Case Background:

Whodunit is a case about a crab meat processing business located at small town on the
eastern shore of Maryland. It is a family-run business that earns from delivering crabmeats to
restaurants thar are located in Maryland. With its current control system in place, everything
seemed to be going quite well until the business lost $40,000 in less than two months.
Issues/Problems:
Who was resposible for stealing $40,000 from the company?
How did that person committed such action?
How to avoid it in the future?
Current Situation:
A Characters and Responsibilities

The crabmeat processing business is headed by John Smith, the president and also a
stockholder of the entity. He has the primary responsibility of receiving orders from
customers and overseeing the entire production process. Aside from this, he also takes
charge of opening mail, signing checks, and preparing bank reconciliations. His wife
Susan, who is also a stockholder, acts as the vice president. She is responsible for
preparing bank deposit tickets and making bank deposits. In addition, she is expected to
prepare checks for payroll and payments of accounts payable. At the end of each day,
Susan constructs daily sales report which she summarizes to obtain monthly sales reports.
Since the system that the entity is using to record Accounts Payable, Accounts Receivable
and Payroll are not integrated, she performs the role of obtaining the running summaries
of the program and inputing them into the General Ledger Program. At month end, she
analyzes the companys trial balance and open balances in the accounts receivable and
accounts payable. Tommy, the son of John and Susan, is the companys shipping
manager. Aside from handling shipping activities, he helps John in overseeing the
production of crabmeat. He company also hires an office worker, Debbie. Her parents
have been friends with the Smiths for nearly a decade. As an office worker, Debbie is

mainly responsible for billing customers by entering sales data into the accounts
receivable program and recording the receipt of cash and checks which she also enters in
the same program. She shares with Susan lot of responsibilities such as preparing bank
deposit tickets and making the deposits, preparing checks, constructing daily and monthly
sales reports and inputting the running summaries of programs into the General Ledger
Program.
B. Areas of concern:

All accounting records are maintained on a microcomputer. The software being used consists
of the following modules: General ledger, Purchase, Accounts receivable and Payroll. Because
they use a microcomputer, which has small capacity, the modules are not integrated meaning the
data means data are not transferred automatically between modules.

INVOICES the entity uses the manual invoices which are not pre-numbered.
PAYROLL The companies does not used checks and pays the employee in cash
instead. Therefore it is not unusual for companies to request large sums of cash from

local banks.
DUTIES employees duties are not properly segregated. Debbie for example is in
charged in billing customer and entering sales in the Account receivable ledger program.
She is also responsible for receiving cash receipt and checks and entering the data into

the account receivable ledger program.

CHECK STAMPS not placing the right stamp on the checks and recording payments
as they are received.

Risk Issues:
There are a lot of problematic areas in the firms control activities, making it sensitive to
fraud. One is its IT Controls where in all the accounting systems used are not linked to one
another. It is easy to manipulate transactions without the others detecting it right away. Another
issue is the segregation of duties. The custody of assets and record-keeping responsibility may lie
on the hands of one person. In this case, Debbie may record the sale, iopen the mail, deposit the
check and record the deposit. Lapping may be done under this situation. There should be proper
segregation of duties since failure might lead to bigger losses in the future. Lastly, lack of strict

