PROBLEM 5. EXPENSE ACCOUNT FRAUD While auditing the financial statements of Pett
ID: 413771 • Letter: P
Question
PROBLEM 5. EXPENSE ACCOUNT FRAUD While auditing the financial statements of Petty Corporation, the certified public accounting firm of Trueblue and Smith discovered that its client’s legal expense account was abnormally high. Further investigation of the records indicated the following:
Since the beginning of the year, several disbursements totaling $ 15,000 had been made to the law firm of Swindle, Fox, and Kreip.
Swindle, Fox, and Kreip were not Petty Corporation’s attorneys.
A review of the canceled checks showed that they had been written and approved by Mary Boghas, the cash disbursements clerk.
Boghas’s other duties included performing the end of month bank reconciliation.
Subsequent investigation revealed that Swindle, Fox, and Kreip are representing Mary Boghas in an unrelated embezzlement case in which she is the defendant. The checks had been written in payment of her personal legal fees.
Required:
a. What control procedures could Petty Corporation 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, and so on).
b. Comment on the ethical issues in this case.
Explanation / Answer
a. What control procedures could Petty Corporation 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, and so on).
The control procedures that Petty Corporation could have employed to prevent this unauthorized use of cash in accordance with the SAS 78/ COSO framework are followings-
b. Comment on the ethical issues in this case.
The ethical issue in this case was related to misuse of position and performing multiple tasks without checks and balances where Mary Boghas was the cash disbursements clerk and she has written and approved the checks and performed the end of month bank reconciliation. She has used company's cash for her personal disbursements where she has paid $15,000 to her attorneys as legal fees and carried them to company’s legal expense account.
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