Bank Deposits and Cash Receipts
Sampson, Inc. needs to understand the possible causes of bank deposits and cash receipts not reconciling. First, the situation is caused by outstanding checks. They need to confirm checks that have not been presented to the banks for payment. The bank’s statements do not include this transaction because they have not yet been presented. However, when the bank receives the check, the problem might be solved. Another possible reason for this case is the deposits in transit. That is the cash amount that is still on the way to the banks. The bank records these cash amounts in the following month, causing the difference during reconcilement. Before and during reconcilement, it is essential to remember the effect of interest earned by money deposited to the bank. Interests accrued from the cash deposited while the company is not aware will imbalance the amounts deposited and the bank’s deposits. Balance service fees are charges that withdraw the company’s account deposits. While the company might not feel the weight due to insignificant amounts withdrawn, the charges lead to imbalances during reconcilement.
Decisions and the Actual Write-Offs of Bad Debt
Decisions to write off bad debts are vested in the entire department, and the head of the department is responsible for signing out the existing bad debts. In most instances, the chief financial officer is vested with the responsibility of writing-off bad debts. But the decision must be based on the actual review of collection efforts which indicates all due diligence was performed. The finance manager is also responsible for authorizing the uncollected debts after reasonable efforts to collect fails. The department writes off the charges to avoid carrying a high amount of receivable balance that overstates the amounts expected when there is evidence the money cannot be collected. Therefore, in the case of Sampson, Inc., there was no reason to worry so long as the entire department agreed with the decision arrived after it had exhausted all the possible means to recover the debt. Bad debts are written-off when necessary and cannot be recovered. However, in the case of Sampson, Inc., the internal audit questioned the reliability and validity of the bad debts writing-off decided and executed by a single person because the process must be reliable and valid to be accepted. Having one person decide and write off the bad debts does not provide room for verification, reliability and does not ensure validity.
Discrepancies Between Physical Inventory and the Perpetual Inventory Data
The occasional discrepancies exist when there is an error in inventory recording or when inventory is stolen. For these two situations, the result can lead to the need for improved security controls and documentation. The perpetual inventory is a continuous track and record of items added or subtracted from the inventory. It keeps the records of the cost of goods bought and those sold. On the other hand, physical inventory is a periodic schedule meant to manually count and record items and the prices of purchases and sales. Therefore, for a discrepancy to exist, recording errors must have occurred, or inventory has been stolen. The necessary action for Sampson, Inc. is to place proper security for the inventory and keep accurate records of inventory movement. Since the perpetual accounts systems keep continuous updates on inventory movement and physical inventory records the periodic inventory, there should be no discrepancies when there is no stolen inventory and when all data are kept accurate.
Physical Inventory and the Perpetual Inventory Records
The observed changes of physical inventory data and the perpetual inventory data show the attempts to hide or manipulate the inventory records due to stolen inventory. Proper documentation is necessary to avoid such a scenario. Finding adjustments to physical inventory means hiding missing merchandise due to errors in or manipulating records to coincide with the perpetual inventory. Abd Karim et al. (2018) finds that inconsistencies often cause challenges observed in inventory management in practices due to the absence of standard operating procedure. Also, when no division of work exists, one person is dependent on to carry out more duties than they can, leading to human errors due to exhaustion. For Sampson, Inc., there is the possibility of adjustment meant to cater to the mistakes made due to human weakness and exhaustion. Sampson, Inc. needs to conduct count activities after short intervals and regularly place accurate recording systems to keep track of inventory to avoid adjustments to meet missing inventories because poor inventory management affects financial performance (Abd Karim et al., 2018).
Customer Refunds and Credits are not Unusual
Having a high number of customer refunds and credits indicates fake sales recorded by sales staff to ensure bonuses associated with target sales are secured. Besides, there could be appropriate reasons to return items. First, a customer may return an item when they have bought the wrong item or after changing their minds later when they receive it. The company can rarely minimize this type of error. When a merchant ships a wrong item, they have to be returned. However, the customers are not obligated to return the wrong shipping. Another cause of many customer refunds includes late arrival of customer purchases when the customer no longer wants them or shipping damaged or defective products. Sampson, Inc. needs to prepare the proper invoicing system for each sales transaction to avoid these cases to ensure that the products are shipped on time and in good condition. Sales staff can be part of a scheme to hide items or resources disguised as customer refunds. Therefore, necessary care should be undertaken to ensure safe and proper refunds of the customer-initiated process only.
Original Source Documents are Missing but Substitutes are Available
Missing documents is one of the main reasons why auditors suspect fraud risks. Employees participate in such activities to scheme the company to create fake suppliers who have copies of source documents and use them in making fraudulent purchases. Employees know that fraud examiners utilize source documents to validate purchases or sales. Therefore, when an organization intentionally loses some source documents, they hide some frauds. However, some source documents are actually lost. It is not recommended to trust staff first responses due to missing documents or accept the offer of copies, but independent verification should be determined using other possible means. The copies should be verified to determine whether the transactions actually did occur or whether the clients are real.
Many Source Documents Lack Appropriate Management Approval
When source documents lack relevant authority’s approval, they show the possibility of fake records being generated. Such occasions occur when control mechanisms protecting source documents are weak. When source documents are not approved, an existing weakness exists in the management or the staff plotting attempts to commit fraud. Auditors need to be vigilant in handling such instances because they portray a possible hidden fraud within the company. Sampson, Inc. management must establish a secure and challenging source document format that cannot be subjected to forgery. Sales and purchases are unsafe when sales staff can quickly develop similar copies of source documents as those used by the company.
References
Abd Karim, N., Nawawi, A., & Salin, A. S. A. P. (2018). Inventory control weaknesses–a case study of lubricant manufacturing company. Journal of Financial Crime.
Abd Karim, N., Nawawi, A., & Salin, A. S. A. P. (2018). Inventory management effectiveness of a manufacturing company–Malaysian evidence. International Journal of Law and Management.
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