company policies and practices create opportunities for fraud. The use of unnumbered sales
invoices and no guidelines with check stamps increase the risk of embezzlement.
Analysis:
Based on the facts, either Susan and Debbie is the most likely to commit fraud. Debbie
and Susan are both doing the billing of customers, making bank deposits, recording cash
receipts, and check and update receivables in their program. There is an improper segregation of
duties because they are both capable of performing receiving and recording functions. It is where
fraud occurs. The first sign that caught Susan's attention was the different balances of the
accounts receivable general ledger and subsidiary ledger. Also, the Accounts receivable listings
were not continuous and appear to have been tampered due to fact that there were tears on them.
It is possible that some transactions were intentionally omitted from the AR records. Unusual
activities also exist in the payments and deposits. Debbie used different stamp on some checks
and presented an inaccurate and unstamped deposit slips. The different stamp used may have
been used to divert the payment for her benefits and the unstamped deposit slips were used to
cover up missing transaction. It is noticed that the records were incomplete. Payments were not
chronologically arranged in the computer. Missing transactions were just added. All these events
were reasonable to conclude that some collections of the accounts receivables were stolen from
the company, along with the cash which were never really coming in. The weakness in the
internal control and the improper segregation of duties caused this fraudulent activities.
Conclusion:
Based on the case facts and our analysis of how the fraud could be reasonably believed to have
occurres, it can be said that Debbie is the perpetrator. Her control over physical assets and
recordkeeping responsibilities enabled her to steal the USD 40,000. One of the possible ways to
do it is through not recording some sales and keeping the checks from payments on these sales.
The fact that Debbie may have tried to cover things up by possibly tampering with the records
and presenting a false bank deposit slip points to her as being the person guilty of the
embezzlement.We conclude that an embezzlement had taken place and someone working for the
company had taken the cash. The fact that the address stamp rather than the for deposit only
stamp was used makes things look very much like an embezzlement. Besides, we found out that

some accounting records had been altered. The accounts receivable listing had been splitted or
ripped apart, which we suggests someone might have run the report many times and pieced it
together. In addition to the evidence is that the detailed accounts receivable balances did not add
up to the summary totals at the end of the report.
Recommendation
Knowing the issues and problem of this case we recommended that this company should
improve its current system through exclusive accountability, segregation of duties, use of
integrated system, pre-numbering of invoice forms, billing all customers and lastly, set clear
policies and guidelines for sensitive processes.
Exclusive Accountability
To improve the control system of the company the key functions must be assigned and
perform by a single person who would primarily be liable and be accountable. The person who is
not involve within the scope of a certain responsibility must not have an access over it. This
recommendation will help the company to at least mitigate the risk for fraudulent activities
where multiple individuals perform particular tasks that made it so hard to distinguish who is
really accountable.
Segregation of Duties
To lessen the chance of some perpetrators to perform their fraudulent act there must be a
proper segregation of duties inside the company. Those individuals who are responsible for
receiving the check must not have access to accounting records and vice versa for them not to
make some alteration or deletion on the records. This must be handle by distinct individuals to
avoid manipulation of recorded file. The transaction authorization must be separated from
processing, as well as authorization from recording, and custody.
Use of Integrated System
The problem to this company is that they are maintained the records of transaction on a
microcomputer, installed with four modules namely: accounts receivable, general ledger,
purchase, and payroll. Because of small capacity of microcomputers the modules are not

integrated. So we recommended to this company to use an integrated system where the data from
the other program will be transferred automatically between modules, like subsidiary ledger
should be automatically integrated to the general ledger. Through this suggestion the risk of
committing error or fraud will be avoided or mitigated because through integrated system it is
hard for the perpetrator to make some changes or deletion to a specific module of program, not
like in transferring records manually from subsidiary ledger to general ledger where it passes the
risk of committing error and frauds.
Pre-numbering of Invoice Forms
Pre-numbered invoice forms allow the company to classify and identify missing or
omitted transactions. This prevents employees from lapping an entire transaction from the
companys accounting records and keeping the cash receipts from the customers. We recommend
that they must issue only pre-numbered invoices.
Billing of all Customers
This will provide measures which will be pertinent to all. The possibility of human error
will be reduced in preparing the billing statement if it is done for all as compared to primarily
identifying customers who are behind in payments. Moreover, having complete billing records
provides the company with an official document which may be used as audit trail.
Set Clear Policies and Guidelines for Sensitive Processes
This will build an effective control environment once implemented. Like in the case of
stamp, the company can explicitly state that only one type of stamp must be used on all customer
checks. There could also be agreement with the bank on encashing company checks. Moreover,
supervision is needed to make this effective.