MCD2060 Trim1 2013 Tutorial 5 Internal Ctrl Regulation Inc Records Students

Required
1. Before Tutorial 5 Moodle Question 1 and 2
2. Presentation Question
3. Additional Tutorial Question 1
4. Textbook questions:
Pages 113 117 Questions 2.13, 2.14, 2.19, 2.26
Page 119 120 Questions 1, 2, 3
Chapter 5 page 265 Question 2, 3, 4

Before coming to Tutorial 4 Readings Prescribed textbooks

Gerrand, J. Hardy L and Contessotto C (2012). Introduction to Financial Accounting.
McGraw Hill. Second Edition ISBN 9781121754096
Text Book 2nd ed Ch 2 pages 85120
Pierson & Ramsay, Ch 7 Appendix 7.1
Regulation Text Book Ch 5 pages 229265, Leo Ch 10 &11
Accounting handbook (2013), CPAs, Melbourne, Pearson-Prentice-Hall 9781486006519
AASB 101

Before Tutorial 5 Moodle Questions post your attempt to Moodle before your tutorial

Question 1 Balance Day Adjustments

(a) Acer Chartered Accountants provides most of its services on credit, and has been
experiencing increasing amounts of bad debts. The business currently records bad debts
under the direct write-off method, but is considering changing to the allowance method
instead. Explain how the allowance method accounts for bad and doubtful debts, and why
it is considered the preferred approach to use.

(b) Acer Chartered Accountants extract of Trial Balance 30 June 2009

Dr Cr
Accounts receivable 353,000
Allowance for Doubtful Debts 3,000
The balance day adjustment is not yet done. P Purcell uses the allowance method.
Additional information
Prepare journal entries for the following:
Write off bad debts of $7,000
Raise the allowance for Doubtful debts to 4% of accounts receivable
Date Details Debit Credit
30/06/09

Bad Debts written off $7,000

30/06/09

Raise the allow for DDebts to 4% of acs receivable

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MCD2060 Trim1 2013 Tutorial 5 Internal Ctrl Regulation Inc Records Students

Question 2 Presentation
Required:
Read the following articles
Select from the articles and your independent research to present the following:
(a) What are the features of sound internal control
(b) What limitations in internal control are identified in the articles
(c) Suggest what measures could be taken to improve internal control in the situations
referred to in the articles

Article One: Some Thoughts to Keep Fraud Out of Your Company

http://accounting.smartpros.com/x60170.xml
Dec. 28, 2007 (Richmond Times-Dispatch) You've heard the horror stories - workers
caught on videotape with their hands in the till.
No business is immune, including yours. But you can try to see that it doesn't happen at your
company by following these tips from Virginia certified public accountants:
Rotate your personnel. At regular or periodic intervals, perhaps every six months depending
upon the nature of the business, switch the people who handle the money, suggested
Richmond CPA Andrew Lakoff.
The person could be an accounting clerk, somebody in the back office who normally handles
customer payments. She could be switched with someone who handles customer collections
or someone from a different department of the company.
The benefits are twofold, Lakoff said: It's a way of cross- training employees to work in
different areas of the company, and it provides a fresh pair of eyes to see what the previous
person has been doing.
Just don't have the same person always doing the same function if you're fraud-conscious,
Lakoff advised.
Say a bookkeeper is employed for 20 years in the same spot with nobody going behind him
checking his work. Then he goes out on sick leave and all kinds of irregularities are
discovered. He may have been stealing for years.
Break up accounting duties. Do you depend on one person to open mail, process payments,
make bank deposits, pay invoices, handle petty cash and reconcile bank statements?
If you have adequate staff, it may be better to divide those responsibilities, the Virginia
Society of CPAs said. That way, no one person controls all of your financial activity.
Turn on your software program's audit trail. Intuit's QuickBooks and other accounting
software has the feature, Lakoff said. It tracks all activity, including when bookkeeping
entries are altered or deleted. It provides the user's name, date and time of changes.
Say an entry for $1,000 was changed to $100. An audit trail will show who made the change
and when.
Some software can be set up to automatically send reports to the owners' computer, a good
feature because running a business is immensely time-consuming. Audit trails are useless if
no one reviews them.

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MCD2060 Trim1 2013 Tutorial 5 Internal Ctrl Regulation Inc Records Students

