The case below tells the actual story of a cash embezzlement scheme.
The case has two major parts: (1) problem and (2) audit approach. For
the case, please consider how the auditor may have discovered the cash
embezzlement scheme.

Problem
The petty cash custodian (1)
brought postage receipts from home and paid them from the fund, (2)
persuaded the supervisor to sign blank authorization slips the custodian
could use when the supervisor was away and used them to pay for
fictitious meals and minor supplies, and (3) took cash to get through
the weekend, replacing it the next week. Postage receipts were from a
distant post office station the company did not use. The blank
authorization slips were dated on days the supervisor was absent. The
fund was cash short during the weekend and for a few days the following
week. The fund was small ($500), but the custodian replenished it about
every two working days, stealing about $50 each time. With about 260
working days per year and 130 reimbursements, the custodian was stealing
about $6,500 per year. The custodian was looking forward to getting
promoted to general cashier and bigger and better things!

Audit Approach
The
audit team should discuss petty cash procedures with the custodian and
supervisor, especially those that relate to situations in which the
custodian or supervisor is not available to provide needed petty cash.
Next, a sample of petty cash reimbursement check copies with receipts
and authorization slips attached should be studied for evidence of
authorization and validity. On Friday, an audit team member should count
the petty cash and receipts to see that they total $500. Then the fund
should be recounted later in the afternoon. (The second count should be a
surprise.) The custodian or supervisor should be present at all times
so that the auditor will not be accused of theft.

Q1
Based on the audit approach discussed, how would the auditor have caught this fraudulent scheme?

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Q2 .

You
are the auditor for KonerkoàOffice Supply Store, which is opening for
business next week. The store owner has established all the controls
you have recommended for ensuring that sales are recorded properly and
cash is accounted for. The owner has heard from other small business
owners that employees often used returned goods as means of skimming
money from the register.

Required:
a. How might an employee use returned goods to skim money from the register?

b. What controls would you recommend to prevent or detect fraudulent returns?

c. What audit procedures might you perform to detect fraudulent returns?

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Q3

Consider the following scenario:

Adam
worked for the local hardware store as an outside sales representative.
His job was to visit local companies and contractors in an attempt to
identify their needs for tools and materials and provide a bid to supply
those items. When a local contractor accepted a new job, Adam would get
its material requirements, come back to the store, and prepare and
submit a proposal for the items. After some initial success with Big
Builder, a large contractor, the number of jobs awarded to Adam had
decreased dramatically.

One day, Adam was back at the store after
losing a bid to Big Builder when he noticed someone in the store
purchasing the exact items and quantities that were in the specification
for that bid. The combination of items was unusual, and it would be an
unlikely coincidence for someone else to want such a combination in that
exact quantity. The customer paid the retail price for the merchandise
and left.

Adam decided to contact Big Builder, but he knew he
could not do so and make any accusations. Adam set up a meeting with the
president of Big Builder and inquired as to how Adam might ncrease
his business and better meet the needs of Big Builder. ventually, the
recent bid entered the conversation. Adam showed his copy of the bid to
the president. The president retrieved a copy of the purchase order and
recognized that the amount on it was more than the bid Adam had
submitted. The company that submitted the bid was K. A. Supplies Inc.
Adam had never heard of K. A. Supplies and noted its address on the
purchase order. The president of Big Builder promised to investigate the
bidding process.

Adam drove to the address of K. A. Supplies and
found a packaging and shipping store at that address. Furthermore, Adam
went to the county courthouse and inquired about K. A. Supplies. The
company was listed in the county records, and one of the purchasing
agents for Big Builder was listed as an officer.

Required:
a. Given the information that Adam knows, what do you believe is occurring at Big Builder?

b. What other information would you want to obtain, and how might you retrieve that information?

c. What controls might be instituted at Big Builder to prevent improprieties in the bidding and purchasing process?