SSS is a well-established crabmeat processing company based in Hopedale, Newfoundland. SSS is committed to using...
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SSS is a well-established crabmeat processing company based in Hopedale, Newfoundland. SSS is committed to using only the freshest and most sustainable ingredients in their products and takes pride in being a responsible member of the community. Their commitment to quality and sustainability has won them many loyal customers and has made them a leading player in the seafood industry. John Smith, the President of the company, has been in the seafood industry for over two decades and has built a wealth of experience and knowledge that has helped the company become a leading provider of crabmeat both locally and internationally. His wife, Susan Smith, serves as Vice President and brings a different skill set to the table with her expertise in marketing and sales. She has been instrumental in expanding the company's reach and customer base and has contributed innovative ideas that have helped the company grow. Their son, Tommy Smith, is the Shipping Manager and is responsible for overseeing the shipping and logistics operations of the company. With his extensive knowledge of the seafood industry, Tommy ensures that the company's products are delivered on time and in perfect condition. The last integral member of the company is Debbie Jones, an office worker, who started working part-time for the company six months ago. She was allowed to work afternoons through a school internship program while she was still a high school senior. After her graduation, she began working full-time at Smith Seafood Processing. Despite not being a member of the Smith family, Debbie has been close friends with the Smiths for over ten years and has a strong bond with them. This has allowed her to feel part of the family and to make valuable contributions to the company. Unfortunately, someone stole more than $55,000 from SSS over the past two months. As a part of this assignment, you are expected to review the relevant facts provided below and identify who was responsible for the theft, how the theft was perpetrated, and propose ways to prevent something like this from happening again. Accounting Records All accounting records are maintained on a personal computer, which hosts an accounting software consisting of the following modules: 1. A general ledger module, which keeps track of all balances in the general ledger accounts and produces a trial balance at the end of each month. 2. A purchases module, which keeps track of purchases and maintains detailed records of accounts payable. 3. An accounts receivable module, which keeps track of sales and collections on account and maintains individual detailed balances of accounts receivable. 4. A payroll module, which manages employee compensation and payroll related activities. This module is also responsible for calculating and processing employee salaries and benefits, tax withhold, and other deductions. The modules are not integrated (that is, data are not transferred automatically between modules). At the end of the accounting period, summary information generated by the purchases, accounts receivable, and payroll programs must be entered into the general ledger program to update the accounts affected by these programs. Sales The crabmeat processing industry in Hopedale, Newfoundland is unusual in that selling prices for crabmeat are set at the beginning of the year and remain unchanged for the entire year. The company's customers (all restaurants) are located within 100 kilometers of the plant and order the same quantity of crabmeat each week. Because prices for the crabmeat remain the same all year and the quantity ordered always stays the same, the weekly invoice to each customer is always for the same dollar amount. Manual sales invoices are produced when orders are taken, although these manual invoices are not prenumbered. One copy of the manual invoice is attached to the order shipped to the customer. The other copy is used to enter the sales information into the computer. When the customer receives the order, the customer will send a check to the company for the amount of the invoice. Monthly bills are not sent to customers unless the customer is behind in payments (that is, does not make a payment for the invoiced amount each week). The industry is unique in another way: Many of the companies pay their workers with cash each week (rather than by check). It was, therefore, not unusual for companies to request large sums of cash from the local banks. Performance of Key Functions by Individual(s) 1. Receive order from customers 2. Oversee production of crabmeat 3. Handle shipping 4. Bill customers (entering sales into accounts receivable program) Open mail 5. 6. 7. Prepare bank deposit tickets and make bank deposits Record receipt of cash and checks (enter obtain collections of accounts receivable into accounts receivable program) 8. Prepare checks (payroll checks and payments of accounts payable) 9. Sign checks 10. Prepare bank reconciliations 11. Prepare daily sales reports showing sales by type of product 12. Summarize daily sales reports to obtain monthly sales report by type of product 13. Run summaries of AR program, AP program, and payroll program at month end and input summaries into GL program 14. Analyze trial balance at month end and analyze open balances in accounts receivable and accounts payable Individual(s) Performing Task Sometimes All others Most of the time John John or Tommy Tommy Debbie John Susan or Debbie Debbie Susan or Debbie John John Susan Susan or Debbie Susan or Debbie Susan John