week 2 homework

docx

School

DeVry University, Chicago *

*We aren’t endorsed by this school

Course

454

Subject

Accounting

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by ragu1363

Terrence M. Ragusa ACCT 454 Week 2 Homework For: Professor Hubler Case 5.2 - Heirloom Photo Plans 1. Explain how Heirloom could defraud the bank and how each internal and external party, except the bank, could defraud Heirloom. 2. What risk factor, unusual item, or abnormality would alert you to each fraud? 3. What control weaknesses make each fraud possible? 4. Recommend one or more controls to prevent or detect each means of committing fraud Answers Heirloom defraud bank: 1. Heirloom could defraud the bank by manipulating its financial statements. For instance, it can create false sales, unusual profits and exaggerate its assets.  Risk Factor: Increase in sales and profits without a relative increase in current assets and receivables. Sales commissions higher than those in the industry.  Weakness: No independent audit report mentioned by the bank.  Recommendation: Carrying out an external and independent audit. Analysis of Heirloom’s financial statements like the profit and loss, and balance sheet. Other Parties except the bank could defraud Heirloom: 1. Photographers could defraud Heirloom by submitting unused coupons. The photographers could change the names of customers that didn’t use their coupons, print them out and submit them.  Risk Factor: An increase in the number of customers using coupons. Complaints from customers. Cases of unauthentic coupons.  Weakness: Customers don’t sign their coupons unless they are checking for a sitting. Photographers can send coupons to customers that are not current.  Recommendation: Number all the coupons before they are used. Require that the photographers confirm that all customers are current before any sitting. 2. Accounting Employees could defraud Heirloom by stealing cash receipts and writing off the accounts receivables.  Risk Factor: Large amounts reported in bad debts accounts. An increase in accounts written off.  Weakness: Cash receipt and posting to financial statements are done by one person. No periodic statements .  Recommendation: Separate the activities of receiving cash from posting. Incorporation of Segregation of Duties. 3. The sales force could steal part cash receipts from sales. They could also falsify their sales to reach an incentive level in ways like booking fake contracts and sending correspondences to their own addresses.  Risk Factor: A decrease in the number of customers paying $900. Customer complaints. Increase in accounts written off.  Weakness: Steep incentive levels that attract unwanted behaviors. No checking of customer credit. No verification of customer addresses and phone numbers.

 Recommendation: Check customer credit, phone numbers and addresses. Analyzing the sales arising from sales force that barely reach an incentive. Base the incentives from actual customer collections but not from the reported sales. 4. The Management could defraud the Heirloom by carrying out transactions acting in their self-interest and without involving the owners of the company.  Risk Factor: Salaries increased, large amounts reported in expense account. Prices increase for assets purchased and low liquidity.  Weakness: No internal controls that prevent the management from defrauding the owners.  Recommendation: Require all payments or purchase transactions be approved by owners. Carry out external and independent audit. 5. Some customers can defraud Heirloom by using the coupons that have not been fully payed.  Risk Factor: An increase in sittings per current customer. Complaints from photographers. Submission of coupons whose customers are already written off.  Weakness: Lack of verification if all customers are current before any sitting. Coupons are given to customers at their initial purchase.  Recommendation: Require photographers to verify all customers before any sitting. Keep a clear record of customer payments. Enhance credit checks on all customers. 7.1 You are an audit supervisor assigned to a new client, Go-Go Corporation, which is listed on the New York Stock Exchange. You visited Go-Go’s corporate headquarters to become acquainted with key personnel and to conduct a preliminary review of the company’s accounting policies, controls, and systems. During this visit, the following events occurred: The information you have obtained suggests potential problems relating to Go-Go’s internal environment. Identify the problems, and explain them in relation to the internal environment concepts discussed in this chapter A. You met with Go-Go’s audit committee, which consists of the corporate controller, treasurer, financial vice president, and budget director. The problem here is that the audit committee staff needs to be with another independent company and the members need to be on the company’s board of directors. This is not what is happening here at Go-Go Corporation.

The solution that I have is that all of the members on the audit committee need to be members of the board of directors. None of these members can be employees of Go- Go Corporation, they need to work for a different company. B. You recognized the treasurer as a former aide to Ernie Eggers, who was convicted of fraud several years ago. The problem with this is the treasurer deals with managing the cash as well as the other financial assets so it is very important that the treasurer be an employee that is committed to integrity and ethical values. I am not saying that this person has not learned their lesson and is now living the straight and narrow road but I am not sure the new company, Go-Go, would hire someone that has been convicted of fraud as the treasurer in the past. The only solution that I have for this is to look through the office policies and human resource standards to see what the company states anything about the treasurer being linked to any past fraud accusations or convictions. A. Management explained its plans to change accounting methods for depreciation from the accelerated to the straight-line method. Management implied that if your firm does not concur with this change, Go-Go will employ other auditors. The problem here is I don’t understand why a company would want to change from depreciation from the accelerated to the straight-line method. The only reason that I could think of would be that it cuts down the depreciation expense, which would increase the net income and could possibly raise the company’s stock price. The solution would be for the company to have a strong reason on why the want to change the accounting method besides just wanting to increase the new income or stock prices. With the commitment to integrity and ethical values, the management does not have a valid reason for wanting to make this type of change so this decision should be looked at more closely. B. You learned that the financial vice president manages a staff of five internal auditors.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

