b. Areas of Consideration It is in this part where the group will place factors, events, observations, etc.

in the case that they considered in trying to provide for the alternative courses of action and the eventual recommendation. These may be cited in bulleted form, in complete sentences. Suppletory statements, which will support (a) cited area(s) of consideration, are encouraged. The companys customers ordered the same quantity of crabmeat each week, the prices for the crabmeat remained the same all year, and the quantity ordered was always the same. Thus, it should be implied that the invoices and payments from the customer that are recorded by the company should be the same as to their dollar amount. The company sends weekly invoice to the customers, and so the customers pay weekly as well. Monthly bills were not sent to customers unless the customer was behind in payments. Payments from customers, then, are expected to come in wee ly and must be reflected as such in the records. If a customer was unable to ma e payment, the customer would have received a bill and the auditor could confirm from the customer regarding the receipt of such bill. The company kept the accounting records in a microcomputer wherein the four modules that made up the whole system were not integrated. This condition did not enable data updating and currency of information between modules. !ence, the records that were maintained by the company"s system were not up#to#date and had been possibly used as a means to perpetrate fraud. The manual sales invoices were not pre-numbered. If these invoices had been pre#numbered, it would have been easy to detect any invoice that had not been recorded. The summary totals from the report that the auditor reviewed did not coincide with the total amount reflected in the general ledger program, and different amounts had been entered. This lac of correspondence between the records raises suspicion as to how the company records its transactions in the system. It should prompt the auditor to in$uire as to why there had been different

amounts that entered in the program, and whether it had been properly authori%ed by management. Sheets from the computer listing had been discovered to be ripped apart at the bottom. This is another instance that should alert the auditor as to the purpose and necessity of such ripping of important documents in the company"s system. There must be a valid reason that would support the act done so as to clear off the auditor"s suspicions. customers check had been stamped on the back with an address stamp of the company instead of the usual !for deposit only" company stamp. This instance is a deviation from the company"s regulation of incoming chec s. It implicates that the chec could have possibly been delivered to another person instead of the chec being deposited directly in the ban . The order of payments that were reflected in the accounts receivable program was not consecutive. That is, a check received on May #$ was only recorded after the May #% and May &' checks . This curious event could possibly signify a loss of control in recording the chec s, or a possible misuse of the chec that was recorded later than its date of receipt. copy of a bank deposit ticket which had not been properly stamped by the bank and with the amounts added up not corresponding to the total at the bottom of the ticket was available and presented to the owner and auditor. Such document is difficult to rely on especially when it lac ed the ban "s stamp. There must be authentication of the said document. c. Alternative Courses of Action To simplify the re$uirement, only two (&) alternative courses of action are re$uired. The group should ensure that the courses of action are mutually exclusive from each other. 'roups are also (IS)*+,-'.( in using /(o 0othing1, /*bserve1, /2ait and see1 alternative courses of action as previously agreed in class. In citing an alternative course of action, a caption which encapsulates the course of action should be provided. -fter which, a discussion on the details of such is provided (steps and how they attempt to solve the problem ). 3astly, the benefits and the costs should be outlined.

ACA

#.

'iven the important facts of the case stated above, it can be inferred that the discrepancy in the records cannot be attributed solely to the malfunctioning of the system. The auditor has a good reason to feel differently, and so, with sufficient facts that would bac up his doubt, he must convince the owners of the company to allow him to continue the investigation. So as to prepare him in convincing Susan to reconsider the problem at hand, the auditor should wor on the facts that he had already gathered. !e must present the facts which are highly indicative of embe%%lement of funds within the company. Such facts would be: a) the customers check had been stamped on the back with an address stamp of the company instead of the usual for deposit only company stamp, b) different amounts had been entered into the eneral led er pro ram, and c) accountin records had been ripped apart for some unknown reason . +nless the auditor can have sufficient reason so as to satisfy his doubts regarding such curious instances that occurred within the company, his efforts to convince the owners to allow him to go further in his investigation is above reproach and necessary. 2ith 4ohn and Susan"s permission, the next thing that the auditor should accomplish to do is to verify whether the received chec s had been subse$uently deposited in the ban . !e can do this by obtaining the most recent ban statement obtained by the company or if none is available at hand, he may send a ban confirmation re$uest to the ban which should accordingly indicate the specific items that he needs confirmation with. In this case, the deposit tic et which (ebbie had presented was suspicious because it lac ed the ban "s stamp verifying its authenticity. !e may, then, re$uest for a verified ban deposit tic et or he may send the suspicious ban deposit tic et and verify its authenticity with the ban . !e must also verify with the ban whether the cancelled chec of the customer who had been called were deposited or cashed. These steps are necessary in order to affirm that all chec s received had been subse$uently deposited in the company"s ban account.

The auditor"s next step is dependent on the ban "s response to the auditor"s letter and in$uiry. If it is discovered in the ban deposit that some chec s have not been deposited or some chec s have been cashed by the ban , the auditor will have substantive proof of embe%%lement of cash and that the malfunctioning of the system was not the real cause of the discrepancy that was noted. !e must, then, proceed to identifying who might have accomplished the embe%%lement, and how such person has committed such act (the steps in accomplishing this are discussed in the recommendations as solutions to the minor problems). If it is otherwise declared by the ban that all chec s (including the

customer"s cancelled chec ) have been properly deposited in their account, the auditor must still be able to find out why the -, control account and the summary totals per -, subsidiary ledger were not in agreement. !e can do this by reviewing the internal control of the company and the issues that have caught his attention upon studying the facts of the case (the steps are li ewise discussed in the recommendations). 5inally, the auditor must be able to recommend ways to ensure that internal controls are properly wor ing and that the loss of cash in the company can be prevented in the future. ()*)+,TS issue as to whether -.STS )ompensation of the auditor for continuing the investigation Postage expenses for sending letter to ban +tility expenses .stimated time frame for

