Chapter 3—Ethics, Fraud, and Internal Control
TRUE/FALSE
1. The ethical principle of justice asserts asserts that the benefits of the decision decision should should be distributed distributed fairly fairly to those who share the risks. ANS: T 2. The ethical principle of informed consent consent suggests suggests that the the decision should be implemented so as to minimie all of the risks and to a!oid any unnecessary risks. ANS: " #. $mployees $mployees shoul should d be made made aware of of the firm%s firm%s commitment commitment to to ethics. ethics. ANS: T &. 'usiness ethics ethics is the analysis analysis of the nature and social impact of computer technology( technology( and the corresponding formulation and justification of policies for the ethical use of such technology. technology. ANS: " ). *ara computer ethics is the e+posure e+posure to stories stories and reports reports found in the popular media regarding the good or bad ramifications of computer technology. ANS: " ,. Source Source code is an e+amp e+ample le of intelle intellectual ctual property property.. ANS: T -. opyright laws and computer industry industry standards standards ha!e ha!e been de!eloped jointly and rarely conflict. ANS: " /. 'usiness 'usiness bankrup bankruptcy tcy cases cases always always in!ol!e in!ol!e fraudulen fraudulentt beha!ior beha!ior.. ANS: " 0. efalcatio efalcation n is another another word word for for financia financiall fraud. fraud. ANS: T 1. The trend toward distributed distributed data processing processing increases increases the e+posure to fraud from remote locations. ANS: T 11. The e+ternal auditor is responsible for establishing establishing and maintaining the internal control system. system. ANS: "
12. Segregation Segregation of of duties duties is an e+ample e+ample of an internal internal control control procedu procedure. re. ANS: T 1#. ontrols in in a computer3based information system are identical to controls controls in a manual system. ANS: " 1&. *re!enti!e *re!enti!e controls controls are are passi!e passi!e techni4ues techni4ues design designed ed to reduce reduce fraud. fraud. ANS: T 1). $thical $thical issues issues and legal issue issuess are essentia essentially lly the the same. ANS: " 1,. 5nternal control control systems systems are recommended but but not re4uired of of firms subject to the "oreign orrupt orrupt *ractices Act. ANS: " 1-. 6peration 6perationss fraud is the the misuse misuse or theft of the the firm%s firm%s computer computer resourc resources. es. ANS: T 1/. The "oreign "oreign orrupt orrupt *ractice *racticess Act Act re4uires re4uires only that that a firm keep keep good records records.. ANS: " 10. A key modifying assumption in internal internal control is that the internal control system system is the responsibility responsibility of management. ANS: T 2. atabase management management fraud includes altering( updating( and deleting deleting an organiation%s organiation%s data. ANS: " 21. 7hile the Sarbanes36+ley Act prohibits prohibits auditors auditors from pro!iding non3accounting non3accounting ser!ices to their audit clients( they are not prohibited from performing such ser!ices for non3audit clients or pri!ately held companies. ANS: T 22. The Sarbanes36+ley Sarbanes36+ley Act Act re4uires the audit committee to hire and o!ersee the e+ternal auditors. auditors. ANS: T 2#. Section && re4uires that that corporate corporate management 8including the $69 $69 certify their organiation% organiation%ss internal controls on a 4uarterly and annual basis. ANS: "
2&. Section #2 re4uires the the management of public public companies to assess assess and formally report report on the effecti!eness of their organiation%s internal controls. ANS: " 2). The objecti!e objecti!e of SAS 00 is to to seamlessly blend the auditor%s consideration of fraud into all phases of the audit process. ANS: T MULTIPLE C!ICE
1. 7hich ethical ethical principle states that that the benefit benefit from a decision must must outweigh the risks( and that there is no alternati!e decision that pro!ides the same or greater benefit with less risk a. minimie ris risk b. justice c. info inform rmed ed cons consen entt d. prop propor orti tion onal alit ity y ANS: 2. 5ndi!iduals who ac4uire some le!el of skill and knowledge knowledge in the field of computer ethics are in!ol!ed in which le!el of computer ethics a. para para com compu pute terr ethi ethics cs b. pop computer ethics c. theo theore reti tica call compu compute terr ethic ethicss d. prac practi tica call compu compute terr ethic ethicss ANS: A #. All of of the follow following ing are are issues issues of compu computer ter security security e+cept e+cept a. releasing releasing incorrect incorrect data to authoried authoried indi!idu indi!iduals als b. permitting computer computer operators unlimited access access to the computer room c. permitting permitting access access to data data by unauthori unauthoried ed indi!i indi!idual dualss d. pro!iding pro!iding correct correct data data to unauthori unauthoried ed indi! indi!idua iduals ls ANS: ' &. 7hich charact characterist eristic ic is not associate associated d with software software as intellec intellectual tual property property a. uni4 uni4ue uene ness ss of of the the prod produc uctt b. possibility of of e+act replication c. automa automated ted moni monito torin ring g to detec detectt intrud intruders ers d. ease ease of diss dissem emin inat atio ion n ANS: ). "or an action action to be called fraudulen fraudulent( t( all of the following following condit conditions ions are re4uired re4uired e+cept e+cept a. poor oor judgm udgmen entt b. false representation c. inte intent nt to dece decei! i!ee d. inju injury ry or loss ANS: A ,. 6ne charac characteris teristic tic of of employee employee fraud fraud is that that the the fraud fraud
a. b. c. d.
