CORRESPONDENCE LEARNING MODULE
ETHC 1023 (Governance, Business Ethics, Risk Management and Internal Control)
2nd Semester Academic Year 2020-2021
Week 16 – ERRORS AND IRREGULARITIES IN THE
TRANSACTION CYCLES OF THE BUSINESS ENTITY
Topics: a) The three basic transactions cycle
1. Sales and Collections Cycle
2. Acquisitions and Payment Cycle
3. Payroll and Personnel Cycle
Learning Outcomes: At the end of this module, you are expected to:
Understand errors and frauds that maybe committed in the business processes,
namely:
1. Sales and Collections Cycle
2. Acquisitions and Payment Cycle
3. Payroll and Personnel Cycle
Hi guys. May this week be full of hope for a COVID-free world, enlightenment, commitment to our
Christian faith and blessings, physically, mentally and spiritually.
LEARNING CONTENT:
This week, we are going to learn about fraud and errors that maybe committed within the transaction cycles of
a business entity and how these are covered by the perpetrators.
The three basic transactions cycle include:
Sales and Collections Cycle
Acquisitions and Payment Cycle
Payroll and Personnel Cycle
I. Sales and Collections Cycle
1. Errors in Recording Sales and Collections Transactions
o Mechanical errors like using wrong quantity or recording sales in the wrong period
o Bookkeeper’s lack of understanding on proper accounting of transactions
2. Frauds in Sales and Collection
a. Fraudulent Financial Reporting
o Recording fictitious sales >> cresting fictitious shipping documents, sales invoices, etc.
o Recording valid transactions twice
o Recording in the current period sales that occurred in the succeeding period
o Recording operating leases as sales
o Recording deposits as sales
o Recording consignments as sales
o Recording sales when the likelihood of a return is high
o Following revenue recognition practices not in PFRS
o Recognizing revenues that should be deferred
ETHC 1023- Governance, Business Ethics, Risk Management and Internal Control | 1
b. Misappropriation of Assets >> withholding cash receipts
a) Skimming A type of white-collar crime that involves taking the cash of a business prior to
entering it into the accounting system. It is an “off-book” fraud because the cash
theft has occurred before it is entered into the bookkeeping system, thus it is
never reported into the accounting
Individuals are also susceptible to skimming thru the ATM, debit card and credits
cards.
How to detect skimming?
You can detect unrecorded sales by comparing your actual inventory with your
book inventory. Declining inventory levels without a corresponding rise in sales is
a red flag for unrecorded sales skimming.
b) Lapping It occurs when an employee alters accounts receivable records in order to
hide the theft of cash. This is done by diverting a payment from one customer,
and then hiding the theft by diverting cash from another customer to offset the
receivable from the first customer.
How to detect lapping?
A lapping scheme can be detected by tracing how cash receipts have been
applied to customer accounts. If there is evidence that cash receipts are routinely
being applied to the wrong customer accounts, then there is likely an
active lapping scheme in progress. A lapping scheme can only temporarily hide
the theft.
c) Kiting Carried out within the banking system, kiting typically involves passing a series
of checks at two or more banking institutions, using accounts that have
insufficient funds.
Before that check clears, they then withdraw the funds from the second bank
account and deposits the funds back into the first.
How to detect kiting?
The strongest method for deterring or stopping kiting is observant, alert tellers,
and the aid of the computer to detail a list of all items presented for payment that
are drawn against uncollected funds.
Examples of vendor fraud:
Billing schemes - In a billing scheme, an employee generates false payments to himself/herself using
the company’s vendor payment system either by creating a fictitious vendor (shell company) or by
manipulating the account of an existing vendor.
Bribery and kickbacks - An employee participates in a bribery scheme when he or she accepts (or
asks for) payments from a vendor in exchange for an advantage.
Check tampering - A check tampering scheme involves forging, altering or creating unauthorized
checks. An employee steals checks for payment to a vendor and alters the payee or forges the
vendor’s signature to deposit them in his or her personal account.
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Over billing - A vendor pads invoices to charge the company for more goods than it ships or to charge
a higher price than agreed. This can be done in collusion with an employee, who receives a kickback or
by the vendor alone to defraud the company.
