Question: Employee Embezzlement via Cash Receipts and Payment of Personal Expenses. This case is designed in a manner similar to the cases in the chapter. You can assume you have received a message from an informant regarding the following case. Your assignment is to write the "audit approach" portion of the case.
a. Write a brief explanation of desirable controls, missing controls, and especially the kinds of "deviations" that might arise from the situation described in the case.
b. Develop some procedures for obtaining evidence about existing controls, especially procedures that could discover deviations from controls. If there are no controls to test, then there are no procedures to perform. Then just move on to letter c. (Refer to test of controls procedures explained in this chapter.) An audit "procedure" should instruct someone about the source(s) of evidence to obtain and the work to perform.
c. Write some procedures for gathering evidence in this case.
d. Write a short statement about the discovery you expect to accomplish with your procedures.
The Extra Bank Account: The Our town Independent School District, like all others, had formal, often bureaucratic, procedures regarding school board approval of cash disbursements. To get around the rules and to make possible timely payment of selected bills, the superintendent of schools had a school bank account that was used in the manner of a petty cash fund. The board knew about it and had given blanket approval in advance for its use to make timely payment of minor school expenses. The board, however, never reviewed the activity in this account. The business manager had sole responsibility for the account subject to the annual audit. The account received money from transfers from other school accounts and from deposit of cafeteria cash receipts. The superintendent did not like to be bothered with details and often signed blank checks so the business manager would not need to obtain a signature all the time. The business manager sometimes paid her personal American Express credit card bills, charged personal items to the school's VISA account, and pocketed some cafeteria cash receipts before deposit. An informant called the state education audit agency and told the story that this business manager had used school funds to buy hosiery. When told of this story, the superintendent told the auditor to place no credibility in the informant, who was "out to get us." The business manager had, in fact, used the account to write unauthorized checks to "cash," put her own American Express bills in the school files (the school district had a VISA card, not American Express), and signed on the school card for gasoline and auto repairs during periods of vacation and summer when school was not in session. (As for the hosiery, she purchased $700 worth with school funds one year.) The superintendent was genuinely unaware of the misuse of funds. The business manager had been employed for six years, was trusted, and embezzled an estimated $25,000.