Introduction Internal controls systems are increasingly essential in achieving organizations

objectives and goals. Utilizing efficient internal controls often helps in eliminating bottlenecks,
frauds, redundancies, errors, and unnecessary steps. Efficient internal control systems often
prevent loss of company resources such as capital assets, inventory, cash, and proprietary
information just as they aid in ensuring compliance with laws and regulations of the country.

Explain how Heirloom could defraud the bank and how each internal and external party,
except the bank, could defraud Heirloom.?
Heirloom can easily defraud the bank by giving the bank a mispresented note receivable aging
lists and a mispresented calculation on the maximum amount Heirloom can borrow from the bank.
The fraud would enable Heirloom to obtain more short term loan. How each internal and external
party, except the bank, could defraud Heirloom? Sales agents According to how Heirloom deals
with its sales agents, there are various loopholes that the sales agents can use to defraud
Heirloom. For instance, sales agents can easily come up with fictitious sales that would not be paid
in full the long run just to increase amount of the monthly sales and increase their commissions.
Photographers Since the entire cost of the photographer is accrued whereas the company points
to the last entry to show how conservative its accounting is, photographers can easily collude with
the accounting department of Heirloom to provide mispresented figures on photographers
expenses therefore defrauding the company. Receivable department and accountants It is clear
that the receipting system of Heirloom is not very much straight forward. For instance, the
salespeople often send Heirlooms accounting department the order form, the total payment or the
down payment, and the signed note for $650 if the customer finances the transaction. In most
cases, the payments are hand-written money orders. In addition, many customers of Heirloom live
in rural areas without a return address is often a Post Office box and phones to confirm receipt of
their phones, accountants can definitely rewrite the cheques from the customers to pay themselves
therefore defrauding the company. Customers The system of sales in Heirloom is not effective in
that it allows for huge amount o credit balances at the hands o their customers without adequate
following techniques of recovering their debts before writing them off. As a result, customers can
pick huge amount of products from the company paying only the down payment and ailing to pay
the rest in order to be classified under bad debts written off.
What risk factor, unusual item, or abnormality would alert you to each fraud?
As for the bank fraud, there would be continuous loaning of money to Heirloom. However, the
company would only pay small portion of their bank loans since they had limited capacity to pay
their loans as compared to false documents they had presented to the bank. For the salespersons
fraud, Heirloom will experience high records in sales volume, but limited money received to back
up the quantity of units sold. The photographers expenses will always be unpredictable as it
increases without quantities evidence of output from them. Luxurious lifestyle of an employee
(accountants and receivable department personnel) will always be high above their normal
incomes revealing the kind of fraud taking place within Heirloom.
What control weaknesses make each fraud possible?

1. Lack of internal control system policy documentations

2. Lack of segregation of duties in the accounting and receivable department
3. Existence of ineffective source documents to record salespeoples actual sales.
4. Heirloom has poor debt collection policies 5. Lack of senior personnel who authorize all
expenses according to authenticity of the expense source document.

Recommend one or more controls to prevent or detect each means of committing fraud.
Due to deficiencies realized in the Heirloom, the following recommendations are necessary:
I. The management of Heirloom should ensure that all their staff know their duties and ensure is
effective segregation of duties within the accounting department.
ii. The management of Heirlooms should come up with a control mechanism whereby sales people
are paid according to amount paid by customer not on the quantity sold.
iii. Heirloom should adopt net 30 days for all their pending debts in order to avoid accumulation of
bad debts.

iv. Photographers expenses should always be on the amount of output of each photographer to
avoid possible collusion between accountants and photographers.

v. All payments towards commissions and photographers should always with necessary support
documents before approval for payment by the CEO of Heirloom.
vi. Banks should always on using audited statements when giving out loans as opposed to non-
audited statements.
vii. The management of Heirloom should develop a documentation of its internal control systems
and place them at strategic place that all employees can access.
viii. The management of Heirloom should review its internal control systems periodically to aid
them in coping with modern trends in organizational fraud prevention.