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The Bad Bookkeeper

The Bad Bookkeeper. Background Gov’t contractor Revenue less than $25 million Company sold technical services. Cash Disbursements. Mail came into accounting and invoices were accumulated. Invoices entered into the Accounts Payable module and payment run prepared.

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The Bad Bookkeeper

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  1. The Bad Bookkeeper • Background • Gov’t contractor • Revenue less than $25 million • Company sold technical services

  2. Cash Disbursements • Mail came into accounting and invoices were accumulated. • Invoices entered into the Accounts Payable module and payment run prepared. • Check stock loaded into printer. • Check alignment checked and payment run sent to printer. Misaligned checked voided and destroyed. Excess check returned to locked storage. • Invoices and checks matched and sent to President for signature. • President reviews support, signs checks and cancels support; bookkeeper mails checks. • Cancelled invoices and checks returned to accounting; invoices filed, checks mailed by bookkeeper. • Manual journal prepared for cash disbursements, reviewed by accounting manager • Manual journal entered into General Ledger and posted by bookkeeper. 1 3 2 4 5 6 7 8 9

  3. Cash Disbursements • Misaligned checks, to be voided, included an extra blank check. • Bookkeeper made check payable to self and forged president’s signature. • Bookkeeper deposited check into personal bank account. 1 2 3

  4. Cash Reconciliation • Bank sends bank statement and checks to company. • Bookkeeper opens bank statement. Forged checks are removed and destroyed. • Original bank statement is altered and photocopied. Original bank statement is destroyed. • Bank reconciliation is prepared by bookkeeper. • Accounting manager reviews reconciliation, general ledger and bank statements. • Approved adjustments are entered into General Ledger. • Financial auditors examine bank statements (copies), bank reconciliations and journal entries but suspect nothing. 1 2 3 4 7 5 6

  5. Hiding The Theft • Altered bank statements: • a. Two forged checks made for $6,500, at the beginning and end of month, so that they are on different pages of the bank statement. • b. Lines on statement that refer to the forged checks are cut out and statement is taped back together for photocopying. • c. Photocopy is kept with bank reconciliation. • Computerized check run (cash disbursements journal), which is used to print the checks, is never posted. • Bookkeeper prepares manual cash disbursement journal and adds $13,000 to several different types of expenses to hide the theft. Bank Statements C/D Journal 1 2 Manual C/D Journal 3

  6. Knowing The Auditors • Monthly theft was $13,000. Bookkeeper knew auditors’ materiality level was more than this amount. • Bookkeeper knew auditors came in November to look at January to October transactions and in January to look at year-end amounts. Journal entries to cover theft were done in November. 1 $6,500 2

  7. Fixes • Segregation of duties • Auditors’ management letter did report this as a weakness • More thorough review • Accounting manager was distracted with installing a new accounting system • Changing internal work flow • President to open Bank Statement • Posting check run

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