it and pocketed the cash, the bank deposit form indicated that the weeks deposits covered receipts #220 240. No one other than the bookkeeper verified that all receipts deposited were accounted for in the form of the numbered cash receipts.

By the time the fraud was discovered, the bookkeeper had stolen thousands of dollars. The bookkeeper confessed to the fraud. She shared that she had a gambling problem and had intended to repay the stolen cash with her gambling winnings. The bookkeeper was terminated, and the organization conducted an internal audit to identify the failure in internal controls.

Can you identify the failures in internal control over cash receipts which set the stage for the fraud? Substantive responses count toward participation points?