Bac 409: Forensic Accounting Question Paper
Bac 409: Forensic Accounting
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2016
DEPARTMENT OF ACCOUNTING AND FINANCE
CAT 1
TIME 2 HOURS
Jane Namarome worked as the assistant manager of Olengo’s Cafe in Nairobi. The Café had a general manager and 16 part-time employees. Olengo’s Café provides breakfast and lunch Monday through Friday. Lunch generates the majority of sales, and most sales are a result of walk in customers. While patrons typically walk in, some catering business exists. Jane has served as assistant manager at Olengo’s Cafe for Mr. Joel Olengo, the owner and founder of the cafe, for more than eight years. Her total employment at Howie’s spans nearly 18 years.
Jane has two teenage children. The oldest one plans to attend college in the near future. Also, Jane’s husband recently lost his manufacturing job due to outsourcing. When Jane became the assistant manager, Mr. Joel Olengo placed his trust in her by giving her keys, which allowed her to come in early or stay late. Jane was responsible for all operations. The following explains her duties specifically related to sales:
• Preparing the cash bank for the cash register
• Closing out the register, counting cash receipts, and preparing the daily cash report
• Correcting errors and making adjustments
• Making the bank deposits, receiving the bank statement, and reconciling the bank account
• Preparing employee time cards
In June, 1996, Mr. Joel Olengo was diagnosed with cancer. His condition weakened in Year 2 and he was unable to go to the cafe every day. Because Mr. Joel Olengo trusted Jane so much, he looked to her to oversee much of the day to day tasks at the cafe and to fax him the daily cash sales reports. Mr. Joel Olengo did not receive any other income, expense, or financial statements. The sales report was based on information pulled from a Z tape, a paper report printed by a cash register.
The kind of register operated by Olengo’s Cafe allowed the printing of a Z tape only when the manager or assistant manager used a special key. Typically, a business will attach a Z tape to the daily cash report as support for amounts collected. The Z total, or accumulated total amount of sales for the register, is printed at the bottom of the Z tape. The Z total may only be reset to zero by the manufacturer of the register. The Z tape also provides a subtotal of daily sales by category and by payment method.
Shortly after Mr. Olengo’s illness worsened in 1997, the County began a major highway construction project on the road in front of the cafe. Customers could always access the cafe despite the construction. The ongoing road construction, however, made it very difficult for some customers to drive to the cafe.
In September of 1998, Mr. Joel olengo passed away. Mr. Olengo’s daughter, ASenath, a food and beverage manager for a hotel in Nyali, inherited the cafe. It took Asenath six weeks after her father’s death before she could focus on the needs of the cafe. Her first task was to review the financial records, so she asked Jane to mail her the daily cash reports, bank deposits slips and bank statements for the previous six months. Asenath quickly realized that for the better part of 1998 the cafe was operating at a loss. Asenath questioned Jane about the large losses, and Jane replied that business was down significantly due to the road construction. Sue knew this did not sound right because most of the customers actually walked to the cafe from the neighboring office buildings.
Asenath began reviewing the cafe’s bank account information for 1998 and noticed that the bank deposits for the last few months did not include the expected level of cash.
Asenath hired a new general manager and told Jane that she would be reassigned to work as part of the serving staff. This means that Jane would not be an assistant manager and would no longer have responsibility for any of the operations. Jane could continue working as a cashier on an as-needed basis.
Asenath called her father’s accountant to discuss these findings and he told her to call the CID and together they would conduct an investigation. The detectives in the CID issued a subpoena for Jane Namarome’s personal bank account records, credit card records and other records. Together they summarized the information which would allow for the preparation of a net worth analysis.
ITEM 1996 1997 1998
Addition to residence 0 0 125,000
Annual tax payment 0 6,000 6,000
Annual life insurance premium 0 4,800 4,800
Annual living expenses 20,000 20,000 22,000
Annual salary 35,000 35,000 35,000
Automobile 20,000 20,000 20,000
Automobile loan payable as of year end 10,000 0 0
Cash balances as of year end 6,000 12,000 25,000
Certificate of deposits as of year end 50,000 50,000 50,000
Diamond ring and other jewelry 0 0 30,000
Investments in stocks and bonds as of year end 30,000 30,000 30,000
Mortgage balances as of year end 90,000 50,000 0
Other annual income 25,000 5,000 62,000
Residence 100,000 100,000 100,000
Second automobile 0 0 50,000
The accountant’s analysis revealed that over a nine month period in 1998 Jane made 107 cash deposits with many of the deposits being in the range of 9,750.00 to 9,999.00. When Becky was questioned why she had so many large cash deposits, she said that she was a part time professional gambler and played the slot machines at the casino every weekend. Jane told the accountant that she had big wins in early Y1998, including a 20,000 video poker payoff, and that she gambled on her winnings and earned income thereafter.
ACCOUNTANT’S FINDINGS OF FACT
Asenath and her accountant met with the detectives and presented their findings which are stated below and are collectively known as the Accountant’s Finding of Facts.