Susan All others All others Susan When Trouble Was Spotted Shortly after the May 30 trial balance was run, Susan began analyzing the balances in the various accounts. The balance in the cash account agreed with the cash balance she obtained from a reconciliation of the company's bank account. However, the balance in the accounts receivable control account in the general ledger did not agree with the total of the accounts receivable subsidiary ledger (which shows a detail of the balances owed by each customer). The difference was not very large, but the balances should be in 100% agreement. At this point, Susan tried to locate the problem. In reviewing the computerized accounts receivable subsidiary ledger, she noticed the following: 1. The summary totals from this report were not the totals that were entered into the general ledger program at month-end. Different amounts had been entered. No one could explain why this had happened. 2. Some sheets in the computer listing had been ripped apart at the bottom. In other words, the listing of the individual accounts receivable balances was not a continuous list but had been split at several points. 3. When an adding machine tape of the individual account balances was run, the individual balances did not add up to the total at the bottom of the report. Susan concluded that the accounts receivable program was not running properly. Next, she decided to find out why the accounts receivable control account and the summary totals per the accounts receivable subsidiary ledger were not in agreement and why we were finding problems with the accounts receivable listing. Since the accounts receivable subsidiary and accounts receivable control account in the general ledger had been in agreement at the end of April, the effort should begin with the April ending balances for each customer by manually updating all of the accounts. The manually adjusted May 30 balances were then compared with the computer-generated balances. After doing this, Susan and John found several differences. The largest difference was the following: Customer Account Per Subsidiary Account Dr. Cr. Sale # 1 Sale # 2 Sale # 3 End. Bal. $5,000 Pmt. #1 $5,000 Pmt. # 2 $5,000 Pmt. # 3 $0 $5,000 $5,000 $5,000 Customer Account Per Manual Reconstruction Cr. 1. Did the customer receive this order? 2. Did the customer receive an invoice for it? 3. Did the customer pay for the order? 4. If so, did the customer have a copy of his canceled check? Sale # 1 Sale # 2 Sale #3 Sale # 4 End. Bal. Dr. $5,000 Pmt. # 1 $5,000 Pmt. # 2 $5,000 Pmt. # 3 $5,000 $5,000 $5,000 $5,000 $5,000 Although they found the manual sales invoice for Sale #4, Susan and John concluded (based on the computer records) that Sale #4 did not take place. As their next step, Susan proposed to call this customer and ask the following: Although John felt that this would be a waste of time, he called the customer. He received an affirmative answer to all questions. In addition, he found that the customer's check was stamped on the back not with the normally used "for deposit only" stamp of the company but with an address stamp giving only the company's name and city. When questioned, Debbie said that she sometimes used this stamp. Right after this question, Debbie, who was sitting nearby at the computer, called Susan to the computer and showed her the customer's account. She said that the payment for $5,000 was in fact recorded in the customer's account. The payments were listed as follows: Amount Date of Payment $5,000 May 3 $5,000 May 17 $5,000 May 23 $5,000 May 10 As they Susan and Debbie were contemplating the order of the payments, i.e., why was a check supposedly received on May 10 entered in the computer after checks received on May 17 and 23, the computer malfunctioned, and the accounts receivable file was lost. Every effort to retrieve the file gave the message "file not found." About five minutes later, Debbie presented Susan with a copy of a bank deposit ticket dated May 10 with several checks listed on it, including the check that the customer said had been sent to the company. The deposit ticket, however, was not stamped by the bank (which would have verified that the deposit had been received by the bank) and did not add up to the total at the bottom of the ticket (it was off by 20 cents). At this point, Susan and Debbie contacted the accounting software vendor to get accounting software updated to the latest version as well as patch potential stability issues. They also purchased the latest version of anti-virus software to further strengthen security of the personal computer. Susan and Debbie were also planning to work all weekend re- entering transactions into the computer. Required (50 marks): 1. If you were asked to help this company, could you conclude from the evidence presented that an embezzlement took place? What would you do next? (7 marks) 2. Who do you think was the embezzler? How was the embezzlement accomplished? (10 marks) 3. What improvements would you recommend in internal controls to prevent this from happening again? Identify (and explain in great detail), at least one suggestion from each of the five classes of internal control activities: authorization, segregation of duties, supervision, proper recording, and independent reconciliation. (25 marks) 4. Would the fact that the records were maintained on a personal computer aid this embezzlement? (5 marks) 5. Provide your response in the form of a professional memo to SSS management in a timely manner. (3 marks) SSS is a well-established crabmeat processing company based in Hopedale, Newfoundland. SSS is committed to using only the freshest and most sustainable