DENTISTAR, INC.

1. DENTISTAR, INC. Group 3 Maria Fernandez de Castro Sonia Canessa-Gonzalez Andres Suarez

2. Internal Controls –Subscriber Termination Refunds • Strenghts: 1) Regional personnel limited from editing subscriber information in Tracking System.\ 2) Segregation of duties: From receipt of request to approval. 3) Finance Coordinator verifies accuracy of manually generated information against Tracking System and supporting documents. 4) Manual review of calculations for refunds by Regional Director of Administration.

3. Internal Controls – Subscriber Termination Refunds • Weaknesses: 1) No Segregation of Duties after refund is approved. Finance Coordinator prepares and signs check. 2) Regional Director does not verify information against Tracking System, only against documents presented, basically ensuring that refunds are calculated correctly (mathematically correct) but bypassing verification of accuracy (justified and assigned correctly). 3) Checks are not verified to assure that they are prepared for the correct customer.

4. Internal Controls – Operating Expenses • Strenghts: 1) Segregation of Duties to the point of approval. 2) Supporting documents from vendor are included to substantiate payment request. 3) Regional Director of Administration reviews and approves. 4) Receptionist is in charge of mailing payments.

5. Internal Controls – Operating Expenses • Weaknesses: 1) No Segregation of Duties after expense is approved. Finance Coordinator prepares and signs checks. 2) Original package is returned to the regional office. 3) No copy of check is made an attached to original documentation.

6. Internal Controls – Month-End Procedures at Headquarters • Strenghts: 1) Bank Statements received at HQ directly from Bank. 2) HQ prepares all bank reconciliations. 3) Regional offices’ personnel are not authorized to edit any transaction balances recorded in the GL System by HQ.

7. Internal Controls – Month-End Procedures at Headquarters • Weaknesses: 1) Original documentation supporting manual disbursements are not sent to HQ. 2) Entries made to the GL are made from manually generated check stubs and not source documents, so there is no cross-referencing to ensure accuracy. 3) Cancelled checks are separated from bank statement and stored away.

8. Internal Controls – Preliminary Recommendations • Subscriber Termination Refunds: 1) Consolidate Refund Request Form with Payment Adjustment Form. Add a line item for check # and date. 2) Forms should be preprinted and pre-numbered by region with carbon copies. 3) New Checkbook with carbon copies. 4) Unsigned printed check should be attached to supporting package.

9. Internal Controls – Preliminary Recommendations (cont.) Subscriber Termination Refunds: 5) Regional Director should review the complete package (inc. check) against Tracking System or corresponding subscriber’s account printout. 2) Once signed, it should be given to the Admin. Clerk for mailing. 6) The Check signing machine should be in Regional Director’s office. 7) Package and signed check should be given to Administ. Clerk for check mailing.

10. Internal Controls – Preliminary Recommendations (cont.) • Subscriber Termination Refunds: 8) Adm. Clerk should then send pre-numbered Refund Request form with check copy to Accounting Dept. for recording. Second copy of pre-numbered Refund request form should be sent to the Computer Information Group for deletion of subscriber. 9) Jumps in sequence (checks, forms) should be investigated.

11. Internal Controls – Preliminary Recommendations (cont.) • Expedited Operating Expenses: 1) Finance Coordinator should prepare manual check and send with supporting documents to Regional Director for signature. 3) Originals of supporting documents, including a copy of signed check should be sent to HQ for booking/processing.

12. Internal Controls – Preliminary Recommendations (cont.) • Month End HQ procedures: 1) Journal Entries should be made timely and directly from original documents, including a carbon copy of check. Same with entries to the subscriber system. 2) Pre-numbered forms should be used to ensure completeness of entries made to GL. 3) Jumps in number sequence should be investigated.

13. Fraud Investigation • SA 82 – Areas of Fraud Control: 1) Control Environment (Management responsibility, positive control environment). 2) Control Activities (Inventories, reconcilations, etc.) 3) Auditor Skepticism (extensive audit procedures, challenge of management’s explanations, etc.)

14. Fraud Investigation-Risk Areas • Susceptibility of assets to misappropriation (check payments/cash): 1) Lack of segregation in duties (Finance Coordinator has multiple functions that place company at risk for abuse). 2) Lack of checks and balances to ensure that checks have been properly issued according to approval. 3) Lack of appropriate oversight (Regional Director’s review is ineffective and incomplete, HQ does not see original documents). 4) Lack of policies and procedures.

15. Fraud Investigation – Next Steps • Auditor confirms that checks are being written out to non-subscribers and remaining undetected due to lack of independent verification. • Auditor should extend scope of audit due to fraud and quantify amount of misstatement. • Create report on results and recommendations (see Preliminary Recommendations). • Once Report is completed, present to upper management or audit committee as necessary.

16. Fraud Investigation – Further Studies • Review of employees’ responsibilities and other areas of risk – Finance Coordinator: 1) Responsibility on Past Due A/R Collection (another possible source of misappropriation). 2) Responsibility on HR issues. 3) Coordinating internal and external audits (possibility for covering up/disguising false documents).