A Secure https://ereader.chegg.com/#/books/9781305465114/cfi/ 5. EXPENSE ACCOUNT

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A Secure https://ereader.chegg.com/#/books/9781305465114/cfi/ 5. EXPENSE ACCOUNT FRAUD While auditing the financial statements of Petty Corporation, the certified public accounting firm of True Blue 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 disburse- ments 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 pay- ment 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 accor- dance with the COSO framework (authorization, segregation of functions, supervision, and so on). b. Comment on the ethical issues in this case. po C = 0 6. SEGREGATION OF FUNCTIONS 39 R.

Explanation / Answer

Ans 1:

The COSO framework defines the internal control as a process designed to provide assurance of achievement of objectives in maintaining efficiency and effectiveness of operations, reliability of financial reporting and compliance with the regulations and laws.

For ensuring that the objectives listed above are addressed to and complied with, the Petty corporation should have incorporated following measures in its practices to prevent the occurance of such cases.

1. Control of internal environment through defining reporting structure, maintain ethics and integrity of people and processes, auditing of process and maintaining checks and balances, assignment of responsibilities and defining HR policies and procedures and promotion of shared values and cultures should have been strong.

2. The risk pertaining to the processes should have been assessed and a stragety of risk avoidance and mitigation should have been in place.

3. Monitoring systems and procedures should have been more efficient in detecting, evaluating and reporting of anomalies in time to prevent potential damages.

4. Information systems should have been more efficient for prompt damage prevention and control.

Ans 2:

The cash disbursement clerk clearly misused her position to embezzle the funds to pay for her personal expenses, by writing the checks she was not authorised for. She is guilty for swindling into the company's money, in addition to acting in a functional role, she was not authorised for. In addition to the clerk, everyone who authorised her for writing checks, the person who was responsible for maintaining checks and balances, the audit committee, the top managers who approved such a big sum without knowing the details and the legal department which could not detect the fraud and approved the payments to the party that had nothing to do with the company's legal affairs, are guilty of either negligence or connivance in this matter.

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