ACCOUNTING INFROMATION SYSTEM

ACC2543

ASSESMENT REPORT

FRAUD AND INTERNAL CONTROL

GROUP MEMBERS:

1. NUR HIDAYAH NADHIRAH BINTI MOHD SATAR (BDA1706-067)

CLASS: DIA 5A

LECTURES NAME: PUAN MAZAFATON BINTI MOHMAD

a) Types of Fraud
A kickback is an employee receives payments or benefits from third parties in return for
business advantages or for unauthorized discounts. A kickback in the form of money,
gifts, credit or anything of value may be viewed as a corrupt practice that interferes with
an employee’s or official’s ability to make unbiased decisions. The objective is to induce
the employee of the buyer to purchase or recommend the purchase of a product or
service offered by the vendor. Some schemes involve multiple employees which
increases the opportunity to avoid a company’s internal control procedures. For
example, financial institution that provides cash or bonuses to mortgage brokers who
convince borrowers to select their services over another provider. The terms of
“kickback” comes from colloquial English language, and describes the way a recipient of
illegal gain “kicks back” a portion of it to another person for that person’s assistance in
obtaining it.

b) Internal controls that an organization can employ to deal with kickbacks is segregation
of accounting duties which involving the custody of assets, authorization of transactions
affecting those assets and recording of related transactions. For example, the Institute
of Internal Auditors suggests there needs to be an adequate division of responsibilities
among those who perform accounting procedures or control activities which are
authorization or recording and those who handle the assets, custody. In general, the
flow of internal processes should be designed in such a manner that one individual’s
roles and responsibilities serve in part as a check and balance of another individual’s
work. Such a system would serve to reduce the risk of undetected errors and limit
opportunities to misappropriate assets or conceal intentional misstatements in the
financial statements.
 SUGGESTION INTERNAL CONTROL FOR EACH PREVENTIVE, DETECTIVE AND
CORRECTIVE CONTROL:-

PREVENTIVE CONTROL
i. Requiring prior approval of credit customers, vendors and purchases. This is to
ensure that we will collect the exact and right amount of credit or debts from the
creditors. It is also to pay and purchase the stocks from vendors in the amount
required as it is not exceed the amount of credit and to prevent from getting involve
in fraud. The approval is needed to make sure the kickback is not happen. As
example the supervisor approve the wrong amount to keep the overbalance for him.
Services are rendered by a vendor who are involved in a kickback relationship are
service operationally needed by the victimized company.
ii. Requiring supervisory review and approval of payroll information before
disbursement to reduces the risk of collusion in altering pay rates and to prevent the
payroll clerk from paying exceed or less amount of salary to the employees. A
company can also initiate processes to detect kickback schemes such as supervisor
periodically reviewing vendor transaction to spot unusual concentration of activity
with a few vendors. Overbilling by vendors is a classic strategy deployed by vendors
to fund their kickbacks.
iii. Segregation of duties is the main and very important to reduce the kickback.
Segregation of duties which is save guarding assets is one the key concepts in
placing internal controls over the company’s assets. It is involves separating three
main function and having them conducted by different employee which are having
custody of assets, being able to authorize the use of assets and recordkeeping of
assets. It will ensure that there is oversight and review to catch errors. It also helps
to prevent fraud or theft because it requires two people to collude in order to hide
the transaction.
iv. Computer password and access controls are worthwhile to combat the kickbacks.
Passwords are placed on computer programs to prevent unauthorized access.
Information and communication involved providing employees and customers with
the ability to express and gather information. This precaution is not just to keep
someone from accessing the records of another employee but also to prevent
unauthorized changes to record. Therefore, computer password and access controls
really helps to keep the private data saved because only specific employee can
access and know the password. By implementing this, it will delay the outsiders to
access the private and important data easily.
 DETECTIVE CONTROL

