The audit was forwarded to local prosecutors for potential criminal charges and to Indiana Attorney General Steve Carter, who can compel repayment through a civil suit. Lake Central School Corp. holds insurance coverage of $25,000 per treasurer, auditors said.

The school bought 5,500 "Smencils" at 50 cents apiece last year and sold the pencils to students for $1 each. But a state audit found that deposits from the pencil sale fell short $867.82.

The State Board of Accounts review, released least week, also cited missing deposits from textbook rental fees and from the sale of day planners, "spiritwear" and yearbooks. All told, the state is holding extracurricular treasurer Lucille Smith, of Dyer, responsible for $3,496 that went missing from July 2006 through January.

"I have been wrongly accused of receipts not deposited," Smith said in a letter to auditors. "I should not be blamed or held responsible for the Lake Central School Corporation's poor or lack of internal controls and/or too many employees and/or students having access, not only to cash but also to inventory."

In the case of the pencils, Smith told auditors some teachers and staff gave the scented pencils to students as rewards without paying for the items. She also said students who complained of defective pencils received replacements free of charge.

State auditors say a scented pencil sale at Protsman Elementary School in Dyer doesn't pass the smell test.