Answering the 4 questions and final essay in attachment

(25 points) Case 1: Control Environment and Control Activities: The Importance of Hiring
Trustworthy
Employees
Joe and Mary Gray started their multimillion-dollar home electronics and car audio store
chain in Texas in the late 1970s. By mid-1983, their company had grown to 10 stores in 3 states
with 500 employees and gross sales of $30 million. The decline of the oil industry in the mid-
1980s led to the company losing almost half of their employees. Additionally, as people moved to
more economically viable states, employee turnover continued to increase. During this time, the
Grays needed to fill a recently vacated Controller position in their main office. The position was
crucial and required a person who was highly motivated and knowledgeable of operations. After
interviewing several candidates, they decided to give Jeff Smith the position.
Jeff was nothing like the previous Controller. He was quickly labeled a “maverick” and was
completing tasks that had been languishing for months. Many of the employees noticed Jeff in the
office working early in the morning, late at night, and on weekends. On many occasions, Jeff
stayed at the office all night and through the next day. He was eager to fill in for people away from
the office due to illness, vacation, or business travel. He was improving the efficiency of the office
and the Grays were elated at his performance. Within six months of Jeff’s arrival, the Grays
expanded the Controller duties to include many office operations, and transferred these responsibilities
to Jeff. Jeff’s charismatic personality and work ethic motivated many in the office to
improve their work habits and efforts. The general consensus was that Jeff was an “inspired”
choice for the position and had brought about a complete renewal of the business.
Approximately one year after Jeff was hired, Joe Gray noticed some anomalies after completing
the physical inventories and year-end closing of the books. He met with Jeff on numerous
occasions to try to resolve the discrepancies, but to no avail. Jeff and Joe worked on identifying
the anomalies for about a month, meeting at the main office one Sunday afternoon to continue
their search. Only Jeff and Joe were in the office that day. They took advantage of Joe’s extra long
meeting table to lay out all of the ledgers and journals on the table in preparation for their search.
After several hours, Joe began to make headway for the first time that afternoon. Jeff excused
himself to take a smoking break while Joe continued to close in on the problem. Twenty minutes
went by and Joe noticed that Jeff had not yet returned. He waited a few minutes and then went to
see where Jeff had gone. Not finding him anywhere in the building, Joe checked outside—Jeff’s
car was gone. Joe tried to call Jeff’s house later that day, but there was no answer. The following
day, Jeff didn’t show up for work. Joe tried to contact him again at home, but he had moved,
leaving no forwarding address.
As it turned out, Jeff had a long history of embezzling from companies—police and federal
agencies had been looking for him for some time. Some of the ways Jeff was able to steal over $2
million included:
• Printing checks and making the necessary reversing entries and using backup files to cover
his tracks.
• Setting himself up as a vendor with a P.O. Box address, with checks mailed to that address
every few weeks. The amounts on the checks were small, so they did not require a second
signature.
• Jeff handled the cash collections, disbursements, and account reconciliations.
• Jeff was able to divert some of the checks received as payments on invoices by using the
company’s check endorsement stamp, signing the checks over to himself, and depositing
them in his personal account.
When Joe came too close to the truth that Sunday afternoon, Jeff realized he was caught and
left town. The authorities were contacted, but Jeff got away one more time by befriending everyone,
having exemplary performance for the time he was with the company, and gaining everyone’s
trust—he was the “perfect employee.”
Questions
1. What were some of the factors that contributed to this situation?
2. What internal controls could have been in-place to prevent this from happening?

(25 points) Case 2: The Control Environment and Control Activities: Proper Authorization of Credit
Richie was the Controller at Ralph Malph Enterprises, a publicly traded sales supported
company. He started the job six months ago and after observing the activities in his area,
he determined that the accounts receivables procedures needed to be tightened up. He approached
Marion, the Accounts Receivable clerk, requesting her assistance in documenting the procedures
related to new customer approvals, credit limits, and cash receipts. Marion indicated that there
were no formal procedures for approving new customers—she received names and billing addresses
from the sales representatives, Warren, Arthur, and Howard. When the information was
passed on from the sales representatives, Marion then performed file maintenance to add the new
customers to the customer master file without putting a customer file together for review. Marion
then told Richie that the credit limit was set at whatever level the related sales representative told
her to give the customer. As for cash receipts, Marion prepared the deposits and took the deposits
to the bank, reconciling the bank statement on a monthly basis. Marion also entered the cash
receipts into the system.
Richie was troubled, because according to the sales representatives and Marion, previous
controllers and some of the executive-level management had never felt having formal authorization
and review procedures for accounts receivable was important. Richie noted that this “tone at
the top,” which was lackadaisical at best, could lead to the perpetration of fraud throughout the
organization. Richie realized that the combination of a lack of control procedures and a lax control
environment could cause RME to have problems with the SEC due to lack of compliance with the
Sarbanes-Oxley Act. He needed to get controls in place quickly, especially since the external
auditors were due to arrive in less than three months.
Questions
1. Identify weaknesses in the current accounts receivable process to include potential
fraudulent activity due to the lack of formalized procedures in the accounts receivables
process.
2. What are your recommendations to improve the control environment and the procedures
in the accounts receivables process?