Price fixing - This type of fraud occurs when competing vendors collude among themselves to set a
minimum price or price range. This makes both vendors’ prices appear competitive and ensures the
company pays an inflated price no matter which vendor is chosen. While employees of the company
are not usually involved, they sometimes provide information to the vendors about pricing and budgets
to facilitate this fraud.
II. Acquisitions and Payments Cycle
1) Errors in the Acquisitions and Payments cycle
o Failing to record a purchase in the proper period
o Recording goods accepted on consignment as a purchase
o Misclassifying purchases of assets as expense
o Failing to record a cash payment
o Recording a payment twice
o Failing to record prepaid expenses as assets
2) Frauds in the Acquisitions and Payment Cycles
o Payment for fictitious purchases >> using fictitious invoices, receiving reports, purchasing orders
o Receiving kickbacks > is illegal payment to an employee for facilitating a transaction.
Paying or receiving kickbacks is a corrupt practice that interferes with an employee's or a public
official's ability to make unbiased decisions.
o Purchasing goods for personal use >> charged to the company account
III Payroll and Personnel Cycle
1) Errors
o Paying employees at the wring rate
o Paying employees for more hours than they actually worked
o Charging payroll expense to the wrong accounts
o Keeping terminated employee in the payroll
2) Frauds involving payroll
Fraud Scheme How to detect Fraud
o Fictitious employees Fictitious or ghost employee Conduct surprise payoff by assigning
schemes are a common check distribution over to an official not
fraud scheme during which associated with preparing payroll
there are people on the Check personnel file and employees’
payroll who don't work for time cards to substantiate absent
the company in question but employees
do collect a salary or Compare budget vs actual payroll
remuneration Look at the percentage of revenue paid
out to commissions and bonuses to see
if it is above the projection.
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o Excess Payments to Increasing the rate above Require human resource officers to approve
employees what was the approved rate, increase in rates of employees
or increasing the number of Monitor total hours worked and paid for
hours that an employee Use analytical procedures to compare cost
actually worked per unit of actual production can also be
helpful
o Failure to record payroll This is done by companies Analytical procedures can be performed to
with difficulty meeting profit test the reasonableness of payroll cost.
targets
Not-for-profit entities with
difficulty managing costs
and expenses
o Inappropriate A company having difficulty Analytical procedures comparing budgeted
assignment of Labor meeting targets in profits cost and verification of inventory actual cost
Costs to Inventory may assign inventory to
labor cost.
--------------------------------------------------------------End of Lesson-------------------------------------------------------------
Please proceed to the Participation part.
References:
1. Corporate Governance, Business Ethics, Risk Management and Internal Control
By: Ma. Elenita Balatbat Cabrera and Gilbert Anthony B
2. Code of Ethics for Professionals
3. www.books.google.com.ph
PARTICIPATION (for recitation purposes) 18 pts
PLEASE write your answer in your Journal of Learning (JoL)
Please upload in LMS your JOL covering Learning Resources for weeks 14, 15 and 16 plus the Participation
answer for Learning Resources Week 16. Make sure that you have your signature on every page you will pass.
Put it in a PDF(preferably) or word format before uploading. Please be guided with the previous criteria/guidelines
for passing the JoL. God bless!
Case Study:
Edilberto Cruz is a highly competent accounting executive of Paloma Morning Breeze Corporation who had
been responsible for accounting-related matters for more than two decades. His devotion to the firm and his
duties has always been exceptional, and over the years, he had been given increased responsibility. For his
entire career, he rarely gets sick or rarely absents himself from work.
Both the President of Paloma Morning Breeze Corporation and a partner of one of an independent CPA firm in
charge of audit were speechless to uncover an embezzlement case of more than P5,000,000 by Edilberto Cruz
over a 10-year period by not recording billings in the sales journal and subsequently diverting cash receipts to
his own bank account.
What factors contributed to the embezzlement of more than P5M?
ETHC 1023- Governance, Business Ethics, Risk Management and Internal Control | 4
