Chapter 5 Problems
5.1. You were asked to investigate extremely high, unexplained merchandise shortages at a department store chain. You found the following: a. The receiving department supervisor owns and operates a boutique carrying many of the same labels as the chain store. The general manager is unaware of the ownership interest. -- It is a red flag warning so it is a fraud because there is a conflict of interest situation which should have alerted the auditor to the possibility of fraud.
b. The receiving supervisor signs receiving reports showing that the total quantity shipped by a supplier was received and then diverts 5% to 10% of each shipment to the boutique. --There is a false representation so this is a fraudulent act.
c. The store is unaware of the short shipments because the receiving report accompanying the merchandise to the sales areas shows that everything was received. --There is intent to deceive as indicated by the efforts to conceal the act so this is also a fraudulent act by the supervisor of receiving. It is not due to an act by the buyers.
d. Accounts Payable paid vendors for the total quantity shown on the receiving report. --It is unrelated to the investigation so this is a weakness in the system of internal control.
e. Based on the receiving department supervisor’s instructions, quantities on the receiving reports were not counted by sales personnel. --The receiving supervisor is advocating a system of a weak internal control so this is an indicator of fraud.
Classify each of the five situations as a fraudulent act, a fraud symptom, an internal control weakness, or an event unrelated to the investigation. Justify your answers.
5.2. A client heard through its hot line that John, the purchases journal clerk, periodically enters fictitious acquisitions. After John creates a fictitious purchase, he notifies Alice, the accounts...