Problem
The Raindrop Preschool opened in 2018 when the first director saw a need for quality childcare in the community. The preschool's purpose is to provide quality care in a loving and compassionate environment for children of busy parents, and it prides itself on its family feel. The fee is $100 per day per child. This is a cash-based business.
As a small business, the Raindrop Preschool maintains a small administrative staff. The key staff member is Lynn, a mother of four children. Even though Lynn has no previous employment as a childcare teacher or manager, she cares deeply for the children and is involved in every facet of childcare operations. While Lynn is very busy, she also seems pretty content with her work and pay.
Because Lynn is often needed in more than one place at any time, she frequently forgets to put the cash in the locked box when a parent pays and delays depositing the payment to the bank. During a pro-bono audit, the auditor noticed a $300 discrepancy between the weekly attendance record and the receipt book. When the auditor probed Lynn if there was additional cash that had been collected, Lynn scrambled to pull a desk drawer and showed $200 (which was just short of the discrepancy). She explained that while she collected the money, she was distracted by a crying baby when she was about to write the receipt.
Additionally, Lynn often goes into panic mode when the centre runs out of supplies. She frequently resorts to using funds from undeposited payments (and forgets to keep the receipts in the process!). Long story short, even though Lynn is so well-loved by the children and the parents and passionate about her job, the audit trail was non-existent.
Task
1. Identify and explain the risk that resulted in the discrepancies between the weekly attendance record and the receipt book.
2. Identify which information quality goals are impacted by this risk.
3. Determine whether the risk you identified will result in the risk of misstatement of financial statement account(s). If it does, state the direction of the misstatement.
4. Given its current operation, assess the risk of fraud in Raindrop Preschool (i.e., low, medium, or high). Briefly explain your answer.