Fraud Examination
5th Edition
ISBN: 9781305079144
Author: W. Steve Albrecht, Chad O. Albrecht, Conan C. Albrecht, Mark F. Zimbelman
Publisher: Cengage Learning
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John and Kayla, two audit staff associates are discussing potential telltale signs to watch out for during an audit, which may indicate an
increased fraud risk. Which of the following would represent an increased fraud risk?
The firm they work for has a company policy which dictates that no clients with related parties or related party transactions
will be taken on
The clients that their firm takes on have robust and effective whistleblowing systems, and the anonymity of the informant is
protected throughout.
The clients their firm works with have historically had low turnover and strong employee retention in key positions.
One of their clients has recently installed a new system of internal control which the client's staff are currently familiarizing
themselves with and are not yet fully proficient in.
Discuss the motives of why C-Suite executives would commit fraud and how understanding the motive for fraud can assist an auditor in the analysis of financial statements. Determine if government regulations such as SOX and PCAOB are effective in reducing unethical behavior of corporate executives, and if additional organizational controls could be applied to expose and reduce fraud committed by C-Suite executives.
The following scenarios are taken from actual fraud cases. For each scenario, categorize as primarily indicating (A) An incentive to commit fraud (B) An opportunity to commit fraud or (C) a rationalization for committing fraud. State your reason for your answer in each scenario.
1. Top management of the company closely guards internal financial information, to the extent that even some employees on a "need to know basis" are denied full access.
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- John Wells, CPA, is planning the audit of CVG Services Inc. As a result of his risk assessment procedures, Wells has identified several fraud risks. a. Explain in detail how Wells might respond to risks of material misstatement of the financial statements due to fraud. b. Describe the auditors’ communication responsibilities in situations in which the auditors believe fraud has occurred.arrow_forwardWhich of the following actions did the Treadway Commission recommend to reduce fraudulent financial reporting? Establish financial incentives that promote integrity in the financial reporting process. Identify and understand the factors that lead to fraudulent financial reporting. Assess the risk of corruption and misappropriation of assets within the company. Design and implement internal controls to provide reasonable assurance of preventing fraudulent financial reporting.arrow_forwardWhich of the following is not a Sarbanes-Oxley Actrequirement intended to reduce fraud opportunities?a. Increase fines and jail sentences for fraud perpetrators.b. All public companies establish an audit committee ofindependent directors.c. Management of all public companies evaluates andreports on the effectiveness of internal control overfinancial reporting.d. External auditors of large public companies evaluateand report on the effectiveness of internal control overfinancial reporting.arrow_forward
- (a) Explain how the new internal audit department of Adom Hotels could assist the directors in preventing and detecting fraud and error. (b) Describe additional functions, other than fraud investigations, the directors of Adom Hotels could ask the internal audit department to undertake.arrow_forwardWho are the professional organizations who are in charge of fraud auditing? Birefly elucidates.arrow_forwardRead the following information and then answer questions a & b below: Assume you are an internal auditor for a large, multinational, manufacturing organization with a division in Mexico. One of your responsibilities is to investigate allegations made on the company’s fraud hotline. When you arrive at work one morning you learn an anonymous tip was left on the hotline that alleges fraud involving the division manager. “Pat’s significant other is a fraudulent vendor,” was the anonymous tip left on your company’s fraud hotline. Pat is a division manager at your company. “Wow. I can’t believe this guy is so blatant,” you are thinking as you review some accounts payable invoices while following up on this anonymous tip. A quick search of the AP file reveals a total of three invoices like the one, all for identical amounts but on different dates. The division manager, Pat, has the authority to approve payment of invoices for less than $10,000. It is obvious to you that the manager has…arrow_forward
- When a fraud has occurred within an organization, management must decide what follow-up action (s) to take. Briefly describe the three follow-up alternatives available to organizations?arrow_forwardResearch a company that had a fraud event happen due to inadequate accounting procedures. Review the fraud event that happened in the company in detail and identify at least two accounting control procedures that were deficient in this event. Propose an internal control system that would have eliminated the fraud, using the ERP system.arrow_forwardFor each situation below identify and explain the threat and one fundamental principle that is comprised.- An accountant has compiled the financial statements for a client and was requested to also audit the statements.- The financial director of Baboo Ltd is very aggressive and dismissive of the audit function and audit team- A chartered accountant values a client’s shares and then leads the negotiations on the sale of the client’s company- The chartered accountant fails to report a fraud of a client because the perpetrator is a close friend and he issympathetic to the interest of his friend.arrow_forward
- Upon 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_forwardWhat are the most common approaches that perpetrators use to commit fraudulent financial reporting? You are asked to be interviewed by a student newspaper regarding the nature of accounting fraud. The reporter says, “As I understand it, asset misappropriations are more likely to be found are more likely to be found in small organizations, but not in larger organizations. On the other hand, fraudulent financial reporting is more likely to be found in larger organizations.” How would you respond to the reporter’s observation? The fraud triangle identifies incentives, opportunities, and rationalizations as the three elements associated with most frauds. Describe how each of these elements is necessary for fraud to occur.arrow_forwardInternal controls are critical for any organization's risk of fraudulent activity. Additionally, new technology assists accountants in minimizing fraud. Demonstrate how an advanced technology transaction processing system may help any organization minimize fraudulent activity.arrow_forward
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