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Black and White is an accounting firm that specializes in fraud investigation. In June, Jackson Maximillen the general manager of Jazzy Industries, approached Michael House.

Black and White is an accounting firm that specializes in fraud investigation. In June, Jackson Maximillen the general manager of Jazzy Industries, approached Michael House. a partner of Black and White, to discuss a problem that has arisen in one of his warehouses. Maximillen is not sure whether fraud is involved or not, but over the past year there have been a series of unexplained inventory shortages, and he has heard rumors of some warehouse staff selling supplies for cash to friends, at greatly reduced prices. Maximillen would like Black and White to conduct an investigation to see if there is any evidence of misappropriation. This matter is urgent and Maximillen would like a final report within the next two weeks. Michael House agrees to undertake the investigation. He will oversee the project; William will manage the project and Gabriel will assist. The following labor rates apply:

Michael House

Partner

$150

William

Manager

$100

Gabriel

Investigator

$60

At the end of each week, every employee of Black and White completes a time sheet online, to account for each hour of their day. The following extracts are taken from time sheets for the three staff involved in the investigation. The Jazzy Industries case has been assigned the code 4506B:

Michael House

Date

Case

Detail

Time (Hours)

1 June

4506B

Initial meeting with Maximillen

1

3547A

Delivery of final report

2

4508F

Initial meeting with Abox Ltd

1

4506B

Briefing meeting with William and Gabriel

1

3 June

9506B

Review of investigation plan

2

4508F

Assessment of review

1

2408D

Report recommendations

1

78432S

Briefing to police

1

4540D

Meeting with lawyers

2

10 June

4506B

Discussion of final report with William and Gabriel

3

11 June

4506E

Delivery of final report

2

William

Date

Case

Detail

Time (Hours)

1 June

4506B

Initial meeting with Maximillen

1

4506B

Briefing meeting with Michael House and Gabriel

1

2 June

4506B

Review of investigation plan with Gabriel

2

6592F

Delivery of final report

4

3 June

4506B

On-site review of inventory ordering systems

5

4506B

Interviews with suppliers

3

6 June

4506B

Consultation with Gabriel

2

4506B

Interview of key managers

3

4508B

Review of transactions

3

9 June

4506B

Meeting with Gabriel to review report

2

4508B

Computer audit of master files

6

10 June

4506B

Discussion of final report with Michael House and Gabriel

3

Gabriel

Date

Case

Detail

Time (Hours)

1 June

4506B

Briefing meeting with Michael House and William

1

2 June

4506B

Preparation of investigation plan

6

4506B

Review of investigation plan with William

2

3 June

4506B

Initial interviews with warehouse staff

4

4506B

Documentation of ordering procedures

4

6 June

4506B

Consultation with William

2

Character checks of key employees

4

Checking of supplier history

2

7 June

4506B

Checking of supplier history

2

4506B

Random check of inventory and supplier transactions

6

8 June

4506B

Preparation of draft report

8

9 June

4506B

Meeting with William to review report

2

4506B

Edit report

3

10 June

4506B

Discussion of final report with Michael House and William

3

Black and White calculate a predetermined overhead rate to cover support staff salaries, office rent, utilities and telecommunication costs, marketing costs. and other costs of running the firm. Professional labor costs make up about 75% of the firm's total operating costs. The anticipated overhead cost for the current year is $4 000 000.

Required:

Black and White operate in a very competitive market and cannot always charge clients prices sufficient to cover the full cost of undertaking a case. In the light of this information:

(a) Why would Black and White require staff to fill in detailed time sheets?

(b) What use could the partners make of the client cost sheet, and the total cost of the case?

(c) How could Michael House justify undertaking the investigation of Jazzy Industries for a loss?


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