Accounting Fundamentals In Society ACCY111

Lecture 11
Dr Sanja Pupovac
 ACCOUNTING SYSTEMS
Chapter 7

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REVIEW OF PREVIOUS WEEK
• Accounting for Retailing :
– Accounting for inventory
– Accounting for transport in and out
– Accounting for discounts received and trade discounts
– Accounting for discounts given.

• Mostly concerned with inventory movements, receipts from customers and

payments to suppliers.

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THIS WEEK
• Theoretical development:
– Internal Controls of accounting systems
• Strategies employed by fraudsters
• Red Flags of Fraud
• Principles of good internal control (including subsidiary ledgers)

• Detailed look at:

– Accounts Receivable
• Accounting for receipts from customers
– Accounts Payable
• Accounting for payments to suppliers

• BOTH areas involving cash and a high volume of transactions

• BOTH present high RISK of FRAUD to the entity.

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INTERNAL CONTROL SYSTEMS
• Efficient use and protection of an entity’s assets is a primary
management function
• All procedures adopted by an entity to control its activities and
protect its assets are described collectively as an internal control
system
• Consists of
– Administrative Controls
– Accounting Controls

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PRINCIPLES OF INTERNAL CONTROL
SYSTEMS
• Clearly established lines of responsibility
• Separation of record keeping and custodianship
• Division of responsibility for related transactions
• Adequate insurance
• Mechanical and electronic devices
• Internal auditing
• Physical controls

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Fraud of Cash
• 9 out of 10 frauds involve the cash account.
• Some techniques include use of:
– Bank accounts with false names
– Forged signatures
– Stolen and counterfeit cards/cheques
– Cash receipts never deposited at the bank
– Withdrawals/fund transfers from the company bank account never recorded
– Understated sales
– Falsified receipts

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Administrative Control Deficiencies
• Too much trust in employees and management
• Improper segregation of duties
• Employees in financial difficulties
• Underpaying or poorly paying staff
• Not ensuring staff regularly take leave and vacations
• Poor relationship between management and employees
• No monitoring controls
• No segregation of duties

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Accounting Control Deficiencies
• No or poor control of access to accounting records
• No approval authorities or authority limits
• No physical audits of assets
• Poor documentation and handling of source documents
• No Trial Balances of the ledger
• No reconciliations of accounts
• Inadequate investment in the accounting information system
• A lack of financial policies and procedures.

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Examples of industries with susceptibility to cash
fraud

• Cheque cashing outlets

• Foreign exchange outlets and functionaries
• Car dealers
• Real estate agents
• Brokers
• Banks
• Insurance companies
• Casinos and gambling establishments

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Red Flags for Cash Fraud
• Increased costs
• Lower quality of goods or services
• Incomplete supplier information on the invoice, e.g. no ABN or address
• Unusual supplier names and/or addresses on the approved supplier list
• Copies of invoices and receipts, not originals.
• New unexplained wealth of employees.
• Staff who have close relationships with suppliers
• Goods that are received but not ordered, and goods ordered but are not received.
• Unexplained or unusual trends in data, e.g. average days needed to collect accounts
receivables.

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Accounts Receivable Fraud: Strategies
• Lapping (most prevalent and hardest to detect)
• Fraudulent write-offs or discounts
• Stolen statements
• Forced Balancing
• Debiting old or fictitious accounts.

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Lapping
• An employee steals a payment from one customer and then
hides the theft by diverting cash from another customer to
offset the payment received from the first customer.
• Can be done in perpetuity
• New receivables pay for older debts, so no one fraud seems
too old.
• The same employee must handle the receipt and do the
record keeping (no separation of duties)

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Fraud example (something to think about) - Advance
Publications

• 46th largest private company in the United States, founded 1922.

• Over $7.6 billion sales and 29 thousand employees.

• In 2010 they were defrauded US $7,917,667.93 by conman Andy Surface.

What Happened?
• In 2010 accounts payable department acted on one email they received.
• A supplier advised that future payments should be paid into a new bank because they
(the supplier) had changed their banking arrangements.

How did the accounting system fail, and let this happen?

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How it was done
• Very simple:
– The fraudster established a real company, naming it “Quad Graph” to be
intentionally confused with the real supplier “Quad/Graphics.”
– He opened a bank account for his company.
– He sent an e-mail to the Accounts Payable department at Advance Publications.
– He waited for the money to roll in.
• This lecture is about preventing such fraud through controls in the accounting
system.

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Controls for Accounts Payable Fraud
• Separation of duties for setting up the supplier in the system and approving
their payments
• Vet all suppliers before they are used.
• Regularly review the volume of activity in each account for reasonableness
and consistency.
• Keep a log of sequentially numbered documents and cheques
• Always require original invoices, not copies, for payment.
• NEVER sign a blank cheque.
• Multiple signatures required for cheques.
• Control access to stored signatures.

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Subsidiary Ledgers, Control Accounts and
Special Journals
– When a large amount of repetitive and detailed information is required separate
subsidiary ledgers are used.
– General journal becomes inefficient where there are many transactions
– To overcome this problem and speed up the process, accountants use SPECIAL
JOURNALS and SUBSIDIARY LEDGERS in addition to the GENERAL JOURNAL
and GENERAL LEDGER.

