Cash Controls and a Suspected Shortage at Northside Family Dental
Northside Family Dental collects about $78,000 a month, roughly 18% in cash copays. The office manager, who has been with the practice for nine years, opens the mail, posts payments, prepares deposits, reconciles the bank statement, and handles payroll. The dentist reviews only a monthly profit-and-loss summary. In March, total deposits were $6,900 below the sum of daily receipts; shortfalls appear mainly in weeks with many cash patients, and several bank fee entries are round numbers such as $450 and $950. A patient called to say her $450 cash payment was recorded as $45. The practice's accountant also found a vendor invoice paid twice. The office manager is on vacation, and the dentist asks what to do now, how to correct the records, and how to prevent a recurrence.
1. Identify the internal control weaknesses and design specific controls to address them.
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One person controls custody of cash (opening mail, deposits), recordkeeping (posting payments), reconciliation, and payroll-a classic segregation-of-duties failure. The dentist also has no independent review, so errors or misappropriation can persist for months.
Controls: (1) separate cash handling, posting, and reconciliation among at least two people; (2) require daily deposit of intact cash with a dual count and a point-of-sale closeout report; (3) have the dentist or an outside bookkeeper review the bank statement and reconciliation monthly, with sign-off; (4) prohibit manual journal entries to cash or revenue without supporting documentation and a second approval; (5) require owner approval and a three-way match (purchase order, receiving, invoice) before paying vendors; (6) conduct surprise cash counts and rotate duties; (7) add a fidelity bond and annual external review. Small practices can outsource reconciliation and statement review-the key is that the person who handles cash does not also prove the balance.
2. Evaluate the pattern: what indicates misappropriation rather than error? What evidence should be secured, and what should the dentist avoid doing?
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The pattern points more toward misappropriation than error: shortfalls concentrate in cash-heavy weeks; bank fee entries are round numbers ($450, $950) that do not match normal bank charges; the $450-to-$45 posting is exactly the kind of alteration that conceals a $405 shortage; and the same person controls receipts, deposits, and reconciliation. The duplicate vendor payment may be a separate control failure or a second scheme. Nine years of trust is not evidence of honesty either way.
Secure, without altering: bank statements and deposit slips, daily receipts and POS journals, reconciliation workpapers, journal-entry audit trail, canceled checks, vendor invoices and payment history, and the patient's payment record. Photograph or copy originals, keep a chain-of-custody log, and do not delete email. Avoid confronting the manager alone, discussing suspicions with staff, or letting anyone 'fix' the records. Engage a CPA for a forensic review and an attorney for privilege and reporting advice, then notify the fidelity-bond insurer. Test innocent explanations-bank errors, timing, a transposed entry-before concluding intent.
3. Explain how to correct the $450 misposting and the duplicate vendor invoice, and how to handle the bank reconciliation items.
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If the patient paid $450 in cash and the deposit included $450, the $45 posting is a bookkeeping error: debit Cash $405 and credit Accounts Receivable $405, and correct the patient ledger. If only $45 was deposited, the $405 is a cash shortage, not an A/R correction; record it in a suspense or receivable-from-employee account pending investigation, and do not write it off as a billing adjustment.
For the duplicate vendor invoice, first request a refund or credit from the vendor and record a receivable if collectible; if not collectible, record a loss, and if an employee caused it, reclassify to a receivable from that employee. Document the approval trail.
On the bank reconciliation: add deposits in transit to the bank balance, subtract outstanding checks, and adjust the book balance for bank fees, interest, and errors. An NSF check reverses the original deposit-debit A/R and credit Cash-and restores the patient balance. Each reconciling item needs support; unexplained differences should not be forced into a plug figure.