The problem is that the internal auditors is not logistically free of the accounting and finance tasks. The solution is to incorporate organization structure and board of director requirements that govern that the internal audit reports go through the audit team on the board of directors instead of the financial vice president. E. You noted that all management authority seems to reside with three brothers, who serve as chief executive officer, president, and financial vice president. The problem here is that the management’s philosophy and operating style can cause a conflict of interest with the rest of the staff. The CEO, President, and FVP are all living together which could cause the three to dominate the whole company. Don’t get me wrong, just because the company is being ran by three brothers does not mean that they will commit any crime, but there could be a possibility. The solution would be to look into the situation and see if this trio is causing an internal control problem. F. You were told that the performance of division and department managers is evaluated on a subjective basis, because Go-Go’s management believes that formal performance evaluation procedures are counterproductive. The problem here is with management’s human resource standards as well as their monitoring system. Subjective evaluations are not as effective because they are not done on a regular basis and they are not as good in finding the problems with the performance of the employees. The solution would be to conduct quarterly performance evaluations to make sure there are no holes in the internal control.

G. You learned that the company has reported increases in earnings per share for each of the past 25 quarters; however, earnings during the current quarter have leveled off and may decline. The problem is that management is trying to cover up the decline in the last quarter. The management’s philosophy and operating style and their commitment to integrity and ethical values can be questioned when any company is faced with declined revenue. The solution would be to perform an audit because there are companies that are committing frauds in connection to prop up earnings. H. You reviewed the company’s policy and procedures manual, which listed policies for dealing with customers, vendors, and employees. The problem is that the policy and procedures manual is incomplete because it only listed policies dealing with customers, vendors, and employees. In the complete policy and procedures manual, one of the methods of assigning authority and responsibility is printed in black and white for all employees to see. The solution would be to either rewrite the manual or complete what is already written. The manual needs to go more in depth about the best business practices, go in depth about the experience need by upper management, along with the policies management expects when dealing with certain transactions and documents. This manual should be a useful tool for all employees to use not just for the new employees but for long timers as well. It would also be updated on a yearly basis to include new policies and procedures. I. Your preliminary assessment is that the accounting systems are well designed and that they employ effective internal control procedures. The problem here is that no system is 100% safe. Even if the accounting system is designed to be safe, management can override the internal controls which can create a weak system.

The solution would be not to fully rely on the internal control procedures until they have been tested and they continue to go through tests on a random monthly basis. J. Some employees complained that some managers occasionally contradict the instructions of other managers regarding proper data security procedures. The problem here is that the managers are not on the same page with the policies and procedures. The solution is for the company to have organizational structure. A company’s organizational structure defines its lines of authority, responsibility, and reporting and provides the overall framework for controlling and monitoring its operations. There should be a manager in charge of different responsibilities so that there is not confusion between different managers. The policy and procedures manual should be referred to before employees approach the manager and if their question is not answered by reading the manual they then can approach the assigned manager for that question. K. After a careful review of the budget for data security enhancement projects, you feel the budget appears to be adequate. This does not seem to be a problem to me. The company is disturbing their budget properly and is not causing budget issues. L. The enhanced network firewall project appeared to be on a very aggressive implementation schedule. The IT manager mentioned that even if he put all of his personnel on the project for the next five weeks, he still would not complete the project in time. The manager has mentioned this to company management, which seems unwilling to modify the schedule. The problem is that the firewall operation schedule is not acceptable.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

My solution is that management’s philosophy and operating style need to be assessed. The manager may be giving too much pressure to the employees to produce results that are unachievable. M. Several new employees have had trouble completing some of their duties, and they do not appear to know who to ask for help. The problem here seems that the employees have not been properly trained and they are not referring to their policy and procedures manual. Since the employees don’t know who to talk to for help, it seems that the company’s organizational structure and methods of assigning authority and responsibility are missing. My solution to this would be good human resource standards that involve that proper training programs for new employees. Going over the policy and procedures manual is mandatory during training. I think that continuous training thought-out all employees time at any company is the best way to avoid a situation like this. N. Go-Go’s strategy is to achieve consistent growth for its shareholders. It also has a policy not to invest in any project unless its payback period is no more than 48 months and yields an internal rate of return that exceeds its cost of capital by 3%. This does not seem to be a problem, in my opinion. This is a risk that Go-Go is willing to make but it does not violate any laws. O. You observe that company purchasing agents wear clothing and exhibit other paraphernalia from major vendors. The purchasing department manager proudly displays a picture of himself holding a big fish on the deck of a luxury fishing boat that has the logo of a major Go-Go vendor painted on its wheelhouse. I see this being a problem because the gifts from the vendors can sometimes sway the purchasing agents to buy more goods from the vendors that give these gifts. All of the decisions on purchasing should be on free will.

The solution would be to put in writing in the policy and procedures manual that there will be no favoritism between vendors based solely on gifts. The integrity and commitment to ethical values and competence should be understood by all employees and should be flowed by all as well. There should also be a code of conduct that is flowed, methods of assigning authority and responsibility which every employee need to be aware of. If it is found out that employee has taken a bride from a vendor for purchase orders, that employee will be reprimanded as upper management sees fit.