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Crispy Bagel Corporation is the fastest-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 Bagel's payroll software needed to be upgraded. The IT Department is organized into two groups, Development and Operations. The Development Group is responsible 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 Bagel's accelerated growth rate, there was no time to perform detailed tests of the payroll data. Instead, the payroll supervisor assumed that the company's 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 Bagel's 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, it's unlikely that the adjustment would be noticed.

Questions to Consider

A. What are the red flags present that suggest 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?

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

 C. How might the fraud be detected? What audit tests might be performed on the processes and IT systems to detect the fraud?

D. In light of your findings, what recommendations might you suggest to improve both manual and IT system internal controls?

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