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Critical Thinking Assignment

Q1. What are some of the inherent limitations in internal control that allowed the fraud to

occur at Roslyn?

The internal control's inherent limitations illustrate the principle of fair assurance and also

the internal controls are not usually structured to avoid mistakes arising from collusion or

manipulation under the role of management regarding the prescribed policies. There are 2 roles

throughout the school districts concerned with the "internal control" regarding district treasurer

cash disbursements, and internal claims auditor. Moreover, "internal claims auditor" deals with

approving and checking invoices for validity and prepares a warrant report. The Treasurer

depends on the auditor to authorize the "Disbursements Warrant" which is the connection

between the budgetary role and the Board. Understanding this implies that there are only two

individuals who are working with the funds. The treasurer depends on only one individual, and

he seems to have faith in their decision to be correct. Furthermore, before 2006 it was not

essential to get an internal auditor. This is a matter of concern as it was not appropriate for them

to review themselves to make sure that there was no fraud. Another concern is that there were no

policies written for the authorization of basic transactions. It could trigger complications, as

transactions could be handled differently each time with no reliability. Some of the limitations

are entailed below.

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Board failed to monitor

The Board of Supervisors did not regulate and supervised activities within the Roslyn

entity. This has made it possible for fraud and comparable to white-collar offenses to actually

happen, in other terms, there was a failure in the segregation of responsibility throughout this

case.

The complete absence of accountability

Roslyn School's misconduct was triggered far more by neglecting accountability on the

side of authorities in control of funds and budgets inside the institution.

Inadequate management

The administration was behind the depletion of these funds at the school. If the

administration had have been efficient, accountable, and responsive, the incident of fraud could

have been stopped.

Audit Failure

There seems to be a better probability that the audit procedure may have shortcomings or

flaws. This is because the incident of fraud happened regardless of the audit conducted. If the

audit was done properly, it would have detected any irregular and unacknowledged transactions.

Q2. Identify the fraud risk factors present within the control system at Roslyn. What

common auditing procedures might have targeted potential opportunities for cash fraud?

SAS 99 (now AU-C 240) became effective for audits of financial statements for periods

beginning on or after December 15, 2002. How might these risks have been anticipated and

documented by MLP following the adoption of SAS 99? Do you believe the Roslyn fraud is

evidence of an auditing standards policy failure, an independent auditing failure, neither,

or both?
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The risk factors for fraud which were found in Roslyn's control system are described

below.

Management override

The representatives of the "Board of Education", who seem to had the power to

circumvent the part of the management framework to hide anyone who was in the part to

mismanage funds from the institute. This gives the school administration incentive and

encouragement to commit fraud.

Collusion

The school's administrator and his accomplices are structured by a framework of control

to maintain a watch on one another, however, they instead colluded to evade the system. By

collusion, inaccurate evidence that these controls have been working successfully may be

submitted to that auditor, or even consistent deceptive excuses may be offered to that auditor by

different individuals within the organization to justify the unexplained outcome of the analytical

process.

Missing division of tasks

It is quite evident that there has been no demarcation and division of the roles of

the existing stakeholders' duties and also that any individual could have interacted with their

proper functioning.

The common audit processes for cash fraud are straightforward, generally consisting of

receiving and checking the bank reconciliations. Moreover, the other auditing techniques that

may have captured cash fraud involve evaluating the primary cash assertions, evaluating cash

lateral risks, cash flow, cash control deficiencies, and primary cash risks. SAS-99 not only

mandates auditors to be fairly confident in their financial records to be free from material
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misstatement but, it also offers them focused instructions on fulfilling their responsibility for the

detection of fraud. It necessitates auditors to search for any fraud throughout the whole audit

procedure, and therefore risk factors can be observed and recorded at several various stages. I

believe that the incident of fraud at Roslyn is proof of the incompetence of auditing principles

policy as well as the failure of autonomous auditing. Appropriate auditing principles could have

rendered it easier to detect hidden fraud, and appropriate autonomous auditing could also have

stopped a vast option for fraud to even happen.

Q6. The Five-Point Plan (FPP) requires the establishment of an audit committee and six

hours of board training on financial oversight responsibilities. What role might these

provisions have in preventing frauds such as the one at Roslyn?

Audit Committee seems to be an autonomous extended version of "The Board of

Directors". Furthermore, anyone present on the committee cannot operate for the corporation in

any other capability, else its autonomy will be compromised. Therefore, they can employ an

audit firm to resolve any dispute between the management and the auditor. Nevertheless, it is

necessary to have an audit committee following the "Sarbanes Oxley Act" since the autonomy of

the committee seems to be supervision that safeguards against factual error and fraud. It is also

necessary for the committee to report any financial expert present on the committee. The

specialist has a combination of education and experience in accounting that enables the board to

comprehend the audit at such a profound level to further mitigate the possibility of fraud.

Moreover, the training for the board on financial supervision obligations provides them with

basic knowledge of their fiduciary responsibilities as a board on this subject. This training would

also be helpful to clarify the uncertainty as to their position in financial supervision.

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Q7. The FPP addressed cash-handling risks through changes in claims processing. What

effect does having the claims auditor report directly to the board have on the potential for

fraudulent expenditures?

Generally, the claims auditor seems to be responsible for disbursing cash and authorizing

invoice packages on the basis of their decision alone. Furthermore, they are not required to join

board meetings or disclose any budget shortfalls. This is among the few "internal controls"

claims auditors have against fraud, which is obviously not enough. Therefore, the claims auditor

responding straightforwardly to the board reduces the risk for fraudulent or unauthorized

expenditure, however, not by a large margin. That being said, If they wish to further reduce the

possibility of fraudulent or unauthorized expenditure, claims auditor have to respond directly to

the committee.
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Works Cited

Elder, Randal J. and Alfred A. Yebba. "The Roslyn school district fraud: Improving school

district internal control and financial oversight." Issues in Accounting Education 32.4

(2017): 25-39.