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.
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.
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.
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...
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