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    Cash Receipts and Payment of Personal Expenses

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    6.47 Employee Embezzlement via Cash Receipts and Payment of Personal Expenses. This case gives the problem, the method, the audit trail, and the amount. In this case, you can assume you have received the informant's message. Your task is to write the "audit approach" portion of the case, organized around these sections:

    Objective: Express the objective in terms of the facts supposedly asserted in financial records, accounts, and statements.

    Control: 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.

    Test of controls: Write some procedures for getting 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 go to the next section.
    An audit "procedure" should instruct someone about the source(s) of evidence to tap and the work to do.

    Audit of balance: Write some procedures for getting evidence about the existence, completeness, valuation, ownership, or disclosure assertions identified in your objective section above.

    Discovery summary: Write a short statement about the discovery you expect to accomplish with your procedures.

    The Extra Bank Account
    Problem: Cash receipts pocketed and personal expenses paid from business account.

    Method: The Ourtown Independent School District, like all others, had red tape about school board approval of cash disbursements. To get around the rules, and to make timely payment of selected bills possible, 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 he often signed blank checks so the business manager would not need to run in for 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.

    Audit trail: 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 is "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.

    Amount: The business manager had been employed for six years, was trusted, and embezzled an estimated $25,000.

    Explain the process and benefits of audit sampling.

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    6.47 Employee Embezzlement via Cash Receipts and Payment of Personal Expenses

    Obtain evidence to determine if expenses paid from the Ourtown Independent School District (OISD) extra bank account were for legitimate school business.

    Cash disbursements should be authorized by responsible OISD officers for valid business purposes. It is not unusual for business managers to have been delegated this responsibility by the person with overall accountability for the finances. Tight control would call for disbursement review at time of check signature by another responsible person (superintendent). This control was not always observed. Management of cash receipts should have compartmentalized control build in as a safeguard:
    1. Amounts listed in a Accounts Received ledger by the person who initially receives the funds (cafeteria manager).
    2. Money deposited by another person and recorded on a banking receipt (business manager).
    3. Comparison of ledger and receipts made by a ...

    Solution Summary

    Ourtown Independent School District believes an employee is embezzling money. You are to conduct an audit of the district's accounts. The process and benefits of audit sampling is explained.