Governanace Chapter 15

Sales and Collections Cycle

* Errors in Recording Sales and Collections Transactions

-Errors in recording sales include mechanical errors, such as using a . wrong piece or wrong quantity,
recording sales in the wrong period (cutoff errors), a bookkeeper's failure to understand proper .
accounting.

-Internal controls -are desigrred to prevent or detect many of these kinds of errors.
* Frauds in Sales and Collections
Frauds in sales generally relate to fraudulent financial reporting.
frauds in cash collections relate to misappropriation of assets, typically accomplished by clerks or

management-level employees.
a. Fraudulent Financial Reporting
Fraudulent financial reporting involving sales typically results in overstated sales or understated sales
return and allowances.
The following methods can be used to increase sales fraudulently:
*Recording fictitious sales (creating fictitious shipping documents, sales invoices, and so on)
*Recording valid transactions twice
*Recording in the current period sares that occurred in the succeeding period ( improper cut off)
*Recording operating leases as sales
* Recording deposits as sales
*Recording consignments as sates
* Recording sales when the chance of a return is likely
* Following revenue recognition practices that are not in accordance with pFRS
* Recognizing revenue that should be deferred
b. Misappropriation Of Asset : Withholding Cash Receipts

1. Skimming -this refers to the act of withholding cash receipts without recording them .
{ Detection of unrecorded cash receipts is very difficult; however, unexplained changes in the
gross profit percentage or sales volume may indicate that cash receipts have been withheld.}
2. Tapping - This technique is used to conceal the fact that cash has been abstracted. { An who
has access to cash receipts and maintains accounts receivable can engage in lapping.}
3. Kiting- This is another technique used to cover cash shortage or to inflate cash balance.
* Kiting involves counting the cash twice by using the float in the banking system.
(Float is the gap between the time the check is deposited or added to an account and the time
the check clears or is deducted from the account it was written on.) Analysing and verifying
cash transfers during the days surrounding year-end should reveal this type of fraud
II Acquisitions and Payments Cycle

*Errors in the Acquisitions and Payments Cycle
The following may occur in the acquisitions and payments cycle:
*Failing to record a purchase in the proper period (cut off errors)

*Recording goods accepted on consignment as a purchase
* Misclassifying purchases of assets and expenses
* Failing to record a cash payment
* Recording a payment twice
* Failing to record prepaid expenses as assets
Entities normally design controls to prevent these errors from occurring or to detect errors
if they do occur.
Auditors should perform substantive tests to determine that the financial statements do not
contain material misstatements that arose because of possible errors.
2. Frauds in the Acquisitions and Payments Cycle

a. Paying for Fictitious Purchases -Thiis involves the perpetrator creating a fictitious invoice
(and sometimes a receiving report, purchase order and so forth) and processing the invoice
for payment.)
b. Receiving Kickbacks-This is usually done in return for the agent's ensuring that the
particular vendor receives air order from the firm. In this scheme, a purchasing agent may
agree with a vendor to receive a kickback (refund payable to the purchasing person on
goods or services acquired from the vendor)
When vendors are required to submit bids for goods or services, the likelihood of kickbacks is
reduced
C. Purchasing Goods for Personal Use- may be purchased by executive or purchasing agents
and charged to the company's account.
Fraud- involving the purchase of goods for personal use is more likely to go unnoticed when
perpetual records are not maintained.
III -Payroll and Personal Character

1. Errors
The most errors that can occur in the payroll and personnel cycle are
a) paying employees at the wrong rate,
b) paving employees for more hours than they worked,
c) charging payroll expense to the wrong acconnts, and
d) keeping terminated employees on the payroll.
Good internal control can be established to prevent these errors from occurring are to
detect them if they do occur
2. Frauds involving Payroll

a. Fictitious Employees
Adding fictitious employees to the payroll is one of the most common defalcations.
Detecting fictitious employees on the payroll is very difficult; but auditors do
sometimes perform a surprise payoff as a deterrent to this form of defalcation.
Alternatively, the auditor may turn the check distribution over to an official not
associated with preparing payroll, signing checks, or supervising workers. Personnel
files and the employees 'completed time cards and time tickets may also be "
examined to substantiate the existence of absent employees
b. Excess Payments to Employees
Increasing the rate above that approved or paying employees for more hours than
they worked are the most common ways of paying employees more than they are
entitled to receive. These practices can be substantially reduced by requiring
personnel department officials to authorize changes in pay rates and by monitoring
total hours worked are paid for. Analytical procedures that focus on cost per unit of
actual production can also be helpful in detecting excess payments to employees.
c. Failure to Record Payroll
Companies having difficulty meeting profit targets or not for profit entities having
difficulty managing costs and expenses might fail to record a payroll. The omission
of payroll can be difficult to hide unless a similar amount of revenues or receipts has
been omitted. Analytical procedures can be performed to test the reasonableness of
payroll cost.
D. Inappropriate Assignment of labor Costs to Inventory
A company having difficulty meeting profit targets might assign to inventory labor cost that
should have been charged to expense. Analytical procedures such as comparing costs
incurred to budgeted cost and verification of valuation of inventory are some of the useful
techniques in detecting such fraud.

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Sales and Collections Cycle

* Errors in Recording Sales and Collections Transactions

* Frauds in Sales and Collections

Frauds in sales generally relate to fraudulent financial reporting.

frauds in cash collections relate to misappropriation of assets, typically accomplished by clerks or

a. Fraudulent Financial Reporting

The following methods can be used to increase sales fraudulently:

*Recording valid transactions twice

*Recording operating leases as sales

* Recording deposits as sales

*Recording consignments as sates

* Recording sales when the chance of a return is likely

* Recognizing revenue that should be deferred

b. Misappropriation Of Asset : Withholding Cash Receipts

II Acquisitions and Payments Cycle

The following may occur in the acquisitions and payments cycle:

*Failing to record a purchase in the proper period (cut off errors)

2. Frauds in the Acquisitions and Payments Cycle

III -Payroll and Personal Character

2. Frauds involving Payroll

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