Financial Accounting
15th Edition
ISBN: 9781337272124
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Question
Chapter 8, Problem 7E
To determine
State the general internal control weakness contributed to the fraud.
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All-Around Sound Co. discovered a fraud whereby one of its front office administrative employees used company funds to purchase goods such as computers, digital cameras, and other electronic items for her own use. The fraud was discovered when employees noticed an increase in the frequency of deliveries from vendors and the use of unusual vendors. After some investigation, it was discovered that the employee would alter thedescription or change the quantity on an invoice in order to explain the cost on the bill.What general internal control weaknesses contributed to this fraud?
An auditor suspects that certain client
employees are ordering merchandise for
themselves over the Internet without recording
the purchase or receipt of the merchandise.
When vendors' invoices arrive, one of the
employees approves the invoices for payment.
After the invoices are paid, the employee
destroys the invoices and the related vouchers.
In gathering evidence regarding the fraud, the
auditor most likely would select items for testing
from the file of all:
Multiple Choice
Cash disbursements.
Approved vouchers.
Receiving reports.
Vendors' invoices.
Paragon Tech Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Paragon Tech’s procedures for the purchase of services. The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorizedmanager. However, because no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Paragon Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.The fraud scheme involves Mae Jansma, the manager of plant and facilities. Mae arranged for her uncle’s company, Radiate Systems, to be placed on Paragon Tech’s approved vendor list. Mae did not disclose the family relationship. On several occasions, Mae would submit a requisition…
Chapter 8 Solutions
Financial Accounting
Ch. 8 - Prob. 1DQCh. 8 - Why should the employee who handles cash receipts...Ch. 8 - Prob. 3DQCh. 8 - Why should the responsibility for maintaining the...Ch. 8 - Assume that Brooke Miles, accounts payable clerk...Ch. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Prob. 8DQCh. 8 - Prob. 9DQCh. 8 - Prob. 10DQ
Ch. 8 - Prob. 1PEACh. 8 - Prob. 1PEBCh. 8 - Prob. 2PEACh. 8 - Prob. 2PEBCh. 8 - Prob. 3PEACh. 8 - Prob. 3PEBCh. 8 - Prob. 4PEACh. 8 - Prob. 4PEBCh. 8 - Financial data for Otto Company follow: a....Ch. 8 - Prob. 5PEBCh. 8 - Prob. 1ECh. 8 - Prob. 2ECh. 8 - Prob. 3ECh. 8 - Pacific Bank provides loans to businesses in the...Ch. 8 - Prob. 5ECh. 8 - An employee of JHT Holdings, Inc., a trucking...Ch. 8 - Prob. 7ECh. 8 - Prob. 8ECh. 8 - Prob. 9ECh. 8 - Prob. 10ECh. 8 - Prob. 11ECh. 8 - The actual cash received from cash sales was...Ch. 8 - The actual cash received from cash sales was...Ch. 8 - Abbe Co. is a small merchandising company with a...Ch. 8 - Prob. 15ECh. 8 - Prob. 16ECh. 8 - Prob. 17ECh. 8 - Prob. 18ECh. 8 - Prob. 19ECh. 8 - Prob. 20ECh. 8 - Prob. 21ECh. 8 - Prob. 22ECh. 8 - Prob. 23ECh. 8 - Prob. 24ECh. 8 - Mattel, Inc., designs, manufactures, and markets...Ch. 8 - El Dorado Inc. has monthly cash expenses of...Ch. 8 - Prob. 27ECh. 8 - Amicus Therapeutics, Inc., is a biopharmaceutical...Ch. 8 - Prob. 1PACh. 8 - Prob. 2PACh. 8 - Prob. 3PACh. 8 - Prob. 4PACh. 8 - Prob. 5PACh. 8 - Prob. 1PBCh. 8 - Prob. 2PBCh. 8 - Prob. 3PBCh. 8 - Prob. 4PBCh. 8 - Prob. 5PBCh. 8 - Tehra Dactyl is an accountant for Skeds, Inc., a...Ch. 8 - During the preparation of the bank reconciliation...Ch. 8 - Prob. 5CPCh. 8 - Prob. 6CPCh. 8 - Prob. 7CPCh. 8 - Prob. 8CPCh. 8 - Prob. 9CP
Knowledge Booster
Similar questions
- 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.arrow_forwardFor each of the following three independent cases of employee fraud, recommend how to prevent similar problems in the future: Case A: Due to abnormal inventory shrinkage in the audiovisual department at a retail chain store, internal auditors conducted an in- depth audit of the department. They learned that a customer frequently bought large numbers of small electronic components from a certain cashier. The auditors discovered that they had colluded to steal electronic components by not recording the sale of items the customer took from the store. Case B: During an unannounced audit, auditors discovered a payroll fraud when they distributed paychecks instead of department supervisors. When the auditors investigated an unclaimed paycheck, they discovered that the employee quit four months previously after arguing with the supervisor. The supervisor continued to turn in a time card for the employee and pocketed his check. Case C: Auditors discovered an accounts payable clerk who made…arrow_forwardAllison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud?a. Inventory.b. Wage expense.c. Consulting service expense.d. Property tax expense.arrow_forward
