MULTIPLE CHOICE
1. D
2. C
3. A
4. B
PROBLEMS
1. FRAUD SCHEME: City Health Inspector
This is an example of economic extortion.
Frauds of this sort are difficult to detect because of the absence of records. Management and auditors
need to take a proactive approach to uncover such activity. The following techniques may be used:
2. FRAUD SCHEME: purchasing agent
This is an example of conflict of interest.
Controls used to prevent or detect this fraud include:
a. The Hardware Company should establish a formal policy stating its position on business
transactions that are not “arms-length” transactions. If such transactions are to be permitted, they
b. The organization should establish a valid vendor file, which is a list of approved suppliers.
c. Independent verification of transactions through management reports could be used to identify
unusual business patterns and material changes in accounts. For example, a report could
3. MAIL ROOM FRAUD AND INTERNAL CONTROL
b.
4. SEGREGATION OF DUTIES
a. These two tasks need to be separated. Having the responsibility for writing off bad debts
e. These tasks should be separated. The employee records the transactions andhas access to
5. EXPENSE ACCOUNT FRAUD
a. Control Procedures:
All checks should require the treasurer’s signature (transaction authorization).
b. Ethical Issues:
Apart from the obvious lack of ethical standards by Mary Boghas, the ethical behavior of
6.Segregation of Functions
a. Sales manager has the power to authorization as well as record keeping.
b. Warehouse clerk has custodial responsibility as well as record keeping responsibility.
c. No risks due to combining these tasks.
d. Foreman has authority to authorize time cards and also has asset custody (the employee pay
check).
e. Accounting clerk both records transactions and verifies the accuracy of the recording.
7. FRAUD MOTIVATING FACTORS
a. Examples of situational pressures in a public company that would increase the likelihood
of fraud include:
Competitive pressures.
b. Opportunity situations that would increase the likelihood of fraud include:
Weak or nonexistent internal accounting controls.
8. FINANCIAL AID FRAUDSegregation of Functions Control:
The tasks in the financial aid process are performed entirely by Mr. Jones. As a minimum, the
following tasks should be performed by separate individuals:
9. KICKBACK FRAUD
Preventive Controls
10. Assessing Internal Control: cash receipts procedures
1.
2.
c) Control: Prepare remittance list in the mailroom.Any loss or theft of checks after they are
3.
11. Assessing Internal Control: cash disbursement procedures
1.
c) Control: The clerk should perform a three-way-match of the purchase order, receiving report, and
2.
a) Weakness: AP clerk authorizes the liability and writes the check to pay it.
b) Risk: The clerk could create a false vendor, set up a liability and disburse funds (see payments to
fictitious vendors, chapter 12),
c) Control: Segregation of duties between the tasks of authorizing a liability and check writing.