Case 1. Identify the primary ethical dilemma and any derivative ethical dilemmas that need to be resolved. 2. Discuss the potential presence of the fraud triangle elements. 3. Assess the internal controls over the sales and collection cycle (hints: a) Identify the parties involved in processing a customer's sales order. b) Identify the weaknesses in the sales and collection cycle observed by Mrs Lee in the restaurant incident. c) Suggest possible internal control activities to strengthen the identified weaknesses above)

On the final evening of a perfect family vacation, Mrs. Lee decided to dine at "The Restaurant" location #106. As the meal was wrapping up, her waiter asked her: "will you need a printed receipt for your dinner?" Mrs. Lee wondered if she heard him right. Did she misunderstand due to the loud music or his accent? Did he mean: "will it be cash or credit?" She dug into her purse and found enough money to pay for the dinner in cash and for the road trip back home the next morning. She decided to pay cash. "Just FYI, you will not get a printed receipt in that case," the waiter reiterated, "the machine is down, and as you see the place is overcrowded." Mrs. Lee and her family had waited for almost an hour to be seated, but did not mind because it was a very popular restaurant. Mrs. Lee had recently been assigned as the area accounting manager for the chain restaurant company they were now dining in, and her area included this location. "No problem," she responds.

At that same moment, Mrs. Lee cannot help but overhear the next table whereby a paying customer is provided a receipt. She notices he paid by credit card.

Restaurant Incident As the area accounting manager of the restaurant chain, Mrs. Lee had extensive experience in establishing systems and procedures for internal control and fraud prevention. She believes that a good system includes responsibility and accountability centers, as well as well-defined authorization and approval procedures to safeguard vulnerable assets. procedures to safeguard vulnerable assets.

In this case, Mrs. Lee suspected her waiter of committing fraud. Initially, she believed that the printer was broken when the waiter told her she could not have a receipt. However, she noted that she could have a printed receipt if she paid by credit card. The waiter's claims were inconsistent. Consequently, Mrs. Lee insisted on a printed receipt for her cash transaction. At this request, the waiter asked her to remind him of the ordered items, which he rewrote on an order slip. He looked around, saw that his supervisor was busy elsewhere, and re-entered the order on the computer terminal. Half an hour later, the waiter returned with a printed receipt. Mrs. Lee could not help but wonder: what caused the time delay? Did it take that long to fix the printer and come back with a receipt, or was the time delay meant to cover up the discrepancy between the new order time and the billing time? Why did the waiter take our order again? Wouldn't that double the entered transactions on the system? How would the cash reconcile at the end of day with the total daily transactions? Was the original order deleted, and if so, why was it deleted? Who authorizes such changes?

Information Flow in a Restaurant Setting

Sales and Collection Cycle

The processes involved in the sales and collection cycle of a restaurant branch are similar whether the business has invested in an automated system or a manual system. Automation, such as point of sale(POS) systems is used to expedite the processes and have built-in controls over approval and authorization. For example, the use of a password ensures that the party involved in entering/processing an order has been authorized or approved. It also ensures an audit trail for the origin of the transaction. A master file in the case holds all data input in chronological order regardless of whether it was further processed or deleted. In Mrs. Lee's restaurant incident, the information flow involved these details: Documents: Sales order, invoice. Processes: -The customer initiates the sales order. -The waiter writes down the order on an order slip and enters it into the POS. Each waiter has an individual identification (ID) that is recognized by the system. The waiter swipes the ID to the POS to enter the order. The POS includes a button for each menu item. Once entered on the POS, the kitchen and the main cashier receive the order Input. -the kitchen terminal prints the order slip, which is handed to the chef for processing. Once the order is ready, the waiter is notified to serve it to the customer. -The waiter later closes the table orders and issues an invoice. -The invoice is automatically registered on the cashier's terminal. -Once collected, the cash is deposited with the cashier. Parties involved: customer, waiter, kitchen, manager, and cashier.

