Page 171 - Accounting Information Systems

142 PART I Overview of Accounting Information Systems

well as receiving and distributing a wide range of out- c. Posting of amounts from both the cash receipts and
side correspondence to various internal departments. the cash disbursements journals to the general
One of Sethi’s jobs was to open cash receipts envelopes ledger.
from customers making payments on their credit card d. Writing checks to vendors and posting to the cash
balances. He separated the remittance advices (the bills) account.
and the checks into two piles. He then sent remittance e. Recording cash receipts in the journal and preparing
advices to the accounts receivable department, where the bank reconciliation.
the customer accounts were updated to reflect the pay-
ment. He sent the checks to the cash receipts depart-
ment, where they were recorded in the cash journal and
then deposited in the bank. Batch totals of cash received 5. EXPENSE ACCOUNT FRAUD
and accounts receivable updated were reconciled each While auditing the financial statements of Petty Corpo-
night to ensure that everything was accounted for. ration, the certified public accounting firm of Trueblue
Nevertheless, over a one-month period Sethi managed and Smith discovered that its client’s legal expense
to steal $100,000 in customer payments and then left account was abnormally high. Further investigation of
the state without warning. the records indicated the following:
The fraud occurred as follows: Because the name of
Since the beginning of the year, several
the company was rather long, some people had adopted
disbursements totaling $15,000 had been
the habit of making out checks simply to Benson. Sethi
made to the law firm of Swindle, Fox, and Kreip.
had a false identification prepared in the name of John
Benson. Whenever he came across a check made out to Swindle, Fox, and Kreip were not Petty Corpora-
Benson, he would steal it along with the remittance tion’s attorneys.
advice. Sometimes people would even leave the payee A review of the canceled checks showed that they
section on the check blank. He also stole these checks. had been written and approved by Mary Boghas, the
He would then modify the checks to make them payable cash disbursements clerk.
to J. Benson and cash them. Because the accounts re- Boghas’s other duties included performing the end-
ceivable department received no remittance advice, the of-month bank reconciliation.
end-of-day reconciliation with cash received disclosed
Subsequent investigation revealed that Swindle, Fox,
no discrepancies.
and Kreip are representing Mary Boghas in an unre-
lated embezzlement case in which she is the defen-
dant. The checks had been written in payment of her
Required
personal legal fees.
a. This seems like a foolproof scheme. Why did Sethi
limit himself to only one month’s activity before
leaving town?
Required
b. What controls could Benson & Abernathy
implement to prevent this from happening a. What control procedures could Petty Corporation
again? have employed to prevent this unauthorized
use of cash? Classify each control procedure in
accordance with the SAS 78/COSO framework
(authorization, segregation of functions, supervision,
4. SEGREGATION OF DUTIES and so on).
Explain why each of the following combinations of b. Comment on the ethical issues in this case.
tasks should or should not be separated to achieve
adequate internal control.
a. Approval of bad debt write-offs and the reconcilia-
tion of the accounts receivable subsidiary ledger and 6. TOLLBOOTH FRAUD
the general ledger control account. Collectors at Tollbooths A and B (see figure on next
b. Distribution of payroll checks to employees and ap- page) have colluded to perpetrate a fraud. Each day,
proval of employee time cards. Tollbooth Collector B provides A with a number of toll