Background:

Crispy Bagel Corporation is a fast-growing bagel chain in the Northeast. Crispy has made a name for

itself in the baking and creation of specialty bagels, muffins, and pastries. The company currently has

150 stores and 750 employees, and expects to triple that number in the next five years. Due to its fast

growth, the accounting information system at Crispy has required several upgrades.

This year, Crispy Bagels payroll software needed to be upgraded. The IT Department is organized

into two groups, Development and Operations. The Development Group is responsible for the coding

and testing of the payroll software; the Operations Group is responsible for the operation and

maintenance of the new payroll software. As the supervisor of both IT groups, the IT manager had

global access to all aspects of the payroll software, including employee additions, pay rate changes, and

employee benefits changes.

The payroll supervisor was responsible for updating the new payroll system, inputting employee data

(names, Social Security numbers, tax and benefit information) and pay rates. Because of Crispy

Bagels accelerated growth rate, there was no time to perform detailed tests of the payroll data.

Instead, the payroll supervisor assumed that the companys employees would notify the payroll

department of any discrepancies in their rate of pay or deductions.

The Fraud:

The IT manager has been with Crispy for just over one year. He has been struggling with a gambling

addiction for the past five years and has run up considerable debts. Crispy Bagels fast growth has put

a strain on the IT Department staff. The IT manager has been required to work overtime nearly every

weekend for the last six months, and because he is a salaried employee, his pay does not reflect this

extra work. In addition, the IT manager was passed over for a raise during his annual review, but was

promised a significant increase in salary in another six months.

Subsequent to turning control of the new payroll software over to the Payroll Department, and before

the first payroll was run using the new system, the IT manager used his supervisory access to increase his

annual pay by $5,000, the raise that he expected to receive in connection with his annual review.

Since this was only an increase of $208 each paycheck, its unlikely that the adjustment would be

noticed.

Required

1. The fraud triangle lists three conditions that are usually present when fraud occurs. Discuss the

three conditions and if they are present for the IT manager? For each condition, provide examples

from the case.

2. What are the red flags present that suggest the possibility of fraud?

3. How would the fraud impact the financial statements? (list the financial statement, the account impacted by the fraud and the impact i.e. overstated or understated)

4. Discuss the procedures you would use to detect this fraud. (be very specific)

5. Discuss the procedures that should be implemented to prevent this fraud. (be very specific)