Facts determined by the Accountant
1. Accountant stated that Defendant’s daily cash sales reports consistently matched to the penny the amount of cash she deposited, a rare occurrence in retail cash sales.
2. The accountant stated that two “Z” tapes were run on the cash register and that one Z tape was always missing and not turned in with the daily cash report. The business only used one cash register
3. The accountant also stated that the Z tapes submitted with the Defendant’s daily cash report were precisely cut just before the cumulative total sales (NRGT), and only provided the sales figures by categories and payment methods. He noticed cumulative total sales were missing from the Z tapes. The change in cumulative total sales between two complete Z tapes provides the amount of receipts that should have been deposited. The accountant noted that the total sales (TS) provided on intermediate Z tapes did not equal the difference between the two cumulative total sales referred to above.
4. The accountant opined that his physical examination of the Z tapes suggested a logical cutting point to conceal the fraud scheme would be above the cumulative total sales and just below net sales.
5. The accountant demonstrated how overcharges could allow someone to take cash from the cafe and not reflect poorly on the cafe’s revenue. For instance, a customer is charged USD 5 for a sandwich that is normally sold for USD 4. The sandwich would be recorded in the register at USD 4, but USD 5 would be collected from the customer. This type of fraud scheme is known as sales skimming.
6. Accountant opined that the cafe suffered a cash shortage of approximately USD 250,000 between Jan. 1 and Sept. 21 of 1998.
Facts Provided by Surveillance Investigator of Chip and Deal Casino
7. The casino investigator stated that Defendant held a “player’s club card” - obtained voluntarily by the patron; it tracks the patron’s casino activity and provides rewards or cash back based on number of points accumulated.
8. Printed coin-in reports show patron’s “coin-in” on slot machines. (“Coin-in” is the combination of actual cash put into slots and credits accumulated by winning.) Investigator reviewed copies of Defendant’s coin in reports from the date she began using her “player’s club card” and copies of pay-out documentation for 1997 through 1999. The coin-in report does not give a breakdown of how much is actual cash and how much are actual credits accumulated by winning. Investigator stated that the report on Defendant’s card showed increased activity in 1997 and 1998. Defendant’s “Coin-in Report” shows in excess of USD 1.7 million in a combination of actual cash and reward credits for 1998. Defendant converted her winning credits into cash. Casino payouts were made in cash for amounts less than USD 1,000 and by check for amounts in excess of USD 1,000.
9. Defendant’s winnings in 1998 as she reported to the IRS were approximately USD 135,000. Defendant did not report any losses.
Facts Provided by Employees
10. The general manager stated that she told the Defendant to stop running two Z tapes on the cash register. The general manager stated that reported cash sales from the cash register doubled when two Z tapes were not run.
11. The accountant stated that the Defendant told him she ran a Z tape from the cash register each day to determine what food items sold and what she needed to order. General manager stated that Defendant was not the person who did the ordering of food. Another employee ordered food and stated that she did not use the Z tapes in determining how much and what food to order.
12. At work, the Defendant was observed exchanging higher denomination bills in the cash register with gambling winnings from her purse, so that cafe workers would not have to get change from the bank. 13. Defendant’s gambling activity increased in 1997 and 1998, but her earned income remained at USD 35,000.
Information Provided by the Defendant
14. Defendant stated that she cut the Z tapes for a study which was being conducted to cuts costs and waste in the cafe. After the study was done, Defendant admitted that she continued to cut the bottom off the Z tape to track inventory. She did not explain how the bottom half of the tapes had been removed just above the grand total amount or how the grand total amount was necessary for the study or for her ordering purposes.
CHARGES AGAINST BECKY
After reviewing the information from Sue and her accountant, coupled with their own investigation, the detectives arrested Becky McGill and charged her with embezzlement of USD 250,000, as well as other charges. Furthermore, the detectives contacted the tax authority and requested them to begin an Income Tax Evasion case on Jane. The prosecutor needs assistance in developing an understanding of embezzlement. He feels that it may be too hard for the jury to grasp. He feels if the jury does not fully understand the count of embezzlement they may find her not guilty on all the other counts. The prosecutor engages you as a consulting expert accountant. Your task is to analyze the elements of embezzlement, and identify the facts that support the allegation, based on the investigation conducted by ASenath’s accountant and the detectives.
ANSWER THE FOLLOWING QUESTIONS
a. Explain what perceived pressure(s) Becky may have faced. How might Becky rationalize her fraudulent actions?(6 mks)
b. . Describe what factors in Howie’s Café system of internal control led to and facilitated Becky’s manipulation of the Z tapes and the theft. In your answer, fully define each of the five components included in the COSO Internal Control – Integrated Framework. The Framework, as updated in 2013, helps organizations design potentially effective internal controls. Relate your explanations back to the framework’s five components. (10 mks)
c. c. What could Howie’s Cafe have done differently to detect this fraud earlier or prevent it from happening? (5mks)
d. Using the above information, prepare a net worth analysis using the indirect approach to calculate Jane’s income from unknown sources for years 1997 and 1998. (12 mks)
e. In each 14 statements of fact, assuming they are true, state the fraud so committed (7mks)
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