is perpetra perpetrated ted at a le!el le!el to which which inter internal nal control controlss do not not apply apply in!ol!es misstating misstating financial statements statements in!ol!es in!ol!es the direct direct con!ersi con!ersion on of cash or other other assets to the employe employee%s e%s person personal al benefit benefit in!ol!es in!ol!es misappro misappropriat priating ing assets assets in a series series of comple+ transacti transactions ons in!ol!ing in!ol!ing third third parties parties
ANS: -. "orces which may permit permit fraud to occur occur do do not not include include a. a gamb gambli ling ng add addic icti tion on b. lack of segregation of duties duties c. centra centrali lied ed decis decision ion makin making g en!iron en!ironme ment nt d. 4uesti 4uestiona onabl blee integr integrity ity of of employ employees ees ANS: /. 7hich of the the followi following ng best best descri describes bes lappi lapping ng a. applying applying cash receipts receipts to a differen differentt customer%s customer%s account account in an attempt attempt to conceal conceal pre!ious pre!ious thefts of funds b. inflating bank balances balances by transferring money money among different bank accounts accounts c. e+pens e+pensing ing an an asset asset that that has has been been stol stolen en d. creati creating ng a false false transa transacti ction on ANS: A 0. 6perat 6peration ionss fraud fraud includ includes es a. altering altering program program logic logic to cause cause the the applicati application on to process process data data incorrec incorrectly tly b. misusing the firm%s firm%s computer resources c. destroyi destroying ng or corrupti corrupting ng a program% program%ss logic logic using using a computer computer !irus !irus d. creating creating illegal illegal program programss that can access access data data files to alter( alter( delete delete(( or insert insert !alues ANS: ' 1. 7ho is responsibl responsiblee for establishin establishing g and maintaining maintaining the internal internal control control system system a. the the inte intern rnal al aud audit itor or b. the accountant c. management d. the the e+te e+tern rnal al audi audito tor r ANS: 11. 11. The concep conceptt of reasona reasonable ble assuran assurance ce suggests suggests that a. the cost cost of an interna internall control control should should be be less than than the benefi benefitt it pro!ides pro!ides b. a well3designed system system of internal controls will detect all fraudulent fraudulent acti!ity c. the objecti! objecti!es es achie!ed achie!ed by an interna internall control control system system !ary dependin depending g on the data data processing method d. the effecti! effecti!eness eness of of internal internal controls controls is a function function of of the industry industry en!ironm en!ironment ent ANS: A 12. 7hich of of the following following is is not a limitatio limitation n of the internal internal contro controll system system a. errors errors are made made due due to employ employee ee fatig fatigue ue b. fraud occurs because of collusion collusion between two employees c. the indus industry try is inhere inherently ntly risky risky d. management management instru instructs cts the bookke bookkeeper eper to make make fraudulent fraudulent journa journall entries entries ANS:
1#. The most most cost3ef cost3effecti fecti!e !e type type of interna internall control control is is a. pre! pre!en enti ti!e !e cont contro roll b. accounting control control c. dete detect cti! i!ee cont contro roll d. corr correc ecti ti!e !e con contr trol ol ANS: A 1&. 7hich of the the followi following ng is a pre!ent pre!enti!e i!e contro control l a. credit credit chec check k before before appr appro!i o!ing ng a sale sale on accou account nt b. bank reconciliation c. phys physic ical al in! in!en ento tory ry cou count nt d. comparing comparing the the accounts accounts recei!able recei!able subsi subsidiary diary ledger ledger to the the control control account account ANS: A 1). A well3desi well3designed gned purch purchase ase order order is an e+ample e+ample of a a. pre! pre!en enti ti!e !e cont contro roll b. detecti!e control c. corr correc ecti ti!e !e cont contro roll d. none none of the the abo abo!e !e ANS: A 1,. A phys physical ical in!entory in!entory count count is an an e+ample e+ample of of a a. pre! pre!en enti ti!e !e cont contro roll b. detecti!e control c. corr correc ecti ti!e !e cont contro roll d. feed feedfo forw rwar ard d cont contro roll ANS: ' 1-. The bank reconciliation unco!ered a transposition transposition error in in the books. books. This This is an e+ample of a a. pre! pre!en enti ti!e !e cont contro roll b. detecti!e control c. corr correc ecti ti!e !e cont contro roll d. none none of the the abo abo!e !e ANS: ' 1/. 