Question 2 Presentation

Have bank statements mailed to your home or a post office box. That way, you get to review
them before your bookkeeper does.
Look out for checks written to suppliers or others whom you don't know, or those made out
to a third party but endorsed by someone in your company. Also look for missing checks.
Say a check is made out to "Office Supply Inc.," said CPA firm owner Sharon Hart of
Barcalow & Hart PLLC in Glen Allen. But the signature on the back is that of an employee in
your company. That's who got the money. There's something kaflooey going on.
Question gaps in check numbers. Are 10 checks missing? Are checks voided? Some people
void checks in the accounting system, then falsify them for fraudulent use, Hart said.
Arrange for surprise audits. Bring in a CPA once a year at different times to conduct a
surprise audit of your company's financial records. Knowing one may occur at any time can
be a deterrent.
Screen potential hires thoroughly. Check past employment, personal and professional
references and criminal records. Ask your trade association or a fellow entrepreneur for the
name of a reputable service, or search online using the keywords "criminal background
checks [your] county."
Create a no-tolerance culture. Communicate to every worker what sort of activities constitute
fraud and what will happen to those committing it. Consider setting up a third-party hot line
for workers to report suspicious activity.
Watch for other red flags. Among them: You ask to see certain reports, but your finance
person fumbles around and can't seem to come up with them. Or, one person does everything
from billing to collections to disbursements, but no one is overseeing the activity.
"The owner's involvement is critical," Hart said. "It really makes a difference."

(C) 2007 Richmond Times-Dispatch. via ProQuest Information and Learning Company;
All Rights Reserved

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Question 2 Presentation

Article Two: Computer-Assisted Forensic Techniques

Within the last ten years, the world of electronic or digital evidence has evolved to become a
vital part of practically every case a forensic account handles. Most cases require an inquiry
into all forms of communications and records of every nature -- especially those that are in
digital form or were created electronically.
Businesses typically generate hundreds or thousands of documents related to various areas of
operations, for instance, thousands of sales invoices, thousands of purchase orders and
thousands of checks. Thus, there could be thousands of documents related to an area being
investigated for fraud.
The computer can be used to perform investigative procedures on accounts payable and
payroll fraud, such as printing out all unauthorized check numbers or checks over a specified
amount, printing out a list of all employees not electing insurance or other employee benefits
(this might signal a fictitious employee scheme), or identifying vendors that always submit
the latest bid or that obtain a disproportionate share of contracts.
For example, an investigator investigating for accounts payable fraud might examine
payments to vendors for certain attributes, such as by checking vendor names on checks
written to an approved vendor list and searching for checks with different addresses for the
same vendor names.
Other examples of investigative procedures that can be performed using computers include
the following:
1. Re-computing items on documents for mathematical accuracy.
2. Searching for fictitious names or addresses by comparing data on documents to
known fictitious names or addresses, for multiple names to the same address, or for
multiple addresses for the same name.
3. Searching for payments made or inventory shipped to a vendor or customer with the
same address as an employee.
4. Searching vendor payments for duplicate payments. (The suspect intercepts and
retains the duplicate payment.)
5. Searching for unusual patterns on purchase orders or contracts, such as unusually
large numbers or amounts.
6. Searching for unusual accounting entries, for example, debit entries to accounts that
normally receive credit entries (such as accounts payable or long-term debt) or credit
entries to accounts that normally receive debit entries (such as loans receivable or
inventory).
7. Also, analyzing entries to suspense, clearing and inter-unit accounts.
The company's general ledger software package generally will include transaction reports that
can be used to identify all transactions affecting an account during a specified period. These
reports can be scanned to help identify unusual items. Also, much of the publicly available
information exists in databases that can be accessed by computer. This can make the data
gathering process more efficient.

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MCD2060 Trim1 2013 Tutorial 5 Internal Ctrl Regulation Inc Records Students

Question 2 Presentation

Article three: Reviewing the Detailed General Ledger

Reviewing the general ledger and journal entries for unusual, unexplained or unsupported
amounts, entries, transactions or patterns can indicate the possibility of fraud and where it
might be occurring and concealed.
Unusual journal entries may include inappropriate charges to expenses or write-offs of assets
such as inventory or receivables, and the entries may be made near a month- or year-end to
conceal the effects of a theft.
An example is an unexplained credit to inventory with the offsetting debit to cost of sales but
with no related sales transaction recorded.
In addition to accounts receivable, inventory and accounts payable, accounts susceptible to
fraudulent entries include the following:
Expense accounts over which no one department or individual has control, such as
general maintenance accounts, general transportation accounts (cabs, freight, etc.),
stationery and general office supplies accounts or scrap disposal accounts
Suspense and cash sweep accounts
Deferred asset or liability accounts
Contra-accounts, such as the bad debt reserve account or the accumulated
depreciation account
Inter-company accounts
Accounts over which a sole, domineering, incompetent or frequently absent individual
has control
The chart of accounts should be scanned to identify accounts of these types that may be
vulnerable to fraudulent entries and which should be scrutinized. The investigator also should
investigate and reconcile differences between control accounts and supporting ledgers. Any
differences may be due to fraud concealed in one or the other account or ledger.

Article Four: The Smoking Gun

It was an internal coup.
The company was positioned to make an initial public offering (IPO). The product offering, a
patient appointment concierge service that worked with groups of doctor practices throughout
several southeastern states, had been tested and refined over several years and was now
ready, with deep-pocket backing, to make its debut in an IPO.
However, two of the corporate offices, both doctors and both board members, as well as the
deepest of the deep-pocket investors, had initiated action to remove the operating and finance
officers and their staffs just prior to the offering. The deep pocket investor was withholding
funds unless they were terminated and replaced by his and the other officer/board members'
choices.
The attorney for the CEO and CFO had no proof that the three were conspiring and needed to
find evidence they were. We were asked to analyze the hard drives of the company's server
and the two laptops the company provided the two doctor board members for data that might
show to a court that an illegal coup was being staged. The two doctors had been barred from
entering the company's premises. The order had been issued after they had left work one day,
and both had left their laptops on their desks. The laptops were kept in the company safe --
now with a new combination code.

