DISCUSSION QUESTIONS
1. Some acts may not be against the law, but they may be considered unethical. For example, it
2. The costs of socially responsible behavior include those associated with environmental
protection, improving worker safety, and affirmative action. In the short run, when one firm incurs
3. Normally, the resolution of an ethical problem on the job would involve consultation between
4. A strong internal control structure provides a very good shield against fraud. However, these
shields are not 100 percent bulletproof, especially when employees collude and/or top management is
5. Employee fraud is committed by non-management employees, and it isgenerally designed to
directly convert cash and other assets for the employee’s personal benefit. In cases of employee fraud,
6. The top management team of publicly traded organizations is often reluctant to publicly admit
that they have been the victim of computer crime because of fear of public opinion regarding their
7. The Sarbanes-Oxley Act requires all audit committee members to be independent and requires
the audit committee to hire and oversee the external auditors. This provision is consistent with many
8. An exposure is the absence or weakness of an internal control. Sometimes cost-benefit analysis
9. For any detected error, more than one feasible corrective solution may exist, and the best course
10. The act addresses auditor independence by creating more separation between a firm’s attestation
and non-auditing activities. This is intended to specify categories of services that a public accounting
firm cannot perform for its client. These include the following functions:
a. bookkeeping or other services related to the accounting records or financial statements;
b. financial information systems design and implementation;
c. appraisal or valuation services, fairness opinions, or contribution-in-kind reports;
11. Small firms with fewer employees than there are incompatible tasks should rely more heavily
on specific authorizations. More approvals of decision by management and increased
12. Having the internal auditing function report to the controller is unacceptable. If the
controller is aware of or involved in a fraud or defalcation, then he/she may give false or inaccurate
13. If a payroll employee were to prepare a paycheck for a nonexistent employee (perhaps
under an alias, or in the name of a relative), and this employee also has the task of distributing the
14. Fraud denotes a false representation of a material fact made by one party to another party with
1. False representation. There must be a false statement or a nondisclosure.
2. Material fact. A fact must be a substantial factor in inducing someone to act.
15. Exposures are weaknesses in the internal control system. For example, assigning the same clerk
responsibility for receiving and booking cash and also updating accounts receivable is an exposure.
16. Usually management fraud does not involve the direct theft of assets. On a macro level,
management may engage in fraudulent activities to obtain a higher price from a stock or debt offering
or just to meet the expectations of investors. The Commission on Auditors’ Responsibilities calls it a
1. The fraud is perpetrated at levels of management above the one to which internal control
structures generally relate.
17. Some of the larger public accounting firms have developed checklists tohelp uncover fraudulent
activity during an audit. Questions for such a checklist might include:
j. Do key executives have unusually high personal debt?
k. Do key executives appear to be living beyond their means?
l. Do key executives engage in habitual gambling?
18. Employee fraud or frauds by non-management employees are generally designed to directly
convert cash or other assets to the employee’s personal benefit. Employee fraud usually involves three
Examples:
CHARGES TO EXPENSE ACCOUNTS. The theft of $50,000 cash could be charged to a
miscellaneous operating expense account. The loss of the cash reduces the firm’s assets by $50,000. To
LAPPING. The employee first steals and cashes a check for $5000 sent by Customer A. To conceal the
accounting imbalance caused by the loss of the asset, Customer A’s account is not credited. Later (the
19. Bribery involves giving, offering, soliciting, or receiving things of value to influence an official
in the performance of his or her lawful duties. Officials may be employed by government (or
regulatory) agencies or by private organizations. Bribery defrauds the entity (business organization
or government agency) of the right to honest and loyal services from those employed by it.
20. Skimming involves stealing cash from an organization before it is recorded on the
21. A shell company fraud first requires that the perpetrator establish a false supplier on the books
of the victim company. The fraudster then manufactures false purchase orders, receiving reports, and
invoices in the name of the vendor and submits them to the accounting system, which creates the
allusion of a legitimate transaction. A pass through fraud is similar to the shell company fraud with the
22. Privacy is the degree of restricted access to personal data. The creation and maintenance of
huge, shared databases makes it necessary to protect individuals (and organizations) from the potential
misuse of such data. This raises the issue of ownership in the personal information industry. Why can
Computer security is an attempt to avoid undesirable events such as illegal access to systems that result
in loss of confidentiality or data integrity. However, security can be used both to protect personal
Laws designed to preserve real property ownership rights have been extended to cover what is referred
to as intellectual property, such as computer software. The question here becomes, what can an
individual (or organization) own? Ideas? Media? Source code? Object code? Copyright laws have been
invoked in an attempt to protect those who develop software from having it copied. However, many
believe the copyright laws can cause more harm than good. For example, should the “look and feel” of
23. The study suggests that notwithstanding the importance of personal ethics, situational pressures
and opportunity contribute greatly to fraud.
SITUATIONAL PRESSURES. As people age, they tend to marry and assume greater responsibilities
and are influenced by significant situational pressures. The heads of households tend to feel situational
OPPORTUNITY. The real culprit responsible for explaining the loss variance presented in the study is
opportunity. Opportunity can be redefined as control over assets or access to assets. Indeed, control and
t. Gender. While the demographic picture is changing, more men than women occupy positions of
authority in business organizations, which provide them greater access to assets.
24. Collusion among employees in the commission of a fraud is difficult to both prevent and detect.
This is particularly true when the collusion is between managers and their subordinate employees.
Management plays a key role in the internal control structure of an organization. They are relied upon
25. Fraudulent statements are associated with management fraud. While all fraud involves some
form of financial misstatement, to meet the definition under this class of fraud scheme, the statement
itself must bring direct or indirect financial benefit to the perpetrator. In other words, the statement is
26. Auditing firms who are also engaged by their clients to perform non-accounting activities such
as actuarial services, internal audit outsourcing services, and consulting lack independence. They are
27. Many boards of directors are composed of individuals who are not independent. Examples of
lack of independence are directors who have a personal relationship by serving on other companies’
boards of directors; have a business trading relationship as key customers or suppliers of the company;
28. A survey by Thompson Financial revealed the strong belief that executives have abused
stock-based compensation. The consensus is that fewer stock options should be offered than currently
29. The use of inappropriate accounting techniques is a characteristic common to many financial
statement fraud schemes. Enron made elaborate use of Special Purpose Entities (SPE) to hide liabilities
through off balance-sheet accounting. WorldCom management transferred transmission line costs from
30. The Sarbanes-Oxley Act created a Public Company Accounting Oversight Board (PCAOB).
31. The Sarbanes-Oxley Act requires all audit committee members to be independent and requires
the audit committee to hire and oversee the external auditors. This provision is consistent with many
32. 1. Public companies must report all off balance-sheet transactions.
2. Annual reports filed with the SEC must include a statement by
management asserting that it is responsible for creating and
33. This class of controls relates primarily to the human activities employed in accounting systems.
These activities may be purely manual, such as the physical custody of assets, or they may involve the
use of computers to record transactions or update accounts. Physical controls do not relate to the
34.
a.Addition errors occur when an extra digit or character is added to the code. For example,
inventory item number 83276 is recorded as 832766.
35. A check digit is a control digit (or digits), which is a function of the other digits, and is added to
a code (or account number) when it is originally assigned. This allows the integrity of the code to be
36. Any key field, such as a customer’s account number, a purchase ordernumber, or an inventory
37. The GFS backup technique, which is used for sequential master files, begins when the current
master file (the father) is processed against the transaction file to produce a new updated master file
(the son). Note that the son is a physically different file from the father. With the next batch of