Jannies Jewelry Stores is a large corporation founded in 1998 that operates 23 retail jewelry stores located throughout the Southeastern United States. Jannies tailors its product line to middle-class shoppers, and specializes in engagement and wedding rings. Each store offers a large variety of jewelry (approximately 1,200 different items) with a fairly narrow price range ($50 to $3,500). Although sales increased rapidly during the rst years of Jannies operations, sales during the last three years were at. In an effort to increase sales, Jannies recently initiated its own credit card program. The credit card program required new manual and new IT systems. Among other things, a credit department was established and an accounts receivable (AR) IT program was installed. The credit departments responsibilities include approving customers for the companys credit cards, following up on past-due receivables, and determining when customer accounts should be written off. The credit department has two employees: a credit manager and an AR clerk. Customers credit card requests are initiated by the customer completing an online application in any of Jannies 23 retail locations. The online application requests the customers name, address, current monthly income, and Social Security number, among other information. Once the credit application is completed, the IT system automatically interfaces with an independent credit bureau. If the information included in the customers application matches the information in the credit bureaus database, and if the customer has a credit score of in excess of a predetermined minimum score, the customer is extended a credit limit equal to 10 percent of his/her current monthly income. Higher credit limits require the approval of the credit manager. The AR IT system interfaces with the companys point-of-sale system, automatically posting sales transactions that occur at the companys stores to the AR trial balance. Customers payments are received at a lockbox, posted to the companys bank accounts daily by the bank. Copies of customer checks and remittance advices are received by the Credit Department, where the AR clerk posts them to customers accounts. Monthly customer statements are automatically generated by the IT system. Each month-end, a report of all customers with past-due balances is generated by the IT system. The credit manager reviews the report and instructs the AR clerk to follow-up on specic customer accounts. Based on the results of the AR clerks follow-up activities, the credit manager determines which accounts should be written off, and processes any necessary adjustments through the IT system. The credit manager meets quarterly with Jannies CFO to discuss any particularly problematic accounts or unusual write-offs of customer accounts. The Fraud Before accepting a position with Jannies Jewelry, the credit manager was employed by Freds Fashions in a similar position. Freds owner decided to discontinue Freds credit card program and eliminated the credit managers position. The credit manager purchased a new home just prior to being laid off. The night prior to being laid off, the credit manager got engaged, promising that he and his new ancee would soon shop for an engagement ring. Even though the position at Jannies paid $20,000 less than the position at Freds, the credit manager was assured by Jannies president that as long as the companys credit card program went well, the credit manager was sure to receive raises that would soon make the salary comparable to his former salary. In addition, the credit manager was looking forward to taking advantage of Jannies employee discount program when purchasing his ancees engagement ring. The credit manager selected a $3,500 ring for his ancee, which with his employee discount cost $2,900. The purchase was nanced on a Jannies credit card, by the credit manager overriding the company policy of granting a credit limit of 10 percent of a customers current monthly salary. The credit manager quickly fell behind in his required credit card payments. Although his account began to show up on the AR past-due report, the credit manager avoided directing the AR clerk to perform follow-up procedures for several months. When he learned that the companys auditors would be visiting his department soon, he wrote his remaining account balance off using the IT system, fully intending to repay the balance when he receives his promised raise.

Questions to Consider: 1. What are the red ags present that suggests the possibility of fraud? Are there conditions present suggested by the fraud triangle that may facilitate fraud? Are there IT-related issues that could facilitate fraud?

2. How would the fraud impact the financial statements? What accounts would be misstated?