Question

Describe how receivables can be falsified, why they would be falsified, and why it is difficult to uncover such fraud??

Answer 1

Solution:-

Describe how receivables can be falsified, why they would be falsified, and why it is difficult to uncover such fraud:-

Falsification by Cashiers:-

When cashiers initially record accounts receivable transactions they:

– Misappropriate funds from some transactions and dupe record keepers into posting all accounts “paid.”

– Record all cash receipt transactions on a cash register system and interface it with an accounts receivable system that marks all accounts “paid.”

• Eliminate entire batches of documents from the cash register; and,
• Reenter check payments on cash register system and misappropriate cash payments.

– Batch numerical sequencing irregularities.

– Misappropriate funds received from a record keeper before making the daily bank deposit.

Falsification by Record Keepers

• When record keepers initially record accounts receivable transactions they:

– Record check payments in the accounting records and turn-in funds to cashier using a “sub-total” report. The cashier deposits these funds. Then, they record cash payments, misappropriate the funds, prepare a “total” report (all accounts are marked paid) and destroy it.

Key Attribute of Fraud

• The number and amount of customer accounts marked “paid” is greater than the number and amount of customer payments deposited in the bank.
• This imbalance rests in plain sight awaiting discovery.

Common Method of Concealing Fraud in Accounts Receivable

• Employees use two methods:

– Write-off the customer’s account balance for any manipulated payments.

• A computer “exception” report listing all write-off transactions is critical.

– Allow the customer’s account balances to become delinquent (risky).

• Employees manipulate prior account balance information both inside and outside the organization by “stealing the statements.”

Independent Customer Service Function

Organizations should establish an independent customer service function for accounts receivables to:

– Investigate customer complaints about their accounts; and,

– Research any other irregular transactions.

Additional Methods of Concealing Accounts Receivable Fraud

Employees falsify accounting records:

– The “no-bill” report. A list of accounts not currently receiving service.

– The “shut-off’ report. A list of delinquent accounts that will have services disconnected unless payment is made by a specific due date.

Secrets to Detecting Fraud in Accounts Receivable

Fraud examiners should:

– Compare total amount of bank deposits with total amount of accounts receivable payments posted to customer accounts over time.

– Scan bank deposits to determine the amount of currency being deposited (and percentage).

– Know the difference between “sub-total” and “total” accounting reports.

– Compare batch sequence numbers from the cash register system to the accounts receivable accounting system to identify any missing or unprocessed batches.

– Review computer “exception” reports listing all write-off transactions for authorization, approval, and support.

– Confirm delinquent account balances by sending account history statements to customers.

– Review “no-bill” reports /and customer files to determine if this status is justified.

– Review “shut-off” reports to ensure services were terminated as required.

– Verify that all billing statements include a date of prior payment (not “payment -thank you”).

– Verify that the organization has established an independent customer service function

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