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MCD2060 Trim1 2013 Tutorial 5 Internal Ctrl Regulation Inc Records Students

Question 2 Presentation

We conducted a forensic examination of their offices and then the company's server, to no
avail. After investigating files on the laptops' hard drives, we found nothing we could use.
Now, we were at an impasse.
But as breaks sometime come, we uncovered that the conspirators did communicate through
e-mail -- not the company's Outlook e-mail running through the server, but on outside sites
where they had accounts with Yahoo! and Hotmail. Now we had something.
We performed a mirror image of the second laptop's hard drive. The CEO had narrowed
down to a three-day period when the two doctors started to voice, in unison, how and why the
CEO, CFO and their staffs were to be terminated because the investor had lost confidence in
them and was withdrawing his critical financial support until they were replaced before the
IPO.
The investor lived in a rural paradise more than 100 miles away from the company
headquarters. We checked the company's telephone records and the doctors' company cell
phone records for this time period. There were no calls with the investor on the company
phones, but there were increased conversations among the three during this time period on
the doctors' cell phones, with a few calls directly prior and afterward.
Now we had something to go on. We began to look for ghosts (a ghost is a writing to the
hard drive that remains cached in Random Access Memory -- known as RAM).
When you think about it, it seems quite logical. When you write an e-mail on your computer
from an Internet e-mail account, what is really happening? That message isn't held in virtual
space; it is written to your hard drive. But because it is not saved to your hard drive, the
metadata -- the tags (also written to the hard drive) that tell your computer what you are
doing and where on your computer it is being done -- are deleted from the tracking file when
you turn the computer off. However, a ghost of the tags remain, even when they may be
overwritten by new data.
Forensic software is pretty comprehensive these days. We knew that during this three-day
time period, there was no reason for any correspondence to take place on the doctor's laptop
with the investor's name attached to it. So we queried the software to find if the investor's
name had been written to the hard drive during this time period, and if so, to track the
metadata attached to the investor's name to the whole writing.
Bingo! You guessed it -- we got the smoking gun -- correspondence between the investor and
the doctors that laid out the whole process and the doctors' roles in staging the coup. We even
got admittance that care was needed because what they were attempting was illegal. Who
could ask for anything more?
Coup blocked. Doctors and an investor thrown off board. New investors waiting in the wings.
The IPO went forward.
Lessons learned. Nothing really disappears. It may be destroyed, but if it isn't destroyed, it is
still there and can be found.

Articles Two, Three and Four extracts from My Life in Crime: Chronicles of a Forensic
Accountant
By William C. Barrett III, CPA/ABV, CVA, CTP, CCFM

http://accounting.smartpros.com/x59274.xml

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MCD2060 Trim1 2013 Tutorial 5 Internal Ctrl Regulation Inc Records Students
Additional Questions Question 1
DEF Limited Bank Reconciliation Statement as at 1 June
Balance as per Bank Statement 2,918 CR
Add: deposit not credited 600
1,759
Less: Unpresented cheques/debits
Chq No. 287 8,000
Chq No. 288 800 8,800
Balance as per Bank Ledger account 5,282 CR
Australia Bank: Bank Statement Account: DEF Limited
Date Particulars Debits Credits Balance Dr/CR
1-Jun Balance 2,918 CR
2-Jun 287 8,000 5,082 DR
2-Jun Deposit 600 4,482 DR
12-Jun Deposit 1,602 2,880 DR
Bank fees 54 2,934 DR
14-Jun IB 01 180 3,114 DR
Deposit 846 2,268 DR
IB 02 90 2,358 DR
Interest on
Investment 360 1,998 DR

Cash Receipts Journal

Date Particulars Rec Details Bank
12-Jun R Twain 1 468 468
12-Jun Sales 2 1,602 1,602
14-Jun Sales 3 864 864
17-Jun H Pentland 4 396
Sales 5 1,188 1,584
Progress Total 4,518
17-Jun
17-Jun
Total

Cash Payments Journal

Date Particulars Chq /IB Bank
3-Jun Wages IB 01 180
Council Rates IB 02 90
16-Jun F Crowe 289 558
Progress Total 828
17-Jun
Total
Additional information
a. One amount representing a deposit on 14 June appears in the Cash Receipts Journal as
Cash Sales $864 but in the Bank Statement as $846
b. Receipts on hand totalling $1,584 were not banked yet
Required
a. Complete the company cash records and complete a Bank Reconciliation Statement at 19 June
b. Suggest possible reasons for the cash management processing issues