Problem

Cash embezzlement overstated accounts receivable, overstated customer

discount expense, and understand cash sales. The company failed to earn
interest on funds "borrowed".
Method
D.Bekel was the assistant controller of sport Equipment, Inc. (SEI), an equipment
retailer. SEI maintained accounts receivable for school districts in the region;
otherwise, customers received credit by using their own credit cards.
Bekels duties included being the company cashier, who received all the
incoming mail payments on school accounts and the credit card account and all
the cash and checks taken over the counter. Bekel prepared the Bank deposit
(and delivered the deposit to the bank), listing all the checks and currency, and
also prepared a remitance worksheet (daily and report) that showed amounts,
discounts allowed on school accounts, and amounts to credit to the accounts
receivable. The remittance worksheet was used by another accountant to post
credits to the accounts receivable. Bakel also reconciled the bank statement. No
one else reviewed the deposits or the bank statements exept the independent
auditors.
Bakel opened a bank account in the name of Sport Equipment Company
(SEC),after properly incorporating the company in the Secretaryof States office.
Over-the-counter cash, checks, and school district patments were teken from the
SEI receipts and deposited in the SEC account. (None of the costumers noticed
the difference between the rubber stamp endorsements for the two similarly
named corporation,and neither did the bank). SEC kept the money a while,
earning interest, and the Bakel wrote SEC checks to SEI to replace the
borrowed funds, in the meantime taking news SEI receipts for the deposit to
SEC. Bakel also payments made by school districts, depositing them to SEC.
Later, Baker deposited SEC checks in SEI, giving the schools credit, but approved
an additional 2 percent in the process. Thus, the school received proper credit
later, and SEC paid less bt yhee amount of the extra discounts.
Audit Trail
SEIs bank deposit systematically showed small currency deposit. Bakel was
nervous about taking too many checks, so cash was preferred. The deposit slips
also listed the SEC checks because bank tellers always compare the deposit slip
listing to the checks submitted. The remittance worksheet showed different
details: Instead of showing SEC checks, it showed receps from school districts
and currency, but not many over-the-counter checks from customers.
The transaction became complicated enough that Bakel had to use the office
computer to keep tract of the school districts that needed to get credit.There
were not vacations for this hardworking cashier because the discrepancies might
be noticed by substitute, and Bakel needed to give the districts credit later.

Amount
Over a six-year period, Bakel built up a $150,000 average balance in the Sport
equipment Company (SEC) accounts, which earned a total of $67,500 interst that
should have been earned by Sport Equipment, Inc. (SEI). By approving the
extra discounts, Bakel skimmed 2 percent of $1 million in manual sale, for a
total of $120,000.Since SEI would have had net income before taxes of about
$1.6 million over this six years (about 9 percent of seles), Bakels embezzlement
took about 12 percent of the income.
Audit Approach
Objective
Obtain evidence to determine whether the accounts receivable recorded on the
books represent claims against real customers in the gross amounts recorded.
Control
Authorization related to cash receipts, custody of cash, recording cash
transactions, and bank statement reconciliation should be separate duties
designed to prevent errors and frauds. Some supervision and detail review og
one or more of these duties should be performed as a next-level control designed
to detect errors and frauds, if they have occurred. For example,someone else
should prepare the remittance woorsheet, or at least the controller should
approve the discount some else should prepare the bank reconciliation.
Bakel ferformed incompatible duties. (While recording was not actually
performed,Bakel provoded the source document-the remittance workshee- the
other accountants used to makethe cash and account receivable entries).
According to the company president, the control was the diligence of our
long-time, trusted, hard-working assistant controller.Note: An auditor who think
like a crook to imagine ways Bakel could commit errors of fraud could think of
this scheme for cash embezzlement and accounts receivable lapping.