5n balancing the risks and benefits that are part part of e!ery e!ery ethical decision( managers managers recei!e guidance guidance from each of the following e+cept a. justice b. self interest c. risk risk mini minimi mia ati tion on d. prop propor orti tion onal alit ity y ANS: ' 10. 7hich of of the following following is is not an element element of the interna internall control control en!ironm en!ironment ent a. managem management ent philo philosop sophy hy and oper operati ating ng style style b. organiational organiational structure of the firm c. well3d well3desi esign gned ed docum document entss and and record recordss d. the function functioning ing of the the board board of director directorss and the audit audit commi committee ttee
ANS: 2. 7hich of the the following following suggests suggests a weakness weakness in the internal internal control control en!ironm en!ironment ent a. the firm has an up3to3 up3to3date date organiat organiational ional chart b. monthly reports comparing comparing actual performance to budget budget are distributed to managers c. performanc performancee e!aluat e!aluations ions are prepa prepared red e!ery e!ery three years d. the audit audit committee committee meets meets 4uarter 4uarterly ly with with the e+terna e+ternall auditors auditors ANS: 21. 7hich of the the following following indicates indicates a strong strong internal internal control control en!ironm en!ironment ent a. the internal internal audit audit group group reports reports to the the audit committ committee ee of the board board of directors directors b. there is no segregation segregation of duties between organiation organiation functions functions c. there are 4uest 4uestions ions about about the the integri integrity ty of management management d. ad!erse ad!erse busine business ss condi condition tionss e+ist e+ist in the the indus industry try ANS: A 22. According According to SAS SAS -/( an effecti!e effecti!e accountin accounting g system perform performss all of the following following e+cept e+cept a. identifie identifiess and records records all all !alid !alid financi financial al transac transaction tionss b. records financial transactions transactions in the appropriate appropriate accounting period period c. separates separates the duties duties of data data entry entry and report report generati generation on d. records records all financial financial transactio transactions ns promptly promptly ANS: 2#. 7hich of of the following following is is the best reason reason to to separate separate duties duties in a manual manual system system a. to a!oid a!oid collusio collusion n between between the program programmer mer and the the computer computer operat operator or b. to ensure that super!ision super!ision is not re4uired re4uired c. to pre!en pre!entt the record record keeper keeper from from authori authoriing ing transacti transactions ons d. to enabl enablee the the firm to funct function ion more efficient efficiently ly ANS: 2&. Segregation Segregation of duties duties in the computer computer3bas 3based ed information information system system includes includes a. separatin separating g the the programm programmer er from from the the computer computer operator operator b. pre!enting management management o!erride c. separatin separating g the in!entory in!entory process process from from the billing billing proces processs d. performing performing indepe independen ndentt !erificati !erifications ons by the the computer computer operat operator or ANS: A 2). 7hich of the follow following ing is not not an internal internal contro controll procedure procedure a. auth autho oria riati tion on b. management%s operating style c. inde indepe pend nden entt !eri !erifi fica cati tion on d. acco accoun unti ting ng rec recor ords ds ANS: ' 2,. The decisio decision n to e+tend e+tend credit credit beyond beyond the normal normal credit credit limit is an an e+ample e+ample of a. inde indepe pend nden entt !eri !erifi fica cati tion on b. authoriation c. segr segreg egat atio ion n of of func functi tion onss d. super!ision