Mrs. Lee mentally analysed the information flow problem with her waiter and determined that there were several problems. Although the system seemed sophisticated - with built-in ID approval controls to authorize modifications/cancellations of orders - the manager allowed his approval code to be used by waiters without supervision. In Mrs. Lee's case, upon closing the table order and issuing an invoice, the waiter asked her whether the payment was to be made with cash or credit. At that point the waiter either cancelled the processed order and pocketed the cash or issued an invoice for credit card payment. The order was re entered, which meant that the original was most likely cancelled. Mrs. Lee questioned how the order could be deleted after being served. Was there any kind of collusion with the kitchen staff,manager, or cashier?

Internal Controls Mrs. Lee knew that the restaurant management had designed and implemented internal controls to safeguard assets and to ensure fraud prevention. The relevant control activities related to the sales and collection cycle included:

Segregation of duties between sales order initiation and kitchen approval; Adequate approval of sales order modification/cancellation Mrs. Lee mentally analysed the information flow problem with her waiter and determined that there were several problems. Although the system seemed sophisticated - with built-in ID approval controls to authorize modifications/cancellations of orders - the manager allowed his approval code to be used by waiters without supervision. In Mrs. Lee's case, upon closing the table order and issuing an invoice, the waiter asked her whether the payment was to be made with cash or credit. At that point the waiter either cancelled the processed order and pocketed the cash or issued an invoice for credit card payment. The order was reentered, which meant that the original was most likely cancelled. Mrs. Lee questioned how the order could be deleted after being served. Was there any kind of collusion with the kitchen staff, manager, or cashier?

Internal Controls Mrs. Lee knew that the restaurant management had designed and implemented internal controls to safeguard assets and to ensure fraud prevention. The relevant control activities related to the sales and collection cycle included:

Segregation of duties between sales order initiation and kitchen approval; Adequate approval of sales order modification/cancellation and authorization for collection: Pre-numbered sales order and sales invoice; Independent verification of the sequence of sales orders and sales invoices: Surveillance cameras; Employee rotation; Random managerial spot checks; Policies and procedures requiring the issuance of a customer's printed receipt; and Ratio analysis: OCash sales to credit card sales per waiter, per branch, per day... oMeal count per waiter relative to sales.

Mrs. Lee understood that management usually selects some - but not all - internal controls based on the cost-benefit rule. However, her major concern was the functionality of the selected controls, including authorization and approvals, employee rotation, and random checks.

Prior to requesting her receipt, Mrs. Lee's waiter was too friendly. Despite the busy evening, he spent more than the expected time to take a customer order. He inquired about her vacation and shared some of his personal concerns. He did not enjoy working weekends and over-time, but felt it provided a good source of income to cover his educational expenses. The waiter also noted that despite his misgivings, he felt like the restaurant was his second home because he had been working there for several years. Mrs.Lee noticed that everyone was friendly and her waiter had close relations with all of the employees: the managers, the waiters, and the kitchen staff. Mrs. Lee also noticed the manager repeatedly lending the waiter his ID to expedite customers' orders that required approval for POS input changes. By assessing the waiter's behavior, Mrs Lee realized that the flow of information was compromised in several areas and that the internal controls were not properly maintained to prevent fraud in this case.

Mrs. Lee's Assessment

After a brief analysis of the consequences on all the stakeholders she could think of - the waiter, herself, her professional colleagues, the manager, and the owners - Mrs. Lee realized that the waiter would be the only one at a disadvantage if she reported the incident. He might lose his job, his education, and his peers. Moving beyond her personal ethics to include her professional ones, Mrs. Lee felt it was best to pay cash and test her theory. If her instinct was correct, she would need to report the waiter. She had used her professional knowledge to assess the flow of information in the restaurant and determined that since it was likely that her waiter was attempting to commit fraud, she was ethically bound to report it.