Dentistar, Inc.

1. Dentistar, Inc. GROUP 1 Andres Advincula Monica Garcia Lory Malebranche Aldo Pedron

2. Task 1 SUBSCRIBER TERMINATION OF FUNDS: • Subscriber requests refund (Refund Request Form – RRF): • Telephone – branch rep completes RRF and forwards to Region Coordinator • Mail – subscriber letter received at Region and given directly to Coordinator • Request for payment adjustment (RPA) – Finance Coordinator/Admin Director: • Review of subscriber’s policy and payment history on STS • Calculate and prepare RPA • Forwards RRF or Subscriber Letter AND RPA to Region Admin Director • Admin Director reviews, recalculates and SIGNS RPAto approve • Review done on calculation only • Totals used are NOT verified online in STS • Approved RPA and documentation returned to Coordinator • RPA disbursement: • Coordinator prepares manual check from approved package • Check is signed by a check machine with Director’s signature (Only signer) • Hand copies the date, payee, amount and purpose on the check stub • Copy of RPA to IT (IN CORPORATE) • Cover letter is prepared to subscriber with attached refund payment • Documents forwarded to receptionist for mailing • Original RRF/subscriber letter is stapled to original RPA and filed by date @ region

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4. Task 1 EXPEDITED OPERATING EXPENDITURES: • Prepare check request: • Specify payee name, amount and reason for request • Attach supporting documentation to request • Forward to region Coordinator • Pre-approval review – Finance Coordinator/Admin Director: • Review of documentation for completeness • Forwards package to Region Admin Director • Admin Director reviews and SIGNS REQUEST to approve • Approved request and documentation returned to Coordinator • Check disbursement: • Coordinator prepares manual check from approved package • Check is signed by a check machine with Director’s signature (Only signer) • Hand copies the date, payee, amount and purpose on the check stub • Documents forwarded to receptionist for mailing • Original/approved check request package filed by payee @ region • Month-end reporting to corporate: • All check stubs written for the month are accumulated and sent to corporate

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6. Task 1 • Strengths: • Maintain all region bank accounts (Control) at Corporate • Segregation of duties • Offsite storage of sensitive documents • Restricted access to financial information (by region) • Restricted access to IT resources (no add/delete functionalities) • Weaknesses: • Lack of control and visibility to Regional operations • Too much room for human error (too much human interaction • Lack of corporate guidance • Unrestricted Check machine • Too much room for human error (too much human interaction)

7. Task 1: Question 3 • In your opinion, is the overall control system in place for manual disbursements at the region effective? Describe any preliminary recommendations to improve this system that you would suggest? • Answer: In my opinion, the control system is not set up adequately. The obvious problems are the check machine, the lack of guidance and all the manual input that is performed. Another issue that should be addressed is the ability for region employees to change payee addresses without verification by management. Though it seems like a small piece of the pie, by allowing employees access to remittance information without checks and balances may lead to a misappropriation of funds somewhere down the line. To improve the system, corporate guidelines need to be drawn up to establish a common set of rules. The check machine should be thrown out of the window, as it is likely that the only reason why the volume has grown so much at West is because they are paying for a lot of things that should be paid for by corporate. Last but not least, authorization controls need to be placed in the subscriber tracking system to require management interaction for any changes in remittance information (payee name, address, bank info, etc.).

8. Task 2: Question 1 • Determine the risk factors relating to misstatements in financial statements arising from the misappropriation of assets as suggested in SAS No. 82. • Answer: Fraud risk factors are event or conditions indicating possible fraud. Fraud itself can take two forms: fraudulent financial reporting and misappropriation of assets. Identifying fraud risks often requires performing the appropriate inquiries, observations or inspections. In the case of Dentistar, risk factors include the lack of segregation of duties among the accounting functions. It appears as though Tom Swindler was in charge of overlapping functions without the proper controls especially the disbursement functions. For the proper controls to exist, the authorization, recordkeeping and custody functions need to be expressly segregated. Non-segregated functions can create opportunities for committing fraud. Coupled with the incentives and pressures the opportunities created can result in the commission of fraud which in turn leads to potential misstatements in the financial statements, whether from fraudulent reporting or misappropriation of assets. The misappropriation of assets, particularly, consists of theft, embezzlement or payments for items not received. If the proper controls are absent, Tom Swindler can easily conceal his theft or embezzlement.

