Q

Based on the control problems identified in Section (A) above, what sorts of fraud are possible in this system?

Home, - What controls are needed to reduce the risk of fraud

Question - Mr Paul finished his accounting qualification in the early 2000s, and he joined AISL Corporation as an accountant. After delivering his services for over two decades, he is a highly regarded employee of the AISL Corporation. His loyalty to the company is reflected in his dedication to his job as a general accounting clerk. From which he has not taken a vacation in almost 15 years. Because of his commitment and long tenure, he has acquired many related responsibilities, which has allowed the AISL Corporation to reduce its workforce through attrition, control salary expenses, and become more efficient and competitive. In particular, Mr Paul is performing the following tasks.

Mr Paul receives copies of credit sales orders from the sales department. He accessed the AR subsidiary ledger from her office computer and recorded the AR from these documents. He then records the sales in the sales journal and posts the transactions to the general ledger accounts. Cash receipts in payment of customer accounts receivable come directly to his office. He records the cash receipts in the GL cash and AR accounts and updates the AR subsidiary ledger. He then endorses the checks "for deposit only" and deposits them in the bank at the end of each day.

a) Based on the above information, identify any control problems in the procedures of AISL Corporation.

Answer - Control problems

AR subsidiary ledger is accessed and recorded Mr paul.

The sales records are recorded in the sales journal and transactions are posted to the general ledger accounts by same person.

GL cash account and the AR accounts and updation of AR subsidiary ledger is done by same person.

There is no independent verification between the AR sub ledger and AR control as these are done by same person.

There is no information security in the organization. There is not user authentication before providing the access to the documents of the organization.

b) Based on the control problems identified in Section (A) above, what sorts of fraud are possible in this system?

Answer - Financial reporting fraud can be committed by Mr paul. He can record the wrong values for the cash inflow and out flow. He can write the misleading financial statements.

The fraud of the misappropriation of the asset can occur.

He can also pursue the information fraud. As all the information handling is done by Mr paul so he can pursue the information fraud. There are no information security controls enforced on the system .The information of the organization can be shared to the outsiders.

c) What controls are needed to reduce the risk of fraud?

Answer - The controls to reduce fraud are

Segregation of the duties: The duties must be segregated between the different designation such as the accounting clerk and billing clerk. Separate persons must be assigned the separate duties in order to prevent the workload on the single peron.

Documentation controls: The documentation procedures must be established in order record each and every transction.

Auditing of financial statements: Auditor must be hired in order to audit the financial statements of the organization.

Verification of the books: GL cash account and the AR accounts and updation of AR subsidiary ledger must be done by separate persons.

There should be independent verification between the AR sub ledger and AR control to prevent fraud.

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