ACCT406 Accounting Information Systems

ACCT406 Accounting Information Systems Assignment
Requirements
Attempt all the cases. The final soft copies of the answers should be sent to the emails of your course reps by the deadline day with all group members listed (any group member who will deliberately not take part in this assignment should be left out). The hard copies of the answers should be left at the lecturer’s office. Each group will present the answers in class if time permits.
ACCT406 Accounting Information System

Case 1
Nino Moscardi, president of Greater Providence Deposit & Trust (GPD&T), received an anonymous note in his mail stating that a bank employee was making bogus loans. Moscardi asked the bank’s internal auditors to investigate the transactions detailed in the note. The investigation led to James Guisti, manager of a North Providence branch office & a trusted 14-year employee who had once worked as one of the bank’s internal auditors. Guisti was charged with embezzling$1.83 million from the bank using 67 phony loans taken out over a three-year period.

Court documents revealed that the bogus loans were 90-daynotes requiring no collateral and ranging in amount from$10,000 to $63,500. Guisti originated the loans; when each one matured, he would take out a new loan, or rewrite the old one, to pay the principal and interest due. Some loans had been rewritten five or six times.

The 67 loans were taken out by Guisti in five names, including his wife’s maiden name, his father’s name, and the names of two friends. These people denied receiving stolen funds or knowing anything about the embezzlement. The fifth name was James Vanesse, who police said did not exist. The Social Security number on Vanesse’s loan application was issued to a female, and the phone number belonged to a North Providence auto dealer.

Lucy Fraioli, a customer service representative who cosigned the checks, said Guisti was her supervisor and she thought nothing was wrong with the checks, though she did not know any of the people. Marcia Perfetto, head teller, told police she cashed checks for Guisti made out to four of the five persons. Asked whether she gave the money to Guisti when he gave her checks to cash, she answered, “Not all of the time, “though she could not recall ever having given the money directly to any of the four, whom she did not know.

Guisti was authorized to make consumer loans up to a certain dollar limit without loan committee approvals, which is a standard industry practice. Guisti’s original lending limit was$10,000, the amount of his first fraudulent loan. The dollar limit was later increased to $15,000 and then increased again to $25,000. Some of the loans, including the one for $63,500, far exceeded his lending limit. In addition, all loan applications should have been accompanied by the applicant’s credit history report, purchased from  independent credit rating firm.
The loan taken out in the fictitious name would not have had a credit report and should have been flagged by a loan review clerk at the bank’s headquarters.

News reports raised questions about why the fraud was not detected earlier. State regulators and the bank’s internal auditors failed to detect the fraud. Several reasons were given forthe failure to find the fraud earlier. First, in checking for bad loans, bank auditors do not examine all loans and generally focus on loans much larger than the ones in question. Second, Greater Providence had recently dropped its computer services arrangement with a local bank in favor of an out-of-state bank.
This changeover may have reduced the effectiveness of the bank’s control procedures. Third, the bank’s loan review clerks were rotated frequently, making follow-up on questionable loans more difficult.
Guisti was a frequent gambler and used the embezzled money to pay gambling debts. The bank’s losses totaled$624,000, which was less than the $1.83 million in bogus loans, because Guisti used a portion of the borrowed money to repay loans as they came due. The bank’s bonding company covered the loss.

The bank experienced other adverse publicity prior to the fraud’s discovery. First, the bank was fined $50,000 after pleading guilty to failure to report cash transactions exceeding$10,000, which is a felony. Second, bank owners took the bank private after a lengthy public battle with the State Attorney General, who alleged that the bank inflated its assets and overestimated its capital surplus to make its balance sheet look stronger. The bank denied this charge.

Required:
1. How did Guisti commit the fraud, conceal it, and convert the fraudulent actions to personal gain?
2. Good internal controls require that the custody, recording, and authorization functions be separated. Explain which of those functions Guisti had and how the failure to segregate them facilitated the fraud.
3. Identify the preventive, detective, and corrective controls at GPD&T and discuss whether they were effective.
4. Explain the pressures, opportunities, and rationalizations that were present in the Guisti fraud.

ACCT406 Accounting Information Systems

Case 2

Mary Smith is the bookkeeper for Dave’s Distributing Company, a distributor of soft drinks and juices. Because the company is rather small, Mary performs all daily accounting tasks herself. Dave, the owner of the company, supervises the warehouse/delivery and front office staff, but he also spends much of his time jogging and skiing.
For several years, profits were good, and sales grew faster than industry averages. Although the accounting system was working well, bottlers were pressuring Dave to computerize. With a little guidance from a CPA friend and with no mention to Mary, Dave bought a new computer system and some accounting software. Only one day was required to set up the hardware, install the software, and convert the files. The morning the vendor installed the computer system, Mary’s job performance changed dramatically.
Although the software company provided two full days of training, Mary resisted learning the new system. As a result, Dave decided she should run both the manual and computer systems for a month to verify the new system’s accuracy.
Mary continually complained that she lacked the time and expertise to update both systems by herself. She also complained that she did not understand how to use the new computer system. To keep accounts up to date, Dave spent two to three hours a day running the new system himself. Dave found that much of the time spent running the system was devoted to identifying discrepancies between the computer and manual results. When the error was located, it was usually in the manual system. This significantly increased Dave’s confidence in the new system.