9. Task 2: Question 2 • Evaluate these risk factors in relation to the control system existing at Dentistar. What, if any, factors or controls mitigate the risks you have identified? • Answer: As mentioned in answer to question 1, the risk factors in relation to the control system existing at Dentistar relate specifically to the lack of segregation of duties in the cash disbursement cycle. To mitigate the risks identified above, Sheila can impose policies and procedures designed to properly segregate the accounting functions at stake that are shared by one individual Tom Swindler and possible other.

10. Task 2: Question 3 • What additional procedures should Sheila Tate perform in her fraud investigation? Review Exhibits E, F, and G for any unusual or fraudulent transactions and perform the additional procedures you feel appropriate. • Answer: To prevent the occurrence of fraud or the persistence of those risk factors a possible procedure would be requesting the pre-numbering of purchase orders, vouchers, checks and requisitions. In addition to verifying proper approval of the expenditures, Sheila must review that the signature on the checks is one other than that signaling approval of the disbursements or the vouchers. She should verify that the receiving reports were manually completed as evidence that “blank forms” (without the quantity) were provided to the receiving department. If none of these controls are being applied, Sheila should draft the appropriate policies and procedures to address all the internal control concerns. Sheila can also review whether each check written has supporting documentation properly filed for review. She should also verify that the signor of the check has stamped and initialed the supporting documentation to cancel it once the check is mailed to avoid re-issuance of a payment (i.e. fraud). Finally Sheila should scan and review the reconciliations applicable to this accounting function. These are possible mitigating factors to the risks of fraud present in the West Region per Sheila.

11. Task 2: Question 4 • Prepare a brief description of the procedures performed and results obtained in step 3. Discuss the factors within the control system that enabled any fraudulent transactions you identify to be processed at the West Region without detection by regional or corporate management. • Answer:The factors within the control system that enabled fraudulent transactions discussed above were not having a correct cash cycle. Within each cycle there needs to be segregation of duties; authorization, recording, and custody of resources/assets. The “blank forms” to the receiving department is a good way to avoid fraud. Verifying the signor of checks and stating in their accounts as the person being paid is good way of making sure that the person signing is the one authorized and that checks are not being paid twice.

12. Task 2: Question 5 • What recommendations would you make to the management of Dentistar to improve controls over manual disbursements at the West Region and to prevent additional instances of fraud? Are there any operational improvements you would suggest that either corporate or regional management of Dentistar implement? • Answer: Segregation of duties, as I mentioned above, is what I would recommend to management in order to improve controls over manual disbursements and prevent additional instances of fraud. The operational improvement I would suggest to corporate would be to re-emphasize the code of ethics in its company. If they have no code of ethics then they need to make one and live by it. Most employees see how top management acts to then follow them.

13. Task 2: Question 6 • The focus of this case has been on the manual cash disbursements of Dentistar. If you discovered an employee attempting to defraud Dentistar in this area it is possible that the same employee would attempt to steal from the company in an alternate manner. What are some of additional areas that might possess the risk of fraudulent activity? What controls does Dentistar currently have in place to prevent fraud in the areas you identified? If no controls currently exist, what recommendations would you make to management? • Answer: Some areas that might possess the risk of fraudulent activity might be the sales cycle, the accounts payable cycle and any other cycle with no controls. Dentistar has no statement of these cycles so I will give recommendations for controls. The recommendations I would make would be the same as above, segregation of duties.