BACKGROUND

A longtime client, Mike Smith, recently entered into a new venture involving his ownership

and operation of a small 18-room motel and restaurant located in an area of California

heavily visited by tourists. He needs your advice.

Mike hired a young couple to run the motel and caf on a day-to-day basis and plans to

pay them a monthly salary. They will live for free in a small apartment behind the motel office

and will be in charge of the daily operations of the motel and caf. The couple will also be

responsible for hiring and supervising the four or five part-time personnel who will help with

cleaning the rooms, cooking, and waiting on customers in the caf, etc. The couple will also

maintain records of rooms rented, meals served, and payments received (which can be in cash,

checks, or credit cards). They will make weekly deposits of the business's proceeds at the local

bank.

As time approaches for the business to open, Mike is concerned that he will have little

control over the operations or records relating to the caf, given that day-to-day control is fully in

the hands of the couple. He lives more than five hours away and will only be

able to visit periodically. The distance is beginning to make Mike a bit nervous. He trusts the

couple he has hired, but he has been around long enough to know that placing employees in

situations where they might be tempted to do wrong is unwise.

Mike needs your help in identifying possible ways his motel and caf could be

defrauded. He especially wants your assistance in identifying creative internal controls to help

prevent or detect fraud.

REQUIREMENTS

l. What are your two biggest concerns relating to possible fraud on the part of the couple for the

motel business? For each concern, generate two or three controls that could effectively reduce

risk related to your concerns. Use common sense and be creative!

2. Are your two biggest concerns relating to possible fraud for the caf business? For each

concern, generate two or three controls that could effectively reduce risk related to your

concerns.

3. Describe the impact each proposed control would have on the efficiency of running the

business. Are the controls you generated both effective and efficient?

4. Describe the potential impact of your controls on the morale of the couple in charge of the

day-to-day operations. How could Mike deal with your concerns?