Learning Objective

After completing and discussing this case, you should be able to examine edits/adjusting journal entries to accounting system records to determine whether any transactions have been altered:

1. Download the accounting record to be examined (e.g., extract edits to cash receipts) for the period you want to examine.
2. Obtain copies of the associated supporting documents (e.g., deposit ticket and bank statement) for the same time period.
3. Schedule the date and amount of the original transaction (e.g., cash before edit) and the date and amount of the edited transactions (e.g., cash after the edit) and differences between the original and edited transactions.
4. Vouch transactions from the accounting record (e.g., data extraction) to the supporting documents (e.g., verify the amount and date of cash actually deposited).
5. Determine whether the edit was justified.
6. If the amounts were not justified, identify the total number and dollars of irregularities.

This case explores the process of vouching from a schedule (e.g., data extraction of edits/adjusting journal entries) to source documents (e.g., deposit slips and bank statements).

Introduction

Inexpensive, readily available, accounting packages have edit functions that can be fraudulently used if a company does not have adequate internal controls (i.e., separation of authorization, accounting, and asset custodian duties). After printing checks to the payee listed on the check, a fraudster can use the edit function to change the name of the payee and account. Vouching from the cash disbursements journal and the canceled check and/or bank statement will document the difference. Similarly, a fraudster can use the edit function to reduce the amount of cash receipts and deposit a lower amount (i.e., steal cash).

This case teaches you how to prepare a spreadsheet detailing original and edited transactions listed on an accounting record (e.g., data extraction from the adjustments and/or cash receipts journal). You will learn how to document the edits by vouching to the amount and date of the edited transactions to the supporting documents (e.g., deposit ticket and bank statement).

Background

On April 2, 2016 (the day following the bank's notification of overdrawn checks), Dr. Anderson reviewed the March 2016 details from her practice over breakfast and noted that deposited cash deposits did not match the cash receipts initially recorded in the Medatrix UltraScan Point of Sale (POS) system. She asked Teresa Padgett, an information technology specialist, to look up the original and edited cash receipt transactions recorded in Medatrix UltraScan for March 2016. Teresa found that Tonya Larsen, who has been the office manager since September 2015, had made a number of even‐dollar edits to the amount of cash receipts (e.g., $2,197.95 reduced to $1,697.95, a $500.00 reduction) and that the smaller edited amounts of cash were deposited days after actual receipt. Teresa Padgett told Dr. Anderson that she thought Tonya Larsen was stealing—altering deposits with different round dollar amounts (more than $1,000 a week). Time stamps on Tonya Larsen's edits show when she changed the information. Every employee has a distinct ID and password that employees are not to share. Tonya Larsen's ID is “203–Tonya.” According to Teresa Padgett, there appears to be a delay of several days between daily sales receipts and actual deposits and there appears to be a pattern of decreased deposits.

Teresa Padgett downloaded the edits to the cash receipts journal for the period September 1, 2015, through March 31, 2016, for further examination.

Summary Requirements

Alexander Z. Boone, Esq., the independent attorney hired by Southern Appalachian Insurance Company, added a review of the edits to the cash receipts journal to your examination of Anderson Internal Medicine's employee dishonesty claim.

Before proceeding, read the documents in Chapter 7, section 7‐3, “Fraudulent Edits/Adjusting Journal Entries.” As you work the case, you will have to read and reread the documents to fully understand the evidence.

As with the information analyzed and summarized from the bank statements, canceled checks, deposit slips, and so on, the results of this additional assignment will be used by the attorney. Your assignment (in general) is as follows:

1. Schedule the provided data extraction [e.g., date and amount of the original transaction (e.g., cash before adjustment) and the date and amount of the edited transactions (e.g., cash after the adjustment)] and calculate the differences, if any, between the original and edited transactions.
2. Vouch the deposit transactions listed on the schedule to the deposit slips and bank statement to verify the amount and date of cash actually deposited.
3. Identify the individual and total number and dollars of irregularities.

The initial steps (see exercise) are to be completed individually. You may confer online on strategy, but do your own work. In particular, all students are to perform the various fraud examination steps and submit their Excel working papers (e.g., schedules) for grades.

Learning Objective

After reading this synopsis, you should be able to:

1. Better understand how to verify data extracted from a ledger, journal (e.g., cash receipts journal), or activity log (e.g., edit or audit trail log).
2. Vouch transactions in the ledger, journal, or activity log to the source document or, vice versa, trace the source document to the associated ledger, journal, or activity log.

Introduction

Essential to detecting and documenting fraudulent accounting transactions is vouching/tracing between the applicable accounting ledger, journal, or activity (edit or audit trail) log and the source document.

If you want to determine whether a transaction is valid, you use a process called vouching. Vouching follows an item found in the accounting ledger, journal, or activity (edit or audit trail) log back to the source document. Tracing is the reverse process, following a source document back to the originating document (ledger, journal, or activity log). In fraud examination, you will use both vouching and tracing.

In Anderson Internal Medicine (Case 2), you traced checks listed in the cash disbursements journal to the canceled checks and bank statements and found that the payee names on several checks did not match the payee names in the cash disbursements journal. You also traced debit card transactions listed on the bank statements back to the cash disbursements journal and found that those transactions were not listed in the accounting records.

Similarly, you can trace numbers and dates on deposit tickets and bank statements to the edit log, which tracks changes to cash deposits. You could also trace to the cash receipts journal; however, that would only show the post‐edit numbers—it would miss those deposits that were allegedly stolen. Also, you can trace transactions listed on the edit log (not the cash receipts journal) to the deposit tickets and bank statements. Pay close attention to deposit dates. Good internal controls require deposits to be made daily (as in the same day received) and intact (without withholding any of the deposit). If a company receives cash and checks, both should be deposited on the dates received.

Exercise 1: Individual Assignment

1. Use the template titled “203‐Tonya Edits Template,” which is available on the companion website.
2. Data extractions are often difficult to read. So, convert the data extraction to a more understandable Excel schedule. Start with the data contained in the extraction labeled “Data Extraction 203 Tonya Edits (Jan Feb Mar 2016).” Schedule the specific information [e.g., date and amount of the original transaction (e.g., cash before adjustment) and the date and amount of the edited transactions (e.g., cash after the adjustment)] into the template. Calculate the differences, if any, between the original and edited transactions.
3. Then, vouch the edited deposit transactions listed on the schedule to the deposit slips and bank statement provided with the second fraud case to verify the amount and date of cash actually deposited. Insert tick mark “√”. This will evidence that the edited deposit amounts on the schedule agree with both the deposit slips and bank statement.
4. Identify the individual, monthly total number and dollars, grand total number and dollars of the irregularities. Was there a trend in average irregularity as well as monthly total number and dollars?

Anderson Internal Medicine (Edits/AJEs)