ANS: ' 2-. 7hen duties duties cannot cannot be segregate segregated( d( the most importan importantt internal internal control control procedure procedure is a. super!ision b. independent !erification !erification c. acce access ss con contro trols d. acco accoun unti ting ng rec recor ords ds ANS: A 2/. An accounting accounting system that maintains maintains an ade4uate ade4uate audit trail is implementing which which internal internal control procedure a. acce access ss con contro trols b. segregation of functions functions c. inde indepe pend nden entt !eri !erifi fica cati tion on d. acco accoun unti ting ng rec recor ords ds ANS: 20. $mployee $mployee fraud fraud in!ol!es in!ol!es three steps. steps. 6f the followin following( g( which is not not in!ol!ed in!ol!ed a. concea concealin ling g the the crime crime to to a!oid a!oid detect detection ion b. stealing something something of !alue c. missta misstatin ting g financ financial ial statem statement entss d. con!er con!ertin ting g the the asset asset to to a usabl usablee form form ANS: #. 7hich of of the following following is is not an e+ample e+ample of independ independent ent !erificat !erification ion a. comparing comparing fi+ed assets assets on hand to the the accountin accounting g records records b. performing a bank reconciliation reconciliation c. comparing comparing the the accounts accounts payabl payablee subsidiary subsidiary ledger ledger to the contro controll account account d. permitting permitting autho authoried ried users users only only to access access the the accountin accounting g system system ANS: #1. The importance to the accounting accounting profession profession of the "oreign orrupt *ractices Act of 10-- is is that a. brib bribery ery will will be be elim elimin inat ated ed b. management will not o!erride o!erride the company%s company%s internal controls controls c. firms are re4uired re4uired to ha!e ha!e an effecti effecti!e !e interna internall control control system system d. firms firms will will not not be be e+pos e+posed ed to to lawsu lawsuits its ANS: #2. The board of directors consists entirely entirely of personal friends friends of the chief e+ecuti!e officer. This indicates indicates a weakness in a. the the acco accoun unti ting ng sy system stem b. the control en!ironment en!ironment c. cont contro roll pro proce cedu dure ress d. this this is not not a weak weakne ness ss ANS: ' ##. omputer omputer fraud fraud can take on on many forms( forms( including including each each of the followi following ng e+cept e+cept a. theft or illeg illegal al use use of of compute computer3rea r3readabl dablee informa information tion b. theft( misuse( or misappropriation misappropriation of computer e4uipment e4uipment c. theft( theft( misuse( misuse( or misappropri misappropriatio ation n of assets by altering altering computer computer3read 3readable able records records and files files
d. theft( theft( misuse( misuse( or or misappro misappropriat priation ion of of printer printer supp supplies lies ANS: #&. 7hen certain certain customers customers made cash cash payments payments to reduce their accounts accounts recei!ab recei!able( le( the bookkeeper bookkeeper embeled the cash and wrote off the accounts as uncollectible. 7hich control control procedure would most likely pre!ent this irregularity a. segr segreg egat atio ion n of duti duties es b. accounting records c. acco accoun unti ting ng syst system em d. acce access ss con control trolss ANS: A #). The office manager forgot forgot to record in the accounting records the daily bank deposit. 7hich 7hich control procedure would most most likely pre!ent or detect detect this error a. segr segreg egat atio ion n of duti duties es b. independent !erification !erification c. acco accoun unti ting ng reco record rdss d. super!ision ANS: ' #,. #,. 'usine 'usiness ss ethics ethics in!ol! in!ol!es es a. how manage managers rs decide decide on what is is right right in conduc conducting ting business business b. how managers achie!e what what they decide is right for for the business c. both a and b d. none none of the the abo abo!e !e ANS: #-. All of of the follow following ing are are conditio conditions ns for fraud fraud e+cept e+cept a. fals falsee repr repres esen enta tati tion on b. injury or loss c. intent d. mate materi rial al reli relian ance ce ANS: #/. The four four principal principal types types of fraud fraud include include all of the follow following ing e+cept e+cept a. bribery b. gratuities c. conf confli lict ct of of inte intere rest st d. econ econom omic ic e+to e+tort rtio ion n ANS: ' #0. The charac characteris teristics tics of useful useful informati information on includ includee a. summ summariat ariation( ion( rele!an rele!ance( ce( timeline timeliness( ss( accuracy accuracy(( and comple completenes tenesss b. rele!ance( summariation( summariation( accuracy( timelessness( timelessness( and completeness completeness c. timelines timeliness( s( rele!ance( rele!ance( summari summariatio ation( n( accuracy accuracy(( and concise conciseness ness d. disaggrega disaggregation( tion( rele!anc rele!ance( e( timeliness( timeliness( accuracy accuracy(( and completene completeness ss ANS: A &. 5nternal 5nternal control control system system ha!e ha!e limitati limitations. ons. These These includ includee
a. b. c. d.
