FRAUD SCHEME – PURCHASING AGENTA purchasing agent for a large hardware retailer has sole discretion in selecting vendors for the parts and supplies sold by the company. The agent directs a...

FRAUD SCHEME – PURCHASING AGENT A purchasing agent for a large hardware retailer has sole discretion in selecting vendors for the parts and supplies sold by the company. The agent directs a disproportionate number of purchase orders to a supply company owned by the agent’s brother-in-law, which charges above-market prices for its products. The agent’s relationship with the supplier is unknown to his employer. Required What type of fraud is this, and what controls can be implemented to prevent or detect a fraud? 2. MAIL ROOM FRAUD AND INTERNAL CONTROL Sarah Sethi, a professional criminal, took a job as a mail room clerk at Benson & Abernathy Company, a large department store. The mail room was an extremely hectic work environment consisting of a supervisor and 45 clerks. The clerks were responsible for handling promotional mailings, catalogs, and inter office mails, as well as receiving and distributing wide range of outside correspondence to various internal departments. One of Sethi’s jobs was to open cash receipts envelopes from customers making payments on their credit card balances. He separated the remittance advises (the bills) and the checks into two piles. She then sent remittance advises to the AR department where the customer accounts were updated to reflect the payment. She sent the checks to the cash receipts department, where they were recorded in the cash journal and then deposited in the bank. Batch totals of cash received and accounts receivable updated were reconciled each night to ensure that everything was accounted for. Nevertheless, over a one-month period, Sarah managed to steal €100,000 in customer payments and then left the state without warning. The fraud occurred as follows: Because the name of the company was rather long, some people had adopted the habit of making out checks simply to Benson. Sethi had a false identification prepared in the name of John Benson. Whenever she came across the check made out to Benson, she would steal it along with the remittance advice. Sometimes people would even leave the payee section on the check blank. She also stole these checks. She would then modify the checks to make them payable to J. Benson and cash them. Because the AR department received no remittance advice, the end-of-day reconciliation with cash received disclosed no discrepancies. Required What controls could Benson & Abernathy implement to prevent this from happening again? 3. SEGREGATION DUTIES Explain why each of the following combinations of task should or should not be separated to achieve adequate internal control. Approval of bad debts write-offs and the reconciliation of the AR subsidiary ledger and the GL control account. Distribution of payroll checks to employees and approval of employee time cards. Posting of amounts from both the cash receipts and the cash disbursement journal to general ledger. Writing checks to vendors and posting to the cash account. Recording cash receipts in the journal and preparing the bank reconciliation.