Page 172 - Accounting Information Systems

CHAPTE R 3 Ethics, Fraud, and Internal Control 143

tickets prestamped from Tollbooth B. The price of the 8. CMA 1289 3–4
toll from Point B to Point A is 35 cents. The fraud
works as follows: Evaluation of Internal Control
Oakdale, Inc., is a subsidiary of Solomon Publishing
and specializes in the publication and distribution of ref-
erence books. Oakdale’s sales for the past year
Toll 35¢ exceeded $18 million, and the company employed an
North A
B average of 65 employees. Solomon periodically sends a
member of the internal audit department to audit the
operations of each of its subsidiaries, and Katherine
Ford, Oakdale’s treasurer, is currently working with
C Ralph Johnson of Solomon’s internal audit staff. John-
Turnpike
D Toll $2
Toll $1 son has just completed a review of Oakdale’s invest-
Toll $4 ment cycle and prepared the following report.
F
Toll E
Entrances G General
Toll $3 Toll $5 South
Throughout the year, Oakdale has made both short-term
and long-term investments in securities; all securities are
registered in the company’s name. According to Oak-
Drivers entering the turnpike at distant points south dale’s bylaws, its board of directors must approve long-
of Point B will pay tolls up to $5. When these drivers term investment activity, whereas either the president or
leave the turnpike at Point A, they pay the full amount the treasurer may approve short-term investment activity.
of the toll printed on their tickets. However, the toll-
booth collector replaces the tickets collected from the Transactions
drivers with the 35-cent tickets provided by Collector
The treasurer made all purchases and sales of short-term
B, thus making it appear that the drivers entered the
securities. The board approved the long-term security
turnpike at Point B. The difference between the 35-
purchases, whereas the president approved the long-
cent tickets submitted as a record of the cash receipts
term security sale. Because the treasurer is listed with
and the actual amounts paid by the drivers is pocketed
the broker as the company’s contact, this individual
by Tollbooth Collector A and shared with B at the end
received all revenue from these investments (dividends
of the day. Using this technique, Collectors A and B
and interest) and then forwarded the checks to account-
have stolen more than $20,000 in unrecorded tolls this
ing for processing.
year.
Required Documentation
What control procedures could be implemented to pre-
The treasurer maintains purchase and sale authoriza-
vent or detect this fraud? Classify the control proce-
tions, along with the broker’s advices. The certificates
dures in accordance with SAS/COSO 78.
for all long-term investments are kept in a safe deposit
box at the local bank; only the president of Oakdale has
access to this box. An inventory of this box was made,
7. FACTORS OF FRAUD
and all certificates were accounted for. Certificates for
Research has shown that situational pressures and oppor- short-term investments are kept in a locked metal box in
tunity are factors that contribute to fraudulent behavior. the accounting office. Other documents, such as long-
term contracts and legal agreements, are also kept in this
box. The president, the treasurer, and the accounting
Required
manager have the three keys to the box. The accounting
a. Identify two situational pressures in a public com- manager’s key is available to all accounting personnel
pany that would increase the likelihood of fraud. should they require documents kept in this box. Docu-
b. Identify three opportunity situations that would mentation for two of the current short-term investments
increase the likelihood of fraud. could not be located in this box; the accounting