poss possib ibil ility ity of hon hones estt erro error r circum!ention mana manage gem ment ent o!er o!erri ride de stab stabil ility ity of syst system emss
ANS: &1. ;anagement ;anagement can e+pect e+pect !arious !arious benefits benefits to follow from implement implementing ing a system of strong strong internal internal control. 7hich of the following benefits is least likely to occur a. reduc reduced ed cos costt of of an e+tern e+ternal al audit. audit. b. pre!ents employee employee collusion to commit fraud. fraud. c. a!ailabili a!ailability ty of reliab reliable le data data for decisi decision3m on3making aking purposes. purposes. d. some assuran assurance ce of complianc compliancee with the "oreign "oreign orrupt orrupt *ractic *ractices es Act Act of 10--. 10--. e. some assur assurance ance that that importan importantt documents documents and and records records are are protected protected.. ANS: ' &2. 7hich of the the following following situation situationss is not a segregation segregation of duties duties !iolation !iolation a. The treasurer treasurer has the the authority authority to sign checks checks but gi!es gi!es the signatu signature re block to the assist assistant ant treasurer to run the check3signing machine. b. The warehouse clerk( who has has the custodial responsibility responsibility o!er in!entory in!entory in the warehouse( warehouse( selects the !endor and authories purchases when in!entories are low. c. The sales sales manager manager has the respons responsibil ibility ity to appro!e appro!e credit credit and the the authority authority to write write off accounts. d. The departm department ent time clerk clerk is gi!en gi!en the undistr undistribut ibuted ed payroll payroll checks checks to mail to absent absent employees. e. The accounti accounting ng clerk who who shares shares the record record keeping keeping responsib responsibility ility for for the account accountss recei!able subsidiary ledger performs the monthly reconciliation of the subsidiary ledger and the control account. ANS: ' &#. 7hich of the following following is not not an issue issue to be addressed in a business code of ethics ethics re4uired by the S$ a. onf onfli lict ctss of inte intere rest st b. "ull and "air isclosures isclosures c.
i >iolatio olations ns e. All of the the abo! abo!ee are issu issues es to to be addr address essed ed ANS: $ S!RT A"S#ER
1. 7hat are are the main issues issues to be address addressed ed in a business business code code of ethics ethics re4uired re4uired by the the S$ ANS: onflicts of interest( "ull and "air isclosures( iolations( Accountability 2.
ensure the accuracy and reliability of accounting records( promote organiational organiational efficiency( efficiency( comply with management%s policies and procedures #. $+plai $+plain n the the purpo purpose se of of the the *A6' *A6' ANS: The *A6' is empowered to set auditing( 4uality control( and ethics standards? to inspect registered accounting firms? to conduct in!estigations? and to take disciplinary actions. &. 7hat are are the fi!e interna internall control control component componentss described described in the the SAS -/ @ 6S6 framework framework ANS: the control en!ironment( risk assessment( information and communication( monitoring( and control acti!ities ). 7hat are are management management respon responsibi sibiliti lities es under under section section #2 #2 and && && ANS: Section #2 re4uires that corporate management 8including the $69 certify their organiation%s organiation%s internal controls on a 4uarterly and annual basis. Section && re4uires the management of public companies to assess and formally report on the effecti!eness of their organiation%s internal internal controls. ,. 5dentify 5dentify to indicate indicate whether whether each procedu procedure re is a pre!enti!e pre!enti!e or detecti!e detecti!e control control.. a.
authoriing a credit sale
*re!enti!e
etecti!e
b.
preparing a bank reconciliation reconciliation
*re!enti!e
etecti!e
c.
locking the warehouse
*re!enti!e
etecti!e
d.
preparing a trial balance
*re!enti!e
etecti!e
e.
counting in!entory
*re!enti!e
etecti!e
ANS: A. pre!enti!e? '. detecti!e? . pre!enti!e? . detecti!e? $. detecti!e se the internal control procedures listed below to complete the statements. segregation of duties general authoriation access controls super!ision
specific authoriation accounting records independent !erification
-. A clerk clerk reorders reorders 2) items items when the in!entory in!entory falls falls below 2) items. items. This is an e+ample e+ample of BBBBBBBBBBBBBBBBBBBBBBBBB BBBBBBBBBBBBBBBBBBBBBBBBBB. B. ANS: general authoriation /. The internal audit department department recalculates payroll for se!eral employees employees each pay period. This This is an e+ample of BBBBBBBBBBBBBBBBBBBBBBBB BBBBBBBBBBBBBBBBBBBBBBBBBB. BB. ANS: independent !erification
0.
1/. The te+t discusses many 4uestions 4uestions about about personal personal traits of employees employees which might help unco!er fraudulent acti!ity. acti!ity. 7hat are three ANS: e+ecuti!es: with high personal debt( li!ing beyond be yond their means( engaged in habitual gambling( appear to abuse alcohol or drugs( appear to lack personal codes of ethics( appear to be unstable 10. Ci!e two two e+amples e+amples of employee employee fraud fraud and e+plain e+plain how how the theft theft might occur occur.. ANS: harges to e+pense accounts: ash could be stolen and charged to a miscellaneous e+pense account. 6nce the account is closed( detection would be more difficult.