The

the

malfunctioning of the system was the real or only cause to the discrepancy of the -, control account and subsidiary ledger will be resolved. .vidence showing the truth regarding such issue can be established. There would be confirmation as to whether the auditor"s assumption that

accomplishing this -)- and how soon the company"s problem be resolved6 one to three wee s

embe%%lement had occurred is valid. The chec s that were supposedly accounted for by the ban any chec that had not can be been verified as to their completeness, and deposited or had been cashed can be attributed to the stolen amount of cash. The auditor would be able to identify the lapses in the internal control of the company and thereby suggest ways in order to amend it.

d. !ecommendations and Conclusion The group should explicitly state which of the alternative courses of action is chosen and state the detailed reason of choosing the option. -fter explaining the reason of the choice, a discussion as to the detailed plan of execution of the chosen course of action should be outlined. The group should be able to defend that the benefits of the chosen alternative course of action are more beneficial than its costs, and that the chosen alternative is better than the other.

7inor problems and the corresponding solutions6

8. !ow did the perpetrator, if there"s any, conceal the fraud9 'iven that the company"s customers ordered the same $uantity of crabmeat each wee , the prices for the crabmeat remained the same all year, and the $uantity ordered was always the same, the records should reflect a single, recurring dollar amount in its records. In this case, :;,<<< was the recurring amount reflected in the payment records. Stealing chec s and tampering records can be possibly done in this situation because there is no variation as to the amount in each customer"s account. If each customer had

variation as to the amount they ordered from the company wee ly, then such uni$ue value per customer can be easily traced to each one of them. It does seem peculiar, however, that a chec the auditor was curious as to why it had been this way. 2ith such things in mind, a possible scenario can be concocted as to how the perpetrator was able to conceal the fraud. The perpetrator could have recorded one sale but ept the payment of the said sale. @ecause no payment was reflected for that account, the perpetrator had to find a way to credit the account in order to avoid the billing of such customer. Thus, the perpetrator could have credited the next payment for a separate sale to the account from which he has stolen the payment (same as how it is done in lapping). In order to resolve the problem as to the next sale having no credited payment, the perpetrator could have possibly not recorded the sale itself. !e is then able to avoid the problem of arising -, balances from the customer whose payment was not recorded which would warrant a bill to be sent to such customer. &. 2ho could have possibly committed the fraud9 The fraud could have been committed by one who has access to the chec s (or cash) and the accounting records. -mong the individuals in the case, the persons who had both functions were Susan and (ebbie. !owever, since Susan was the one who hired the fraud auditor in order to locate the problem, Susan can be crossed out of the list. Therefore, (ebbie is the only one who could have possibly committed the embe%%lement of cash. She had access to cash and helped record the receipt of cash in the records. She also admitted that she sometimes used the address stamp instead of the /for deposit only1 stamp which was the proper stamp to use in order that the chec s be all warranted for deposit only. +sing the address stamp would mean the chec would be delivered to the company and whoever could get hold of it can encash it received on 7ay 8< was only

recorded after the 7ay 8= and 7ay &> chec s. The dating was inconsistent? thereby,

right away. -lso, she was only able to present a copy of a ban deposit tic et which had not been properly stamped by the ban and the amounts added up did not correspond to the total at the bottom of the tic et. This could mean that the ban deposit tic et was invalid or tampered with. >. If there was really embe%%lement, was the company"s delegation of tas s a contributing factor9 The company"s delegation of tas s was a huge contributing factor to the occurrence of fraud. In fact, the delegation of tas s was not the only factor that contributed to an opportunity for fraud within the company. The internal control of the company had its lapses and must be dealt with accordingly. A. 2hat can be done in order to prevent the embe%%lement to occur again9 The fraud could have been prevented in the first place if the internal controls had been wor ing and monitored by management. !owever, there had been problems in the physical controls in their system as discovered by the auditor. )learly, the internal control activities of the company need improvement. .numerated below are the recommendations to each internal control activity of the company6 T,-0S-)TI*0 -+T!*,IB-TI*0 The chec s to be deposited should pass by authori%ation for deposit from a person not performing the deposit of the chec s in the ban . The same person should prepare a list of chec s that are clear for deposit so that such list can be compared with the records and the ban deposit tic ets in order to verify the completeness of chec s deposited in the ban . 5rom the four persons involved in the case, 4ohn should be the assigned person for the Cob since he does not have any recording function. S.',.'-TI*0 *5 (+TI.S -s emphasi%ed above, the duties assigned to each person in the company played an important part in determining whether fraud could have occurred. In the case of this company, the custody of assets should be separate from the record# eeping responsibility. -lso, the eeper of records as to sale and receipt of payment is better off separated

because the accounts receivable program in the minicomputer cannot permit the segregation of such tas s. S+P.,DISI*0 There should be strict supervision especially when such small company only employs few people in its operations. Segregation of duties is difficult to accomplish in a small company. -))*+0TI0' ,.)*,(S The manual sales invoices should be pre# numbered for convenience in chec ing whether all invoices had been recorded. -)).SS )*0T,*3S The person in charge of record# eeping should not have access to cash and other assets. Preferably, such person should also not have access to important documents received from the ban (e.g. ban deposit tic et) which are used in the audit trail. I0(.P.0(.0T D.,I5I)-TI*0 The company does prepare daily sales reports which summari%e the company"s business activity. !owever, they made a mista e in assigning (ebbie to such preparation of sales report which she could falsify in order that she could cover up her theft of cash. The sales report should be prepared by the person in charge of shipping the crabmeat to their customers who, in this case, is Tommy. ;. 2hat will be the future conse$uences if the fraud really happened but the company did not pursue in trying to discover it9