Fraud Examination
6th Edition
ISBN: 9781337619677
Author: Albrecht, W. Steve, Chad O., Conan C., Zimbelman, Mark F.
Publisher: Cengage,
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Question
Chapter 12, Problem 6SC
To determine
The revenue-related fraud symptoms and list the fraud schemes in the given case.
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Consider the scenario in which Brooke Miles, an accounts payable clerk for West Coast Design Inc., misappropriated $48,350 by paying false bills for commodities that were never delivered to the company. It was the clerk's responsibility to open accounts in the names of the phony corporations and pay the cheques at a nearby bank. Describe a fraud-prevention or detection method that may have been used to avoid or identify the scam.
One of the largest losses in history from unauthorized securities trading involved a securities trader for the French bank Societe Generale. The trader was able to circumvent internal controls and create more than $7 billion in trading losses in six months. The trader apparently escaped detection by using knowledge of the bank’s internal control systemslearned from a previous back-office monitoring job. Much of this monitoring involved the use of software to monitor trades. In addition, traders were usually kept to tight trading limits. Apparently, these controls failed in this case.What general weaknesses in Societe Generale’s internal controls contributed to the occurrence and size of the losses?
WorldCom committed the largest fraud in U.S. history. What was the primary method WorldCom’s management used to carry out the fraud?
Chapter 12 Solutions
Fraud Examination
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- Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?arrow_forwardWhen in an examination of a retail firm, Lily, a recently recruited internal auditor, discovered a plan in which the warehouse manager and a buying staff moved around Php2 million worth of products to an outside warehouse, where they were sold to third parties. Because the warehouse manager changed the perpetual inventory records and subsequently transmitted receiving reports to the accounts payable department for processing, the fraud was not discovered earlier by the internal audit team. Which one of the following steps did Lily follow that resulted in the discovery of the missing materials and the fraud? Group of answer choicesRandom sampling of receiving reports and tracing to the recording in the perpetual inventory records.Selecting a random sample of purchase orders and trace to receiving reports and to the records in the accounts payable department.Performance of physical inventory count, then reconciliation of the amounts with the perpetual inventory…arrow_forward18.During an audit of a retail company, Lily, newly hired internal auditor, found a scheme in which the warehouse manager and a purchasing staff diverted approximately Php2 million worth of goods to an outside warehouse, the sold the goods to third parties. The fraud was not found earlier by the internal audit team since the warehouse manager updated the perpetual inventory records and then forwarded receiving reports to the accounts payable department for processing. Which of the following procedures did Lily perform which would have most likely led to the discovery of the missing materials and the fraud? Group of answer choices Random sampling of receiving reports and tracing to the recording in the perpetual inventory records. Selecting a random sample of purchase orders and trace to receiving reports and to the records in the accounts payable department. Performance of physical inventory count, then reconciliation of the amounts with the perpetual inventory records. Random…arrow_forward
- Both Siemens and their accountant KPMG and Walmart and their accountant EY failed to resolve the conflict between the integrity and independence of the external auditors and the business interests of the accounting firms. Instead, the two accounting firms put self-interest before the public interest and shareholder interest of their respective clients when their clients sought to maximize company profits by: a. Bribery of foreign government officials b. Customer Identity theft c. Aggressive Inventory method of accounting d. Aggressive Revenue Recognition inconstant with GAAP e. Failing to book interest income from special purpose entities.arrow_forwardHannaford is a national grocery chain whose electronic payment processing system was breached by hackers as early as December 7, 2007. The hackers stole up to 4.2 million credit and debit card numbers, expiration dates, and security codes, but did not steal customer names. On February 27, 2008, Visa Inc. notified Hannaford that Hannaford’s system had been breached. Hannaford discovered the means of access on March 8, 2008, and contained the breach on March 10, 2008. Hannaford gave notice to certain financial institutions on March 10, 2008. On March 17, 2008, “Hannaford publicly announced for the first time that between December 7, 2007 and March 10, 2008, the