ACC701

VIRTUAL GROUP
CASE STUDY
(20%)

GROUP MEMBERS:

1. SHAZIDA BIBI – 2018002105

2. SHIVENDRA NAICKER- 2018000339

3. PATRICK SHIVNIL DEO- 2018000167

 
PART A

 Sota Tale Era Ltd.’s “bank reconciliation shows an overdraft of $150 954, whereas
the company states that it has a profit before tax of $300 000. It indicates that the
company has overstated its assets and understated” liabilities.

 According to the “bank reconciliation statement, there are seven (7) outstanding
deposits. Whenever, there are more outstanding deposits in bank reconciliation, it
means that the business is keeping cash and is not following the important internal
control which is daily banking. However, if outstanding deposits are been cleared
within five days, it’s said to be alright, but if the deposit takes more than five days,
then it can create a concern or rather problem like lapping fraud can arise. Thus, when
we consider Sota ltd case, we can say that, the account receivable receipts of $22728,
was cleared within five days, which is good, fraud may not come there, however, the
other six outstanding deposits of cash sales receipts are normally banked in between
9-11 days, which can create problem such as, lapping” fraud.

 Another concern could be “the outstanding cheques. There is a delay in clearing

cheques to the supplier. There are total of nine outstanding cheques, out of which, the
two cheques relating to other expenses payment are cleared within six days- which
may not create errors or fraud, however, the remaining seven cheques, which are
accounts payable payment are cleared between 19-22 days. This can create
misallocation between cash and payables. For instances, for cheque #6124 of accounts
payable payment of the amount $20624, was written off by the business (Sota ltd) on
30th December and it is cleared on 18th January, it create approximately 19 days for
the cheque to be cleared. Thus, these 19 days is a concern, basically, when individual
get a cheque they will carry it to the bank as soon as possible, but here at Sota ltd, it
takes 19 days, which means that the business has written the cheque on 30th
December, has decreases the cash at bank but did not gave the cheque to the supplier,
the business was holding the cheque with them. However, then maybe they gave it to
the supplier on 17th January and then the supplier might have presented it on 18 th
December. The business is trying to understate the cash in the business record [but in
fact it is not understated] but overstate cash in the bank record. This situation may
have arisen in accounts payable payment of Sota ltd bank reconciliation” statement.
PART B

 Delay in banking - “looking at the Sota ltd, one of the outstanding deposits of
receipts from cash sales of amount $1306, which was written to the business on 24 th
December and cleared on 4th January. [Approximately: 11 days gap before cheque is
cleared]. Thus, to investigate the auditor need to check the date stamp by the bank on
the paying in slip. If this is the same date as on the bank statement, then this is the
actual date the cash was paid into the bank. Check the amount banked agrees with the
receipt for the date shown in the cash book. This will determine whether there is a
delay in banking cash received. If there is a delay, you should ask if there is cash for
sales which are unbanked and how it is held. If there is no cash, a fraud” (lapping) is
probably taking place.

 “Uncleared Cheques:”
 For “old outstanding cheques not yet cleared, discuss with the accountant, the
possible reasons for the supplier not cashing the cheque. Review the
supporting documentation and subsequent cheques and invoices for the
particular supplier to determine if a write back” is required.
 When looking at “Sota Tale Era Ltd, the company posted cheque number 6128
on 30th December however the cheque was not cashed or cleared until 21
January as such it took almost 22 days” to be cleared.
 In “the case of delay in cashing cheques , check the clients procedures for
sending cheques to suppliers if there appears to be a review of cheques before
mailing it could indicate a delay at the year end and may warrant a write back
as suggest above. Ask the accountant if cheques are held before release to
supplier as this might also require a write back. Review the types of suppliers
to the company, if many of the suppliers are foreign then two or three week
period to cash is not unusual. Review last year’s work to see if a similar
pattern appeared” then.
 Also “review the supplier’s statements and check the date cheques were
received per their records. If this date is similar to the bank statement it is
further evidence that cheques were not posted before the end” of the year.
PART C

Adjustments:

 If “the cash sales receipts from 24th December to 31st December were to be stated as a
result of fraud then they should be excluded from the cash receipts, sales and profit of
the company as such should be reduced accordingly”.
 Also “any payments recorded on 30th December but sent after the year end should be
redated as being paid in January. An adjustment journalized to eliminate them from
cash payments in December and to restore them to the balance on accounts payable”.
 After “adjustments, the new cash at bank balance should be an overdraft of $1362.
With an overdraft of $1362, Sota Tale Era Ltd will have a further decrease in its
liabilities thus the profitability of the company will increase”.

“Adjusted Bank Reconciliation of Sota Tale Era Ltd for the year ended 31st
December 2019

Balance as per bank statement at 31st December 2019 ($19 730)

Add outstanding deposit (debit to income
statement)
31st Dec ARL $22 728
$2998
Less outstanding cheques
(add to creditors)
29th Dec chq 6123 CP $2432
20th Dec chq 6131 CP $1928
st
Balance as per cash at bank at 31 December ($1362)
2019