1. The te+t describes si+ si+ internal control acti!ities. acti!ities.
E'a(ple general 8purchase of in!entory when le!el drops9 or specific 8credit appro!al beyond normal limit9
Segr Segreg egat atio ion n of fun funct ctio ions ns
sepa separa rate te aut autho hori ria ati tion on fro from m proc proces essi sing ng sep separ arat atee cust custod ody y of assets from record keeping
Super!ision
re4uired when separation of duties is not possible( such as opening the mail 8cash receipts9
Accounting records
maintain an ade4uate audit trail
Access controls
maintain physical security
5nde 5ndepe pend nden entt !er !erif ific icat atio ion n
bank bank reco reconc ncil ilia iati tion on(( phy physi sica call in! in!en ento tory ry coun countt
2. ontrast ontrast management management fraud with employee employee fraud. fraud. ANS: $mployee fraud is usually designed to directly con!ert cash or other assets to the employee%s personal personal benefit. ;anagement fraud in!ol!es less of a direct benefit to the perpetrator. ;anagement ;anagement fraud may in!ol!e an attempt to misstate financial performance in order to gain additional compensation or to earn a promotion. ;anagement fraud may also in!ol!e an attempt attempt to misstate financial financial performance in order to increase the price of the company%s stock stock or to reduce the cost of debt.
#. iscuss the the importance of the "oreign "oreign orrupt *ractices Act of 10-- to the accounting accounting profession. profession. ANS: The "oreign orrupt *ractices Act of 10-- 8"*A9 8"*A9 is a law that re4uires all companies registered with the Securities and $+change ommission to: keep records that fairly and reasonably reflect the transactions of the firm and its financial position maintain a system of internal control that pro!ides reasonable assurance that the organiation%s organiation%s objecti!es are met As a result of the "oreign orrupt *ractices Act Act of 10--( management de!otes substantial time to de!eloping and maintaining the internal control structure because failure to do so !iolates the "*A and could lead to hea!y fines and imprisonment. Accountants are key participants in establishing and maintaining the internal control structure. Therefore( it is accountants who are instrumental in ensuring that the firm is in compliance with the "oreign orrupt *ractices Act of 10--. &. 7hy are the the computer ethics issues issues of pri!acy( pri!acy( security( security( and property ownership ownership of interest to accountants ANS: *ri!acy is a concern because the nature of computer data files makes it possible for unauthoried indi!iduals to obtain information without it being recognied as DmissingE from its original location. Security is a concern because its absence makes control from a pri!acy !iewpoint 4uestionable. 5n addition lack of security may ma y permit unauthoried changes to data( therefore distorting information that is reported. *roperty ownership raises issues of legitimacy of organiational software( !aluation of assets( and 4uestions of lost re!enues. ). According to common law( law( there are fi!e conditions conditions that that must be present for an act to be deemed fraudulent. Name and e+plain each. ANS: 5n order for an act to be deemed fraudulent under common law( it must possess the following characteristics: )alse representation( meaning some misrepresentation or omission must ha!e occurred( actions( (aterial )acts( meaning that the facts must influence someone%s actions( intent( meaning there must ha!e been the intention to decei!e others( *usti)ia+le reliance( meaning it did affect someone%s decision( and in*ur& or loss must ha!e occurred. ,. ;anagement fraud fraud is regarded as more serious serious than employee fraud. fraud. Three special characteristics characteristics ha!e been discussed for management management fraud. 7hat are they they $+plain. ANS: 5t usually occurs at le!els abo!e the normal internal control system. There is typically an intent to present a better picture of the business than is !alid( often to decei!e creditors and@or shareholders. 5f assets are misappropriated( the route is 4uite de!ious in!ol!ing a mae of business transactions.
-. "our principa principall types of corrupti corruption on are discussed discussed.. Name all four and e+plain e+plain at least least two. ANS: orruption in!ol!es an e+ecuti!e( manager( or employee of a business working in collusion with an outsider. outsider. The four principal types t ypes of corruption are: bribery( illegal gratuities( conflicts of interest( and economic e+tortion. soliciting( or recei!ing things of !alue to influence an official in the ri+er& in!ol!es gi!ing( offering( soliciting( performance of his or her lawful lawful duties. An ille-al -ratuit& in!ol!es gi!ing. recei!ing( offering( or soliciting something of !alue because of an official act that has been taken. A con)lict o) interest occurs when an employee e mployee acts on behalf of a third party during the discharge of his or her duties or has self3interest in the acti!ity being performed. Econo(ic e'tortion is the use 8or threat9 of force 8including economic sanctions9 by an indi!idual or organiation to obtain something of !alue.
