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CHAPTER 15

“Errors and Irregularities in the


Transaction Cycles of the
Business”
T H R E E B A S I C B U S I N E SS
T R A N S A C T I O N C YC L E

Sales and Collection Cycle


Acquisitions and Payments Cycle

Payroll and Personal Cycle


FRAUD AND ERROR
SALES AND COLLECTION
CYCLE

Errors in Recording Sales and Collections


Transactions
Frauds in Sales Collections
• Fraudulent Financial Reporting
• Misappropriation of Assets: Withholding
Cash Receipts
1. Skimming
2. Lapping
3. Kitting
ERRORS IN RECORDING SALES
AND COLLECTIONS

• Include mechanical errors


such as wrong piece or wrong
quantity, recording sales in
the wrong period, and failure
to understand proper
accounting for a transaction
FRAUDS IN SALES AND
COLLECTIONS

• Fraudulent Financial
Reporting
Ex: Recording Fictitious Sales
Recording valid transaction twice
Recording in the current period
sales
that occurred in the succeeding
period
Recording operating lease as sales
Recording deposits as sales
Recording consignments as sales
M I S A P P R O P R I AT I O N O F
A SS E T S : W I T H H O L D I N G
CASH RECEIPTS
 Skimming – act of withholding cash receipts
without recording them
 Lapping – used to conceal the fact that cash
has been abstracted; shortage of one
customer’s account is covered with a
subsequent payment made by another
customer
 Kitting –another technique used to cover
cash shortage or two inflate cash balance
A C Q U I S I T I O N S A N D PA Y M E N T S
CYCLE

Errors in the Acquisitions and


Payment Cycle
1. Failing to record a purchase in the
proper period
2. Recording goods accepted on
consignment as purchase
3. Misclassifying purchases of assets and
expenses
4. Failing to record a cash payment
5. Recording a payment twice
6. Failing to record prepaid expenses as
A C Q U I S I T I O N S A N D PA Y M E N T S
CYCLE

Frauds in the Acquisitions and Payments


Cycle

1. Paying for Fictitious Purchases


2. Receiving Kickbacks

3. Purchasing Goods for Personal Use


PAY R O L L A N D P E R S O N N E L C Y C L E

ERRORS

A. Paying employees at the wrong rate,

B. Paying employees for more hours than they


worked

C. Charging payroll expense to the wrong accounts,


and

D. Keeping terminated employees on the payroll.


PAY R O L L A N D P E R S O N N E L C Y C L E

Frauds Involving Payroll

1. Fictitious Employees

2. Excess Payments to Employees

3. Failure to Record Payroll

4. Inappropriate Assignment of Labor Costs to


Inventory

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