Chapter 5 Homework

Jazzlynn Ben Chapter 5 Problems Dr. Ennis 5. 1. You were asked to investigate extremely high, unexplained merchandise shortages at a department store chain. You found the following: a. The receiving department supervisor owns and operates a boutique carrying many of the same labels as the chain store. The general manager is unaware of the ownership interest. — It is a red flag warning so it is a fraud because there is a conflict of interest situation which should have alerted the auditor to the possibility of fraud. b.
The receiving supervisor signs receiving reports showing that the total quantity shipped by a supplier was received and then diverts 5% to 10% of each shipment to the boutique. –There is a false representation so this is a fraudulent act. c. The store is unaware of the short shipments because the receiving report accompanying the merchandise to the sales areas shows that everything was received. –There is intent to deceive as indicated by the efforts to conceal the act so this is also a fraudulent act by the supervisor of receiving. It is not due to an act by the buyers. d.
Accounts Payable paid vendors for the total quantity shown on the receiving report. –It is unrelated to the investigation so this is a weakness in the system of internal control. e. Based on the receiving department supervisor’s instructions, quantities on the receiving reports were not counted by sales personnel. –The receiving supervisor is advocating a system of a weak internal control so this is an indicator of fraud. Required Classify each of the five situations as a fraudulent act, a fraud symptom, an internal control weakness, or an event unrelated to the investigation.

Justify your answers. 5. 2. A client heard through its hot line that John, the purchases journal clerk, periodically enters fictitious acquisitions. After John creates a fictitious purchase, he notifies Alice, the accounts payable ledger clerk, so she can enter them in her ledger. When the payables are processed, the payment is mailed to the nonexistent supplier’s address, a post office box rented by John. John deposits the check in an account he opened in the nonexistent supplier’s name. Required a. Define fraud, fraud deterrence, fraud detection, and fraud investigation. Fraud- Any and all means a person uses to gain an unfair advantage over another person. • Fraud Deterrence- Actions that are taken to discourage the perpetration of fraud. • Fraud Detection- Identifying the indicators of fraud sufficient to warrant recommending an investigation • Fraud investigation- Performing the extended procedures needed to determine whether fraud has occurred, as suggested by the indicators. b. List four personal (as opposed to organizational) fraud symptoms, or red flags, that indicate the possibility of fraud.
Do not confine your answer to this example. o High personal debts or great financial losses o Bragging about exploits o Collectors and creditors appearing at the place of the business o Strong desire to beat the business c. List two procedures you could follow to uncover John’s fraudulent behavior. 1) Trace all of the payments back to the supporting documentation. No record of the receipt of the goods would be listed in the receiving department, as well as the purchasing department. 2) Inspect the documentation supporting the release of a check to a vendor. . 6. An auditor found that Rent-A-Wreck management does not always comply with its stated policy that sealed bids be used to sell obsolete cars. Records indicated that several vehicles with recent major repairs were sold at negotiated prices. Management vigorously assured the auditor that performing limited repairs and negotiating with knowledgeable buyers resulted in better sales prices than the sealed-bid procedures. Further investigation revealed that the vehicles were sold to employees at prices well below Market value.
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Three managers and five other employees pleaded guilty to criminal charges and made restitution. Required a. List the fraud symptoms that should have aroused the auditor’s suspicion. ? Management’s justification for departing from established policy. ? Departure from the established policy of requiring sealed bids to dispose of vehicles being salvaged. ? Vehicles, in fact, have been repaired before they were sold for salvage. b. What audit procedures would show that fraud had in fact occurred? ? Review thoroughly of sales documentation, identifying persons to whom sales were made at “negotiated prices. ? Evaluate the adequacy of proceeds obtained in negotiated sales. ? Review maintenance records for charges associated with salvaged vehicles. Case 5-1 1. How does Miller fit the profile of the average fraud perpetrator? How does he differ? How did these characteristics make him difficult to detect? 2. Explain the three elements of the opportunity triangle (commit, conceal, convert), and discuss how Miller accomplished each when embezzling funds from Associated Communications. What specific concealment techniques did Miller use? 3.
What pressures motivated Miller to embezzle? How did Miller rationalize his actions? 4. Miller had a framed T-shirt in his office that said, “He who dies with the most toys wins. ” What does this tell you about Miller? What lifestyle red flags could have tipped off the company to the possibility of fraud? 5. Why do companies hesitate to prosecute white-collar criminals? What are the consequences of not prosecuting? How could law enforcement officials encourage more prosecution? 6. What could the victimized companies have done to prevent Miller’s embezzlement?