/. ;isappropriation of assets can in!ol!e in!ol!e !arious schemes: charges charges to to e+pense accounts( lapping( lapping( and and transaction fraud. $+plain each and gi!e an e+ample. ANS: Char-es to e'pense accounts in!ol!e fictitious charges to such accounts as miscellaneous e+pense to offset theft of an asset. 'ecause the e+pense account is closed to re!enue at the end of the period( the period in which it could could be detected is short. Lappin- is a techni4ue whereby an early theft is co!ered up by a later one( i.e.( with the mo!es DlappingE o!er each other. The simplest e+ample in!ol!es taking a customer%s payment. A later payment is then credited to the first customer%s customer%s account( not the second. second. And And on it goes. This This re4uires some control o!er billing to a!oid tipping off the last customer. Transaction )raud in!ol!es deleting( altering( or adding false transactions to di!ert assets to the perpetrator. perpetrator. "or e+ample( if an employee employee lea!es the business and the the super!isor fails to notify payroll and continues to clock the employee in and out( a fraudulent paycheck would be produced. 5f( in addition( the super!isor distributes distributes the paycheck( it can be kept( and cashed.
0. omputer omputer fraud fraud is easiest easiest at the data data collectio collection n stage. stage. 7hy 7hy ANS: omputer fraud is easiest at the data collection stage because much of what occurs after the data collection or input stage is not !isible to human eyes. 6nce entered( the system will presume that the input is legitimate and will process it as all others. 1. $+plain why collusion between employees employees and management management in the commission commission of a fraud is difficult to both pre!ent and detect. detect. ANS:
ollusion among employees in the commission of a fraud is difficult to both pre!ent and detect. This is particularly true when the collusion is between between managers and their their subordinate employees. employees. ;anagement plays a key role in the internal control structure of an organiation. They are relied upon to pre!ent and detect fraud among their subordinates. 7hen they participate in fraud with the employees o!er whom they are supposed to pro!ide o!ersight( the organiation%s organiation%s control structure is weakened( or completely circum!ented( and the company becomes more !ulnerable to losses. 11. 11. Since all all fraud in!ol! in!ol!es es some form of of financial financial missta misstatement tement(( how is Fraudulent Statement fraud Statement fraud different ANS: "raudulent statements are associated with management fraud. 7hile all fraud in!ol!es some form of financial misstatement( to meet the definition under this class of fraud scheme( the statement itself must bring direct or indirect financial benefit to the perpetrator. 5n other words( the statement is not simply a !ehicle for obscuring or co!ering a fraudulent act. "or e+ample( misstating the cash account balance to co!er the theft theft of cash does not fall under under this class of fraud scheme. scheme. 6n the other hand( understating liabilities liabilities to present a more fa!orable financial picture of the organiation to dri!e up stock prices does 4ualify. 4ualify. 12. $+plain $+plain the problem problemss associated associated with with lack of audito auditorr independen independence. ce. ANS: Auditing firms who are also engaged by their clients to perform non3accounting acti!ities such as actuarial ser!ices( internal audit outsourcing ser!ices( and consulting lack independence. They are essentially auditing their own work. This risk is that as auditors they will not bring to management%s attention detected problems that may ad!ersely affect their consulting fees. "or e+ample( $nron%s auditors F Arthur Andersen Andersen F were also their internal auditor%s and their management consultants. 1#. $+plain $+plain the problem problemss associated associated with with lack of direct director or independen independence ce ANS: ;any boards of directors are comprised of indi!iduals who are not independent. $+amples of lack of independence are directors who: ha!e a personal relationship by ser!ing on the boards of other directors companies? ha!e a business trading relationship as key customers or suppliers of the company? ha!e a financial relationship as primary stockholders or ha!e recei!ed personal loans from the company? ha!e an operational relationship as employees of the company. company. 1&. $+plain the problems problems associated with Guestionable Guestionable $+ecuti!e $+ecuti!e ompensation Schemes ANS: A sur!ey by Thompson "inancial re!ealed the strong belief that e+ecuti!es ha!e abused stock3based compensation. The consensus is that fewer stock options should be offered than currently is the practice. $+cessi!e use of of short3term stock options options to compensate directors directors and e+ecuti!es e+ecuti!es may result in short term thinking and strategies aimed at dri!ing up stock prices at the e+pense of the firm%s long3 long3 term health. 5n e+treme cases( financial statement misrepresentation misrepresentation has been the !ehicle to achie!e the stock price needed to e+ercise the option. 1). $+plain $+plain the problems problems associated associated with with inappropria inappropriate te accounting accounting practices practices.. ANS:
