Question

Harriet Knox, Ralph Patton, and Marcia Diamond work for a family physician, Dr. Gwen Conrad, who is in private practice. Dr. Conrad is knowledgeable about office management practices and has segregated the cash receipt duties as follows. Knox opens the mail and prepares a triplicate list of money received. She sends one copy of the list to Patton, the cashier, who deposits the receipts daily in the bank. Diamond, the rec­ordkeeper, receives a copy of the list and posts payments to patients’ accounts. About once a month the office clerks have an expensive lunch they pay for as follows. First, Patton endorses a patient’s check in Dr. Conrad’s name and cashes it at the bank. Knox then destroys the remittance advice accompanying the check. Finally, Diamond posts payment to the customer’s account as a miscellaneous credit. The three justify their actions by their relatively low pay and knowledge that Dr. Conrad will likely never miss the money.

1. Who is the best person in Dr. Conrad’s office to reconcile the bank statement?

2. Would a bank reconciliation uncover this office fraud?

3. What are some procedures to detect this type of fraud?

4. Suggest additional internal controls that Dr. Conrad could implement.

Answer 1

1. The best person in Dr. Conrad’s office for reconciliation of the bank statement would be Dr. Conrad. The reason is that he has vast knowledge about office management, and also holds the responsibility as the owner of the business to have control of every department that constitutes the entire organisation.

2. No, the reconciliation of the bank statement would not uncover this office fraud. Reason being there was collusion among the employees, in which they neither recorded the transaction receipt nor they deposited the cheque in the bank. In case there was a income reconciliation done with receipts, then the fraud probably could have definitely uncovered.

3. Dr. Conrad must get onboard one more employee that oversees the processes of reconciliation. Also, there can be income reconciliation with receipts and bank reconciliation. It is vital that proper documentation of all the records must be made. The transaction need to be approved by concerned authority. He should implement surprise checking process. Dr. Conrad should conduct daily review of all the activities. He may outsource the task to any third independent party who would work like an internal auditor for Dr. Conrad. The checks received should be marked ‘For Deposit only’ at the time they are received. Remittances if met should not be destroyed in any circumstances.

4. The additional internal controls that Dr. Conrad should implement.

--Must tell the patients to insist on an official receipt to prove payment

-- Inform patients to cross the checks and it need to be "for account payee only"

-- Instruct the bank not to accept endorsements to patient checks

-- Any credit or adjustment in the accounts must be approved

-- Remittances once met should be marked paid.

--Endorsement for patients check should not be accepted.