security of its information technology systems had been breached, leading to the theft of as many as 4.2 million debit card and credit card numbers belonging to individuals who had made purchases at more than 270 of its stores.” It also announced “that it had already received reports of approximately 1,800 cases of fraud resulting…arrow_forwardRohini works as an accountant with PQR Ltd. She embezzled $20,000 from the company bank account. She was caught in the annual audit of the company. She justified her action saying that her employer has not given any pay rise, so she had to take $20,000 from the account. Explain in your own words the internal control that may have failed in the above situation. Also explain which element of the fraud triangle Rohini is referring to justify her action.arrow_forward
- Hatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and possible legal violations in the presentation of the company’s financial statements. A due diligence team from the SEC has been sent to Hatfield’s corporate headquarters in Philadelphia for a complete audit in order to further assess the situation.Several unique circumstances at Hatfield are discovered by the SEC due diligence team during the course of the investigation:∙ Management has been involved in ongoing negotiations with the local labor union, of which approximately 40% of its full-time labor force are members. Labor officials are seeking increased wages and pension benefits, which Hatfield’s management states is not possible at this time due to decreased profitability and a tight cash flow situation. Labor officials have…arrow_forwardAn audit manager has led the audit of Topaz Ltd for the last three years. Evidence of a fraud involving the falsification of timesheets and supplier invoices to a significant value have been found. Senior management within Topaz are implicated. Discuss the extent to which the external auditor should be criticised for not discovering this fraud.arrow_forwardHatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and possible legal violations in the presentation of the company’s financial statements. A due diligence team from the SEC has been sent to Hatfield’s corporate headquarters in Philadelphia for a complete audit in order to further assess the situation.Several unique circumstances at Hatfield are discovered by the SEC due diligence team during the course of the investigation:∙ Management has been involved in ongoing negotiations with the local labor union, of which approximately 40% of its full-time labor force are members. Labor officials are seeking increased wages and pension benefits, which Hatfield’s management states is not possible at this time due to decreased profitability and a tight cash flow situation. Labor officials have…arrow_forward
- Hatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and possible legal violations in the presentation of the company’s financial statements. A due diligence team from the SEC has been sent to Hatfield’s corporate headquarters in Philadelphia for a complete audit in order to further assess the situation.Several unique circumstances at Hatfield are discovered by the SEC due diligence team during the course of the investigation:∙ Management has been involved in ongoing negotiations with the local labor union, of which approximately 40% of its full-time labor force are members. Labor officials are seeking increased wages and pension benefits, which Hatfield’s management states is not possible at this time due to decreased profitability and a tight cash flow situation. Labor officials have…arrow_forwardA former chairman, CFO, and controller of Donnkenny, Inc., an appeal company that makes sportswear for Pierre Cardin and Victoria Jones, please get guilty to financial statement fraud. These manager used false journal entries to record fictitious sales, head inventory and public warehouses so that it could be recorded as sold and required sales orders to be backdated so that the sale could be moved to an earlier period.the combined effect of these actions caused 25 million out of 40 million and quarterly sales to be phony. A. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud? B.Would an audit committee made up of representatives from Senior Management be effective in stopping this type of fraud?arrow_forwardA client operates two plants. In Plant A, throughout the entire cutoff test window, all sales have been recorded as FOB shipping point. In Plant B, all sales have been recorded as FOB shipping point in the cutoff window prior to year-end and either FOB shipping point or FOB destination in the cutoff window subsequent to year end. Which plant would an auditor judge to have higher fraud risk? Question 27 options: Plant A would have higher fraudulent financial reporting risk than Plant B. Plant B would have higher risk of the misappropriation of assets than Plant A. Plant A would have higher risk of the misappropriation of assets than Plant B. Plant B would have higher fraudulent financial reporting risk than Plant A.arrow_forward
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