Question

You are a CPA who has recently transferred from the auditing and assurance department to the forensic accounting department of a public accounting firm where you have worked for two years. You receive a call from Sterling Preston, a senior manager in your group, who tells you that the next morning the two of you will drive to Suburbia, Illinois for a meeting. You confirm that you will be in the office at 7:00 a.m. to ride with Sterling to the meeting.

The next morning, while driving, Sterling explains what might happen in the meeting:

“WrecksAll Drugs has recently requested proposals from firms for audit services. Although our firm is not interested in the audit, the owner has also expressed concern about potential fraud at the company. We are headed to the law offices of an attorney for WrecksAll Drugs, which is a group of privately owned drug stores in Suburbia. Have you ever been there? Me either, but it’s a big town. We have a lead on a possible embezzlement. One of our audit partners spoke to their attorney, who may need an investigation at the Company. The owner, Ben Broughton, found some funny business in the deposits. The Director of Accounting, Conrad Scaglia, has been put on leave. They are going to explain what is going on to see if we can help. Just listen and take some notes, and of course, ask clarifying questions as needed.”

You and Sterling arrive and are ushered into a conference room at the law firm. Present are Ben, his lawyer, you, and the senior manager. The lawyer does most of the talking:

“WrecksAll operates 3 retail stores across the city, and competes with stores of two national chains, and also with several retail drug stores located on site at area hospitals. The Company has developed a successful niche in the marketplace by locating its stores near otherwise underserved residential neighborhoods, and by providing personalized service, generating loyalty form a core base of its customers. Much of its core customer base tends to be elderly and below median income for Suburbia.”

Ben, the owner, interjects:

“One service we provide to qualified customers is that we fill prescriptions on credit for customers enrolled in Medicare, Medicaid, or private medical insurance plans. We file claims for customers for drug purchases, and the insurance reimbursement checks are received directly by us from health insurance programs, in payment of customer credit accounts. We don’t make too many mistakes. I am the only person who can write off a customer’s account. Of course, we also accept payment by cash, check, or major credit card for all customers.”

The attorney continues:

“Ben has found suspicious activity in the deposits. Every shift, a deposit slip is completed by each cashier and deposit amounts (cash, checks and credit card batches) are removed from the cashier’s register and are keyed into the point of sale register by the cashier as a register withdrawal for deposit. As a matter of procedure, bank deposit slip totals can be compared to the register reports for each shift and each cashier. Deposit slip totals nearly always agree to the register report totals. However, often throughout each week, certain deposits contain less cash than indicated on the register report. By an equal amount, these same deposits contain more value in checks than indicated on the register report.”

After the conclusion of the meeting at the attorney’s office, you will visit WrecksAll’s offices, which are located in the rear of the retail space for WrecksAll store #2. Sterling will leave you at WrecksAll offices for some initial fact finding while he attends a sales call and lunch with another law firm in Suburbia, and then he will rejoin you in the afternoon at WrecksAll.

You and Sterling are left alone in the conference room and you discuss the following questions. Provide your written answers to these questions below, and prepare to discuss them in class. 1) Form one or more initial hypotheses about what could be happening to explain why deposits balance with the register

1 While this case is based on a collection of experiences from professionals in practice, all names, facts, documents and data provided in this case are fictional representations. reports in total, but cash deposited is less than amounts reflected on the register report and checks deposited are greater than the amount reflected on the register report.

2) For each of the hypotheses stated in #1) above, label which ones are fraud hypotheses and which hypotheses, if true, would be non-fraud explanations?

3) List what information and documents you would like to receive in order to begin investigation of this matter?

4) The owner suspects that Conrad, the Director of Accounting, has manipulated the deposits. Conrad is on leave, pending conclusion of the investigation. Would you like to request that Conrad come in for an interview with you today? Why, or why not?

5) Availability of WrecksAll staff and your time is currently limited. After some initial fact finding today, your firm will propose a scope of services to WrecksAll and its attorney and ask to execute an engagement letter to complete the investigation. Review the WrecksAll organization chart that follows. The organization chart indicates the titles for each position, which can indicate the nature of job responsibilities for each position. Each position also is connected by a line to a position above it, indicating the supervisor for each position in the chain of command. Some of the boxes near the bottom of the organization chart represent numerous positions of identical responsibility, such as cashier. Document and select three individuals from the organization chart you would like to interview today in order to help you better plan the engagement and revise your current hypotheses about the cause of differences between deposits and company register report details. Which three positions would you ask to interview today? Explain why you have selected each of these individuals.

Answer 1

1) Form one or more initial hypotheses about what could be happening to explain why deposits balance with the register

Answer: One of the hypothesis could be inadvertent accounting in the register i.e. accounting deposits as check instead of cash, whereas while the actual is deposited into bank, the total tallies with register.

Second hypothesis could be willful accounting of cash deposit as check deposit resulting in temporary embezzlement of cash and by the time depsoit slips are filled, the total deposit done tallies with the register.

Third hypothesis could be fraud accounting of checks received from customer and reducing customer balance whereas actual check deposit is lower than the register.

2) For each of the hypotheses stated in #1) above, label which ones are fraud hypotheses and which hypotheses, if true, would be non-fraud explanations?

Answer: Hypothesis #1 could be non-fraud and other two could be fraud.

3) List what information and documents you would like to receive in order to begin investigation of this matter?

Answer: Bank reconciliation, cash ledger, bank book, deposit slips and exisitng policy for control checks.

4) The owner suspects that Conrad, the Director of Accounting, has manipulated the deposits. Conrad is on leave, pending conclusion of the investigation. Would you like to request that Conrad come in for an interview with you today? Why, or why not?

Answer: Not today, reason being we should first look into the records and other relevant information before calling Conard for the interview. It would be more fruitful once we are completely into the grip of the records.

5) Since organisation chart is not made available, this question could not be answered.