ingredients in their products and takes pride in being a responsible member of the community. Their commitment to quality and sustainability has won them many loyal customers and has made them a leading player in the seafood industry. John Smith, the President of the company, has been in the seafood industry for over two decades and has built a wealth of experience and knowledge that has helped the company become a leading provider of crabmeat both locally and internationally. His wife, Susan Smith, serves as Vice President and brings a different skill set to the table with her expertise in marketing and sales. She has been instrumental in expanding the company's reach and customer base and has contributed innovative ideas that have helped the company grow. Their son, Tommy Smith, is the Shipping Manager and is responsible for overseeing the shipping and logistics operations of the company. With his extensive knowledge of the seafood industry, Tommy ensures that the company's products are delivered on time and in perfect condition. The last integral member of the company is Debbie Jones, an office worker, who started working part-time for the company six months ago. She was allowed to work afternoons through a school internship program while she was still a high school senior. After her graduation, she began working full-time at Smith Seafood Processing. Despite not being a member of the Smith family, Debbie has been close friends with the Smiths for over ten years and has a strong bond with them. This has allowed her to feel part of the family and to make valuable contributions to the company. Unfortunately, someone stole more than $55,000 from SSS over the past two months. As a part of this assignment, you are expected to review the relevant facts provided below and identify who was responsible for the theft, how the theft was perpetrated, and propose ways to prevent something like this from happening again. Accounting Records All accounting records are maintained on a personal computer, which hosts an accounting software consisting of the following modules: 1. A general ledger module, which keeps track of all balances in the general ledger accounts and produces a trial balance at the end of each month. 2. A purchases module, which keeps track of purchases and maintains detailed records of accounts payable. 3. An accounts receivable module, which keeps track of sales and collections on account and maintains individual detailed balances of accounts receivable. 4. A payroll module, which manages employee compensation and payroll related activities. This module is also responsible for calculating and processing employee salaries and benefits, tax withhold, and other deductions. The modules are not integrated (that is, data are not transferred automatically between modules). At the end of the accounting period, summary information generated by the purchases, accounts receivable, and payroll programs must be entered into the general ledger program to update the accounts affected by these programs. Sales The crabmeat processing industry in Hopedale, Newfoundland is unusual in that selling prices for crabmeat are set at the beginning of the year and remain unchanged for the entire year. The company's customers (all restaurants) are located within 100 kilometers of the plant and order the same quantity of crabmeat each week. Because prices for the crabmeat remain the same all year and the quantity ordered always stays the same, the weekly invoice to each customer is always for the same dollar amount. Manual sales invoices are produced when orders are taken, although these manual invoices are not prenumbered. One copy of the manual invoice is attached to the order shipped to the customer. The other copy is used to enter the sales information into the computer. When the customer receives the order, the customer will send a check to the company for the amount of the invoice. Monthly bills are not sent to customers unless the customer is behind in payments (that is, does not make a payment for the invoiced amount each week). The industry is unique in another way: Many of the companies pay their workers with cash each week (rather than by check). It was, therefore, not unusual for companies to request large sums of cash from the local banks. Performance of Key Functions by Individual(s) 1. Receive order from customers 2. Oversee production of crabmeat 3. Handle shipping 4. Bill customers (entering sales into accounts receivable program) Open mail 5. 6. 7. Prepare bank deposit tickets and make bank deposits Record receipt of cash and checks (enter obtain collections of accounts receivable into accounts receivable program) 8. Prepare checks (payroll checks and payments of accounts payable) 9. Sign checks 10. Prepare bank reconciliations 11. Prepare daily sales reports showing sales by type of product 12. Summarize daily sales reports to obtain monthly sales report by type of product 13. Run summaries of AR program, AP program, and payroll program at month end and input summaries into GL program 14. Analyze trial balance at month end and analyze open balances in accounts receivable and accounts payable Individual(s) Performing Task Sometimes All others Most of the time John John or Tommy Tommy Debbie John Susan or Debbie Debbie Susan or Debbie John John Susan Susan or Debbie Susan or Debbie Susan John Susan All others All others Susan When Trouble Was Spotted Shortly after the May 30 trial balance was run, Susan began analyzing the balances in the various accounts. The balance in the cash account agreed with the cash balance she obtained from a reconciliation of the company's bank account. However, the balance in the accounts receivable control account in the general ledger did not agree with the total of the accounts receivable subsidiary ledger (which shows a detail of the balances owed by each customer). The difference was not very large, but the balances should be in 100% agreement. At this point, Susan tried to locate the problem. In reviewing the computerized accounts receivable subsidiary ledger, she noticed the following: 1. The summary totals from this report were not the totals that were entered into the general ledger program at month-end. Different amounts had been entered. No one could explain why this had happened. 