The use of inappropriate accounting techni4ues is a characteristic common to many financial statement fraud schemes. $nron made elaborate use of Special *urpose $ntities 8S*$9 to hide liabilities through off balance sheet accounting. 7orldom 7orldom management transferred transmission line costs from current e+pense accounts to capital accounts. This allowed them to defer some operating e+penses and report higher earnings. Also( Also( they reduced the book !alue of hard assets of ;5 by b y H#.& billion and increased goodwill by the same amount. Iad the assets been left at book !alue( they would ha!e been charged against earnings o!er four years. Coodwill( on the other hand( was amortied o!er much longer period. 1,. 1,. $+plai $+plain n the the purpo purpose se of of the the *A6'. *A6'. ANS: The Sarbanes36+ley Act creates a Pu+lic Co(pan& Accountin- !%ersi-ht oard .PCA!. The *A6' is empowered to set auditing( 4uality control( and ethics standards( to inspect registered accounting firms( to conduct in!estigations( and to take disciplinary actions. 1-. 7hy is an 5ndepen 5ndependent dent Audit Audit ommit ommittee tee importan importantt to a company company ANS: The Sarbanes36+ley Act re4uires all audit committee members to be independent and re4uires the audit committee to hire and o!ersee the e+ternal auditors. This pro!ision is consistent with many in!estors who consider the board composition to be a critical in!estment factor. "or e+ample( Thompson "inancial sur!ey re!ealed that most institutional institutional in!estors want corporate boards to be comprised of at least -)J of independent directors 1/. 7hat are the the key points points of the D5ssuer and ;anagement isclosureE of the Sarbanes36+ley Sarbanes36+ley Act ANS: 1. *ublic *ublic companie companiess must report report all all off balan balance3sh ce3sheet eet transac transactions tions.. 2. Annual Annual reports reports filed with with the S$ must include include a statement statement by managem management ent asserting asserting that that it is responsible for creating and maintaining ade4uate internal controls and asserting to the effecti!eness of those controls. #. 6fficers must must certify that that the company%s company%s accounts Kfairly Kfairly present% the firms financial condition condition and results of operations. Lnowingly filing a false certification is a criminal offence. 10. 5n this age of high technology technology and and computer based information information systems( systems( why are accountants accountants concerned about physical 8human9 8human9 controls ANS: This class of controls relates primarily to the human acti!ities employed in accounting systems. These acti!ities may be purely manual( such as the physical custody of assets( or they may in!ol!e the use of computers to record transactions or update accounts. *hysical controls do not relate to the computer logic that actually performs these accounting tasks. This is the subject matter of chapter 1,. =ather( they relate to the human acti!ities that initiate such computer logic. 5n other words( physical controls do not suggest an en!ironment in which clerks update paper accounts with pen and ink. >irtually >irtually all systems( regardless of their sophistication( sophistication( employ human acti!ities that need to be controlled. 2. Iow has the Sarbanes Sarbanes36+l 36+ley ey Act Act had a significan significantt impact on corporat corporatee go!ernance go!ernance ANS: The Sarbanes36+ley Act re4uires all audit committee members to be independent and re4uires the audit committee to hire and o!ersee the e+ternal auditors. This pro!ision is consistent with many in!estors who consider the board composition to be a critical in!estment factor. "or e+ample( a Thomson "inancial sur!ey re!ealed that most institutional institutional in!estors want corporate boards to be comprised of at least -) percent independent directors.
21. iscuss the the non accounting accounting ser!ices ser!ices that e+ternal auditors auditors are no longer permitted permitted to render render to audit audit clients under S6M legislation. legislation. ANS: The Act addresses auditor independence by creating more separation between a firm%s attestation and non3auditing acti!ities. acti!ities. This is intended to specify categories of ser!ices that a public accounting firm cannot perform for its client. These include the following nine functions: 'ookkeeping or other ser!ices related to the accounting records or financial statements? "inancial information systems design and implementation? Appraisal or !aluation ser!ices( fairness opinions( or contribution3in3kind contribution3in3kind reports? Actuarial ser!ices? 5nternal audit outsourcing ser!ices? ;anagement functions or human resources? 'roker or dealer( in!estment ad!iser( or in!estment banking ser!ices?
22. 7hat are the the key points points of the D5ssuer and ;anagement isclosureE of the Sarbanes36+ley Sarbanes36+ley Act ANS: The Sarbanes36+ley Act imposes new corporate disclosure re4uirements including: *ublic companies must report all off3balance3sheet transactions. transactions. Annual reports filed with the S$ must include a statement by management asserting that it is responsible for creating and maintaining ade4uate internal controls and asserting to the effecti!eness of those controls. 6fficers must certify that the company%s accounts accounts Dfairly presentE the firm%s financial condition and results of operations. Lnowingly filing a false certification is a criminal offence.