- Eric Wilson works at Lime Inc. He used Lime Inc.'s Sam's Club card to make personal purchases. Immediately before the company paid the bill for the Sam's Club charges each month, Eric placed his receipt in with the legitimate work-related receipts for Sam's Club. The accounts payable clerk rarely verified that the receipts were signed by authorized employees or that the purchases were actually for work-related items. What type of fraud is this? Forged maker Pay and return Personal purchases Pass-through 4arrow_forwardYou are a fraud examiner and have been hired by Blackman Company to carry out an investigation. Blackman is a beverage company that has experienced increased shipments of beverages but no increase in revenue. Management suspects that inventory is being shipped to unknown places or is being stolen.How would you use invigilation to help you determine whether inventory is being stolen or shipped to unknown locations? Briefly explain how you would carry out this investigative procedure.arrow_forwardWhat internal control or procedure(s) would provide protection against the following threats? An employee makes a credit sale to a customer who is already four months behind in making payments on his account. An employee writes off a customer’s accounts receivable balance as uncollectible to conceal the theft of subsequent cash payments from that customer Customers are billed for the quantity ordered, but the quantity shipped is actually less because some items have been back ordered. The mailroom clerk steals checks and then endorses them for deposit into the clerk’s personal bank account Goods are shipped to a customer, but that customer is not billed.arrow_forward
- Charles Hart, an accounts payable clerk, is an hourly employee. He never works a minute past 5 P.M. unless the overtime has been approved. Charles has recently found himself faced with some severe financial difficulties. He has been accessing the system from his home during the evening and setting up an embezzlement scheme. As his boss, what control technique(s) discussed in lectures network risks and auditing could you use to help detect this type of fraud?arrow_forward1. What does it mean to say that internal control has limitations and what are these limitations? 2. Provide an appropriate response based on the following scenarios. Assume that the accounting clerk posts a customer’s payment for the wrong amount, giving the customer credit for less than he or she actually paid. How will this error be detected? How might this error have been prevented? Assume that the employee who opens the mail steals a customer payment. How will this theft be detected? How might this theft have been prevented? 3. What is petty cash and what purpose(s) does it serve? 4. What types of controls should be in place to make sure people in the office don't just take from petty cash (for their own personal use) whenever they feel like it? In your opinion, what is an appropriate amount to have in petty cash? 5. Prepare the necessary journal entries for each of the following: (a) On March 1, issued a check to establish a petty cash fund of $1,410 (b)…arrow_forwardYou are the auditor for Konerko’s Office Supply Store, which is opening for business next week. The store owner has established all the controls you have recommended for ensuring that sales are recorded properly and cash is accounted for. The owner has heard from other small business owners that employees often used returned goods as means of skimming money from the register. a. How might an employee use returned goods to skim money from the register? b. What controls would you recommend to prevent or detect fraudulent returns? c. What audit procedures might you perform to detect fraudulent returns?arrow_forward
- Some of the largest business frauds ever perpetrated have involved the misstatement of inventory. Two classics were at Leslie Fay and McKesson Corporation. Feel free to check them out to get a feel for the impact that it has. There is considerable information regarding inventory frauds available on the Internet. Search for information about another instance of inventory fraud at any other company, and prepare an explanation of the nature of the inventory fraud.arrow_forwardBaker, an employee of ABC Corporation, had complete control of the purchasing function for his department. Baker authorized the purchase of several thousand dollars’ worth of supplies which were unnecessary to ABC. Baker used these supplies to make improvements to his home. This is an example of what kind of fraud? a. Check tampering b. Theft of inventory c. Personal purchases with company funds d. Misuse of company assetsarrow_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_forward
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