– The total balance of the related subsidiary ledgers is recorded in a control account
– Often used for a range of accounts including
• Accounts Receivable
• Accounts Payable
• Inventory
• Plant and Equipment
• Investments
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FOUR MAJOR SPECIAL JOURNALS

For recording credit

SALES JOURNAL sales

For recording credit

PURCHASES JOURNAL purchases (items
purchased for resale

CASH RECEIPTS JOURNAL For recording all

cash receipts

For recording all

CASH PAYMENTS JOURNAL cash payments
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SALES JOURNAL
– Used solely for recording sales of inventory on credit
– Detail by debtor posted to subsidiary ledger daily
– Total posted to general ledger monthly
– Other columns can be added to the sales journal to
satisfy the needs of a specific entity.

• Advantages of a sales journal:

– Each transaction recorded on a single line.
– Entries do not require a narration.
– Eliminates posting separate debits and credits during
the month.

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Manual accounting systems – special journals

• Summary of sales journal procedures:

– From each sales invoice, enter the date of the
sale, invoice number, customer’s name and
amount of sale on a line in the sales journal.
– At the end of each day, post each sale to the
related customer’s account in the subsidiary
ledger.

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Manual accounting systems – special journals

• Summary of sales journal procedures:

– At the end of each month, total the accounts
receivable column of the sales journal and post the
total amount as a debit to the Accounts Receivable
Control account in the general ledger.
– Add the account balances of the accounts receivable
subsidiary ledger to verify that the total is equal to the
accounts Receivable Control account balance in the
general ledger.

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In ACCOUNTS RECEIVABLE In GENERAL LEDGER
SUBSIDIARY LEDGER

Debtor A
100

Accounts Rec
Debtor B (Control)
Account
200 800

Debtor C
500

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PURCHASES JOURNAL
• Records only credit purchases
• Can be used for items other than inventory
• Total posted to general ledger monthly
• Detail by creditor posted to subsidiary ledger daily
• Advantages
– as for sales journal

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In ACCOUNTS PAYABLE In GENERAL LEDGER
SUBSIDIARY LEDGER

Creditor X
200

Accounts Payable
Creditor Y (Control) Account
300 900

Creditor Z
400

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CASH RECEIPTS JOURNAL
• Records all receipts of cash
• Records each receipt and total banked
• Totals posted to general ledger monthly
• Detail (debtors only) posted to subsidiary ledger
daily
• “Other” accounts posted daily
• Columns set up for common receipts

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 CASH PAYMENTS JOURNAL
• Records all payments of cash
• Records each payment and cheque number
• Totals posted to general ledger monthly
• Detail (creditors only) posted to subsidiary
ledger daily
• “Other” accounts posted daily
• Columns set up for common payments

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USE OF GENERAL JOURNAL

• All transactions that cannot be recorded in special

journals are recorded in the GENERAL JOURNAL.
• a) Transactions involving Notes Payable/Receivable
b) Sale of non-current assets
c) Sales Returns and Allowances
d) Purchases Returns and Allowances
e) Write-offs of uncollectable accounts
f) Adjusting entries
g) Closing entries
h) Reversing entries

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OTHER ISSUES
• Abnormal balances in subsidiary ledgers
– Credit balances in accounts receivable
• E.g. deposit paid by customer prior to sale
– Debit balances in accounts payable
• E.g. deposit paid to supplier prior to purchase

• Account set-offs
– Buying and selling from same customer/supplier
– Need legal right to set-off

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COMPUTERISED ACCOUNTING ADVANTAGES

• Reduction in processing costs

• Speed of processing
• Error reduction
• Automatic posting
• Automatic production of documents and reports
• Improved reporting and decision making
• Faster response time

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COMPUTERISED ACCOUNTING
DISADVANTAGES

• Failed systems
• Power failure
• Viruses
• Hackers
• Fraud

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LIMITATIONS OF INTERNAL
CONTROL SYSTEMS
• Absolute assurance not possible
• Effectiveness influenced by size of entity’s operations
– E.g. small business – separation of duties?
• Good controls can break down due to tiredness, indifference or
carelessness
• Heavy reliance on segregation of duties
– Collusion?
• Difficulties in detecting computer fraud
Assessment 2: Accounting and Modern Slavery

• In WEEK 12 in your ENROLLED tutorial

• You will not be allowed to sit exam in another class
• Based on week 10 lecture and week 11 tutorial
• 3 questions (short and long answer)
• 45 min
• UOW student card
• No dictionaries permitted
• Bring pencils, rubbers
• Be on time!
• There will be a lesson/tutorial to follow

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Assessment 2: Accounting and Modern Slavery

• Questions based on week 10 lecture and

• One (1) question on: disclosure in relation to ANY modern slavery

themes and supply chain from your selected Sustainability/CSR report,
modern slavery report/statement from any (1) company of your choice.

• Make sure to acknowledge which company and report you have used, e.g
Coles Group Sustainability Report 2019, Coca - Cola Modern-Slavery-
Statement-2018, etc.

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NEXT WEEK…

Chapter 19 - Analysis and interpretation of

financial statements: ratio analysis.

“The power of education extends beyond the development of

skills we need for economic success” – Nelson Mandela

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