At the end of the month, Dave was ready to scrap the manual system, but Mary said she was not ready. Dave went back to skiing and jogging, and Mary went on with the manual system. When the computer system fell behind, Dave again spent time catching it up. He also worked with Mary to try to help her understand how to operate the computer system.
Months later, Dave was very frustrated because he was still keeping the computer system up to date and training Mary. He commented, “I’m sure Mary knows how to use the system, but she doesn’t seem to want to. I can do all the accounting work on the computer in two or three hours a day, but she can’t even do it in her normal eight-hour workday. What should I do?”
Required:
a. What do you believe is the real cause of Mary’s resistance to computers?
b. What events may have contributed to the new system’s failure?
c. In retrospect, how should Dave have handled the accounting system computerization?

ACCT406 Accounting Information Systems

Case 3
The Nyameye Company, a client of your firm, has come to you with the following problem. It has three clerical employees who must perform the following functions:
• Maintain the general ledger
• Maintain the accounts payable ledger
• Maintain the accounts receivable ledger
• Prepare checks for signature
• Maintain the cash disbursements journal
• Issue credits on returns and allowances
• Reconcile the bank account
• Handle and deposit cash receipts
Assuming equal abilities among the three employees, the company asks you to assign the eight functions to them to maximize internal control. Assume that these employees will perform no accounting functions other than the ones listed.
Required:
i. List three possible unsatisfactory pairings of the functions.
ii. State how you would distribute the functions among the three employees. Assume that apart from the nominal jobs of the bank reconciliation and the issuance of credits on returns and allowances, all functions require an equal amount of time.

Case 4
A) Your current system is deemed to be 90% reliable. A major threat has been identified with an impact of GHS3,000,000. Two control procedures exist to deal with the threat. Implementation of control A would cost GHS100,000 and reduce the likelihood to 6%. Implementation of control B would cost GHS140,000 and reduce the likelihood to 4%. Implementation of both controls would cost GHS220,000 and reduce the likelihood to 2%. Required:
Given the data, and based solely on an economic analysis of costs and benefits, what should you do? Show workings
B) The Langston Recreational Company (LRC) manufactures ice skates for racing, figure skating, and hockey. The company is located in Kearns, Utah, so it can be close to the Olympic Ice Shield, where many Olympic speed skaters train.
Given the precision required to make skates, tracking manufacturing costs is very important to management so it can price the skates appropriately. To capture and collect manufacturing costs, the company acquired an automated cost accounting system from a national vendor. The vendor provides support, maintenance, and data and program backup service for LRC’s system.

LRC operates one shift, five days a week. All manufacturing data are collected and recorded by Saturday evening so that the prior week’s production data can be processed. One of management’s primary concerns is how the actual manufacturing process costs compare with planned or standard manufacturing process costs.
As a result, the cost accounting system produces a report that compares actual costs with standards costs and provides the difference, or variance. Management focuses on significant variances as one means of controlling the manufacturing processes and calculating bonuses.

Occasionally, errors occur in processing a week’s production cost data, which requires the entire week’s cost data to be reprocessed at a cost of $34,500. The current risk of error without any control procedures is 8%. LRC’s management is currently considering a set of cost accounting control procedures that is estimated to reduce the risk of the data errors from 8% to 3%. This data validation control procedure is projected to cost $1,000 per week.

Required:
a. Perform a cost/benefit analysis of the data-validation control procedures.
b. Based on your analysis, make a recommendation to management regarding the control procedure.

ACCT406 Accounting Information Systems

Case 5
Explain how the principle of separation of duties is violated in each of the following situations. Also, suggest one or more procedures to reduce the risk and exposure highlighted in each example.
a. A payroll clerk recorded a 40-hour workweek for an employee who had quit the previous week. He then prepared a paycheck for this employee, forged her signature, and cashed the check.
b. While opening the mail, a cashier set aside, and subsequently cashed, two checks payable to the company on account.
d. A cashier prepared a fictitious invoice from a company using his brother-in-law’s name. He wrote a check in payment of the invoice, which the brother-in-law later cashed.
e. An employee of the finishing department walked off with several parts from the storeroom and recorded the items in the inventory ledger as having been issued to the assembly department.
f. A cashier cashed a check from a customer in payment of an account receivable, pocketed the cash, and concealed the theft by properly posting the receipt to the customer’s account in the accounts receivable ledger.
g. Several customers returned clothing purchases. Instead of putting the clothes into a return bin to be put back on the rack, a clerk put the clothing in a separate bin under some cleaning rags. After her shift, she transferred the clothes to a gym bag and took them home.
h. A receiving clerk noticed that four cases of MP3 players were included in a shipment when only three were ordered. The clerk put the extra case aside and took it home after his shift ended.
i. An insurance claims adjuster had check signing authority of up to $6,000. The adjuster created three businesses that billed the insurance company for work not performed on valid claims. The adjuster wrote and signed checks to pay for the invoices, none of which exceeded $6,000.
j. An accounts payable clerk recorded invoices received from a company that he and his wife owned and authorized their payment.
j. A cashier created false purchase return vouchers to hide his theft of several thousand dollars from his cash register.
k. A purchasing agent received a 10% kickback of the invoice amount for all purchases made from a specific vendor.]

ACCT406 Accounting Information Systems

To Be Continuous…