Question

Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern town. Last winter, his brother Mike lost his job at the machine plant. By January, temperatures were sub-zero. and Mike had run out of money. Dylan saw that Mike's account was overdue, and he knew Mike needed another delivery to heat his home. He decided to credit Mike's account and debit the balance to the parts inventory because he knew the parts manager, the owner's son, was incompetent and would never notice the extra entry. Months went by, and Dylan repeated the process until an auditor ran across the charges by chance. When the owner fired Dylan, he said, "If you had only come to me and told me about Mike's situation , we could have worked something out".

Question one: What can a business like this do to prevent employees fraud of this kind?

Question two: What effect would Dylan's actions have on the balance sheet" The Income Statement?

Answer 1

Question one: What can a business like this do to prevent employees fraud of this kind?

A business should establish a internal control regarding entries passed in which a entry passed by a employee must be approved by appropriate authority, so that these chances of fraud can be mitigated.

Question two: What effect would Dylan's actions have on the balance sheet" The Income Statement?

This fraudulent entry would have following consequences on financial statements:

a) Closing inventory will be increased by this amount and hence the net income would also be increased by the same amount because closing inventory will be shown in credit side of income statement.