SOLUTIONS

CHAPTER 1

Suggested Solutions to Case 1

1.     By misstating the interim quarterly information, the county appeared to be in compliance with its bond covenants when in fact it was not. In this case, management override occurred in two situations. The first was when Robert asked the public works superintendent to process a purchase order without issuing it. In the second situation of management override, Robert adjusted the tax collections using journal entries. Both of these situations occurred because Robert was in a position to pressure employees and exercise management override over recorded amounts through journal entries. In this case, no one appears to review journal entries made by the finance director. Even if the county manager were reviewing journal entries made by the finance director, she may not have understood them. It is also likely she might have involved herself in the fraud as she was under pressure from the county commission and felt her job was in jeopardy.

2.     The following preliminary procedures might have detected this situation:

     Review of the interim financial statements (may have indicated a decline in tax collections or a downward trend in the collection ratio).

     Inquiries of the county manager as well as other managers (for example, public works superintendent) and administrative staff.

     Reviewing bond covenants for potential pressure on management (management pressure or incentive to meet the covenants).

     Review ...

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