i. Computer usage logs must be kept to avoid the outsider from access the private
data or important information of company. It is to ensure that access to it is only
available through a password protected interface. This log will track all changes
made from an external or internal source by the user name, IP address, or type of
management interface used to access the switch which is very useful for tracking
down erroneous or kickbacks entries.
ii. Logs are a form of detective control to be reviewed and audited at regular intervals.
Kickbacks scheme cannot easily detect in a company’s books and records. Financial
records must be examined by someone who understands the particular industry and
notices subtle red flags indicating the possible presence of kickback arrangement.
Auditors are required to about control activities and the overall control environment.
So that, the employees will have no chance to edit and change the data and to avoid
from making errors. Some types of errors can be spotted by running reports that
only show items that fall outside of the normal results. These may not all indicate
certain errors, but the probability of underlying errors is higher for the reported
items.
iii. Surprise cash account is useful in order to deal with kickbacks. This is because the
employee will always beware and alert to not use the cash indiscriminately. They will
also make sure the cash account is in the correct amount as the transaction in the
company.
iv. Reconciliation means proving documenting that an account balance is correct. For
example reconcile the balance in general ledger account cash in checking to the
balance shown on the bank statement. The purpose is to report the correct amount
in general ledger account cash in checking.
 CORRECTIVE CONTROL

i. Training and operation manuals can be revised to prevent future errors and
irregularities. Most employees have some weakness in their workplace skills.
Therefore, training allows employees to strengthen those skills that each employee
needs to improve. This will also build the employee’s confidence as they have a
stronger understanding and responsibilities of their job. As an example, before hiring
the employee, we give them training sufficiently and penalty to make sure they can
work honestly not involve in kickbacks.
ii. Data backups can be used to restore lost data in case of a fire or other disasters. For
example, if the manager itself intent to steal the company’s private data and
important information to sell it in order to gain profits for himself. The advantages if
our company has data at another place are the company will not lost all the
information and data easily.
iii. Insurances can be utilized to protect against damage to the property owned or
stolen assets. As for example, if the fire occurs to the company and cause damages
to the property and asset which need the high cost to repair all the damages, the
company can claim the right insurance of damages in order to have a backup
financial when facing loss.
INTERNAL CONTROL CASE STUDY

CONTROL WEAKNESS IN PAYROLL SYSTEM

1. Payroll clerk prepares and signed the paychecks without authorization, then
distributes the checks to the employees. This will have a tendency in fraud which he
or she may be take the checks for his personal use. It will also may lead to the
employees made a certain error. The checks will not be in independent checks as it
does not authorize by supervisor.
2. Supervisor prints a summarized personnel timesheet form from the validation
terminal without reviewing it, straightaway forwards it along with the employee time
card. This will cause that employees will not be discipline with their works. They will
come to work freely without follow the rules of their work.
3. Maintenance of time cards every two weeks. Employees can adjust and charging
more time than they actually worked. This is because it has a long period to update
their hour-worked. The credibility of employees will decline and they will received
the salary exceed their hour-worked.
4. Computer terminal located in each sales offices and work area. The system will not
accurate because the computer terminal does not located in certain area. It should
just locate at least two place of computer terminal area. The employee also can get
involved in fraud as they can access data and adjust their time-worked as they like
when computer terminal located in each sales office and work area. The terminal
supposedly should in office area.
5. Payroll clerk prepares and signed the paychecks, then distributes the checks to the
employees. The clerk think he has power to prepares and sign the paycheck.
Inadequate segregation of duties could make fraud detection difficult. For example,
accepting the cash from customers without recording the transaction in the
company’s books. Moreover, the clerk will also use this opportunity to get the
benefits for himself.
FIXED ASSESTS SYSTEMS

1. No accounting records and reports upon receiving of particular asset. This will lead
to lack of proper information and inadequate documents and records. The Inventory
may be exceeding from the purchasing department budget. Therefore, it will affect
financial because the department will make purchasing of same items as the double
record will occur.
2. No approval is required upon disposal of fixed asset item in the organization. It will
affect the amount of fixed assets as it will not be able to properly classify and record
fixed asset data in consistent and uniform manner. Unnecessary shortage cost
incurred.
3. Cash disbursement clerk prepares a check and records the checks in the check
register. The clerk will commit the fraud and intentional errors as he or she is the
only person who is responsibilities to prepare and records the check. They may
record that the checks was stolen whereas they took the checks and hide the
transaction.
4. The purchasing department clerks select the supplier himself. The supplier will not
be an independent supplier as they are selected by their friends and relatives. The
clerk itself also will have sympathy.
5. The cash disbursement clerk receives the cash disbursement voucher from account
payable and straight forward send invoice to the vendor. It will cause the problem
when the invoice are receives in the wrong amount and it will difficult to send
another invoice to the vendor. The supervisor must check the cash disbursement
voucher first before sending it to the vendors.