2. Some sheets in the computer listing had been ripped apart at the bottom. In other words, the listing of the individual accounts receivable balances was not a continuous list but had been split at several points. 3. When an adding machine tape of the individual account balances was run, the individual balances did not add up to the total at the bottom of the report. Susan concluded that the accounts receivable program was not running properly. Next, she decided to find out why the accounts receivable control account and the summary totals per the accounts receivable subsidiary ledger were not in agreement and why we were finding problems with the accounts receivable listing. Since the accounts receivable subsidiary and accounts receivable control account in the general ledger had been in agreement at the end of April, the effort should begin with the April ending balances for each customer by manually updating all of the accounts. The manually adjusted May 30 balances were then compared with the computer-generated balances. After doing this, Susan and John found several differences. The largest difference was the following: Customer Account Per Subsidiary Account Dr. Cr. Sale # 1 Sale # 2 Sale # 3 End. Bal. $5,000 Pmt. #1 $5,000 Pmt. # 2 $5,000 Pmt. # 3 $0 $5,000 $5,000 $5,000 Customer Account Per Manual Reconstruction Cr. 1. Did the customer receive this order? 2. Did the customer receive an invoice for it? 3. Did the customer pay for the order? 4. If so, did the customer have a copy of his canceled check? Sale # 1 Sale # 2 Sale #3 Sale # 4 End. Bal. Dr. $5,000 Pmt. # 1 $5,000 Pmt. # 2 $5,000 Pmt. # 3 $5,000 $5,000 $5,000 $5,000 $5,000 Although they found the manual sales invoice for Sale #4, Susan and John concluded (based on the computer records) that Sale #4 did not take place. As their next step, Susan proposed to call this customer and ask the following: Although John felt that this would be a waste of time, he called the customer. He received an affirmative answer to all questions. In addition, he found that the customer's check was stamped on the back not with the normally used "for deposit only" stamp of the company but with an address stamp giving only the company's name and city. When questioned, Debbie said that she sometimes used this stamp. Right after this question, Debbie, who was sitting nearby at the computer, called Susan to the computer and showed her the customer's account. She said that the payment for $5,000 was in fact recorded in the customer's account. The payments were listed as follows: Amount Date of Payment $5,000 May 3 $5,000 May 17 $5,000 May 23 $5,000 May 10 As they Susan and Debbie were contemplating the order of the payments, i.e., why was a check supposedly received on May 10 entered in the computer after checks received on May 17 and 23, the computer malfunctioned, and the accounts receivable file was lost. Every effort to retrieve the file gave the message "file not found." About five minutes later, Debbie presented Susan with a copy of a bank deposit ticket dated May 10 with several checks listed on it, including the check that the customer said had been sent to the company. The deposit ticket, however, was not stamped by the bank (which would have verified that the deposit had been received by the bank) and did not add up to the total at the bottom of the ticket (it was off by 20 cents). At this point, Susan and Debbie contacted the accounting software vendor to get accounting software updated to the latest version as well as patch potential stability issues. They also purchased the latest version of anti-virus software to further strengthen security of the personal computer. Susan and Debbie were also planning to work all weekend re- entering transactions into the computer. Required (50 marks): 1. If you were asked to help this company, could you conclude from the evidence presented that an embezzlement took place? What would you do next? (7 marks) 2. Who do you think was the embezzler? How was the embezzlement accomplished? (10 marks) 3. What improvements would you recommend in internal controls to prevent this from happening again? Identify (and explain in great detail), at least one suggestion from each of the five classes of internal control activities: authorization, segregation of duties, supervision, proper recording, and independent reconciliation. (25 marks) 4. Would the fact that the records were maintained on a personal computer aid this embezzlement? (5 marks) 5. Provide your response in the form of a professional memo to SSS management in a timely manner. (3 marks)
Expert Answer:
Answer rating: 100% (QA)
Memorandum To SSS Management From Julie Reynolds FinancialInternal Controls Consultant Date 23RD MARCH 2024 Subject Investigation into Possible Embezzlement and Recommendations for Improved Internal C... View the full answer
Related Book For
Financial Accounting A User Perspective
ISBN: 978-0470676608
6th Canadian Edition
Authors: Robert E Hoskin, Maureen R Fizzell, Donald C Cherry
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