Concept explainers
a.
Introduction:The term fraud can be explained as a deliberate action of an individual or group of individuals involved in voluntarily presenting the deceptive financial statements of a company.
To identify:The situation where Company KC is trusting Person S for auditing their financial statements.
b.
To identify:The obligation of Company GT to uncover the threat.
c.
To identify:Thehow the Person S luxurious lifestyle raised suspicions for the regulatory authorities.
d.
To identify:That how the management and auditors could have been more professionally skeptical in the given scenario.
e.
To identify:The responsibility of audit committee.
f.
To identify:The internal controls that the Company KC should have employed.
g.
To identify:That how the management and auditors should have responded to the behavior of the Person S.
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Chapter 2 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
- The following paragraphs describe fraudulent accounting committed by the company Gateway. After reading the paragraphs, list the journal entries you think would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. On September 21, 2000, Gateway's sales representative sent an e-mail to the consumer leasing company confirming that the consumer leasing company would issue a purchase order for $16.5 million of PCs, for which it would receive a 5% discount, that the consumer leasing company would be billed by September 30, 2000 and would take the PCs by October 31, 2000.arrow_forwardCASE: You are a fraud expert and have been asked to investigate possible wrongdoing at a local nonprofit organization. You suspect that one of the workers, Stacey, has been embezzling money. After securing enough evidence to be very confident of Stacey's guilt, you speak with the president of the organization, Jamie. Jamie assures you that Stacey could be doing nothing wrong, that she has known Stacey for years, and Stacey is a good person. Further, she indicates that because of her relationship with Stacey, even if something were going wrong, no action would be taken with respect to the potential fraud. QUESTIONS: 1)How do you respond to Jamie? How do you explain to her what is at stake? 2) What monitoring and control systems should have been in place at Jamie's organization to prevent such a behavior? Explain. 3)Would you recommend an ethics audit to this company? Why?arrow_forwardAssume you are the lead forensic investigator for a potential fraud case at AJB, Inc. After searching public records and other Internet sources, you accumulate the following financial information for the suspected fraud perpetrator, Jaleesa P. Crimin. YEAR 1 YEAR 2 YEAR 3 Assets: Residence #1 $243,000 $243,000 $243,000 Residence #2 138,000 Stocks and bonds 15,000 30,000 57,000 Automobiles 27,000 52,500 52,500 Boat 34,500 34,500 CD 12,000 42,000 81,000 Cash 5,670 12,150 29,160 Liabilities: Mortgage balance #1 136,080 68,040 16,200 Mortgage balance #2 138,000 Auto loans 18,000 57,000 Boat loan 34,500 9,000 Income: Salary 78,750 82,650 Interest/other 8,730 17,790 Expenses: Mortgage payments 24,300 42,120 Auto loan payments 9,720 9,720 Boat…arrow_forward
- Nino Moscardi, president of Greater Providence Deposit & Trust (GPD&T), received an anonymous note in his mail stating that a bank employee was making bogus loans. Moscardi asked the bank’s internal auditors to investigate the transactions detailed in the note. The investigation led to James Guisti, manager of a North Providence branch office and a trusted 14-year employee who had once worked as one of the bank’s internal auditors. Guisti was charged with embezzling $1.83 million from the bank using 67 phony loans taken out over a three-year period. Court documents revealed that the bogus loans were 90-day notes requiring no collateral and ranging in amount from $10,000 to $63,500. Guisti originated the loans; when each one matured, he would take out a new loan, or rewrite the old one, to pay the principal and interest due. Some loans had been rewritten five or six times. The 67 loans were taken out by Guisti in five names, including his wife’s maiden name, his father’s name,…arrow_forward1. "The steps in the accounting cycle for a merchandising company are different from the accounting cycle for a service company." Do you agree or disagree? Explain. 2. A local bank reported that it lost $150,000 as the result of an employee fraud. Mr. X is not clear on what is meant by an "employee fraud." Explain the meaning of fraud to Mr. X and give examples of frauds that might occur at a bank. 3. On September 1, ABC Company had an inventory of 30 calculators at a cost of $18 each. The company uses a perpetual inventory system. During September, the following transactions occurred. Sept. 6 Purchased 80 calculators at $20 each from DeVito Co. for cash. Sept. 9 Paid freight of $80 on calculators purchased from DeVito Co. Sept. 10 Returned 2 calculators to DeVito Co. for $42 credit (including freight) because they did not meet specifications. Sept. 12 Sold 26 calculators costing $21 (including freight) for $31 each to Mega Book Store, terms n/30. Sept. 14 Granted credit of $31 to Mega…arrow_forwardUpon hearing that you are enrolled in a fraud class, a manager of a local business asks, “I don’t understand what is happening with all these major scandals such as the Bernie Madoff scandal, the Goldman Sachs accusations, and the Enron fraud. There are billions of dollars being stolen and manipulated. How can any good auditornot notice when billions of dollars are missing?” How would you respond?arrow_forward
- The following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. In the fourth quarter of FY 1999, Rite Aid prematurely recognized $17 million relating to a litigation settlement with a vendor. Rite Aid should not have recognized this sum in that period because the settlement offer was expressly contingent upon the execution of a formal settlement agreement which did not take place until May 20, 1999. Moreover, the litigation settlement was also contingent upon the execution of a purchasing agreement that was not finalized until May 18, 1999. Both of these contingencies were expressly stated in the February 26, 1999 letter of intent signed by Grass.arrow_forward1 On 15 December 2020, the company received a confession letter from the finance manager (i.e. Alex Chee) who confessed that he has been lodging fraudulent expense claims over the past 5 years, amounting to some RM4 million. The financial controller’s primary estimates indicate that this figure could be correct; however, he believes it will take at least a couple of months before the exact figure is known. The police have been informed of the fraud and are searching for Alex, who appears to have left the country. Required: Advise the management with reference to MFRS 137 with regard to the accounting treatment in 2020.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
- Sarah, a friend of yours, recently started her own business, The Bike and Boulder Company (B&B). B&B specializes in the sales of mountain bikes and rock climbing equipment. Sarah is putting the finishing touches on her company policies and procedures. She knows you are taking a fraud class and asks you to review what she has completed thus far. You quickly notice that Sarah has neglected to address fraud and fraud prevention in her policies and procedures. What policies and procedures would you suggest Sarah implement to prevent and detect fraud at B&B?arrow_forwardThe following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. Rite Aid failed to record an accrued expense for stock appreciation rights it had granted to employees, in a program that gave the recipients the right to receive cash or stock in amounts tied to increases in the market price of Rite Aid stock. Rite Aid should have accrued an expense of $22 million in FY 1998 and $33 million in FY 1999 for these obligations.arrow_forwardWhich of the following is NOT a method UCI's former executive VP and CFO used to embezzle 2.97 million? options: 1) Charging personal purchases on UCI's corporate credit card, followed by arranging for UCI to pay the credit card statement by check 2) Preparing false expense reports and submitting them for reimbursement, resulting in payment to himself since nobody other than the accounts payable supervisor reviewed these reports 3) Adding family members to UCI's payroll and placing large checks into their bank accounts 4) Submitting unsupported check requests for personal credit card accounts and nonbusiness expenditures, such as construction work on his personal residencearrow_forward
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