Stuart P. Carver, a certified public accountant, has worked for the past eight years as a payroll clerk for Southeast Industries, a small furniture-manufacturing firm in the Northeast. Stu recently experienced unfortunate circumstances. His newborn baby girl, Stuann, required major heart surgery and the medical bills not covered by Stu's insurance have financially strained his family.

Stu is a hard worker and a model employee. Although he received regular performance raises during his first few years at the company, his wages have not increased in the past three years. Stu recently asked his supervisor, Rufus Johnson, for a raise. While Rufus agreed that Stu deserved a raise, he told Stu that he could not currently approve of one because of sluggish sales.

Stu continued his accounting duties and the financial pressures in his life continued. When salesperson Lena Grey quit suddenly over a dispute with management, Stu came up with a plan. Since he processed employee terminations, time card approval, and paycheck distribution, he decided to delay Ms. Grey's termination, forge the weekly time cards with his signature and then cash Lena's checks for himself. (Since he distributes the paychecks every two weeks no one would find out anyway.) In fact, no one ever discovered his scheme and Stu continued the practice for two full years, earning Stu an extra $200,000.

1. How does Stu's scheme affect Southeast's balance sheet (specifically Cash and Retained Earnings) for the year? Ignore income taxes.
2. How does Stu's scheme to continue to pay Lena affect the income statement (specifically Revenues, Expenses and Net Income)?
3. Use the fraud triangle to identify the three elements of the fraud triangle and to explain how Stu 's situation meets each of these elements. Write two to three sentences to explain each fraud element.
4. What internal controls could have been put in place to prevent Stu's paycheck scheme in the first place? (Name at least three)