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A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as “sold,” and required sales orders to be backdated so that the sale could be moved to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony. a. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud? b. How could this type of fraud be stopped?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 8, Problem 8E
Textbook Problem
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A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as “sold,” and required sales orders to be backdated so that the sale could be moved to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony.

  1.        a.            Chapter 8, Problem 8E, A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear , example  1 Why might control procedures listed in this chapter be insufficient in stopping this type of fraud?
  2.       b.            Chapter 8, Problem 8E, A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear , example  2 How could this type of fraud be stopped?

(a)

To determine

Explain the reasons for the procedures that are listed in the chapter are insufficient for stopping the frauds.

Explanation of Solution

Internal Control: Internal control refers to the policies, and plans of the business organization along with other measures with a view to safeguard its assets, encourage the employees to adhere to the plans, to improve on the operational efficiency, and to ensure correct and reliable accounting information.

Five elements of internal control are as below:

  • Control Environment: Control Environment refers to the attitude of top brass of the company or the corporate culture. The top brass of the company must set the tone to improve the morale for rest of the employees of the business.
  • Risk assessment: The business must be able identify the risk associated with it, and accordingly use the internal control to safeguard its assets and ensures fairness in presentation in accounting information.
  • Control procedures: The objective of setting the control procedure is to ensure that the business achieves its objectives...

(b)

To determine

Explain the ways through which frauds happened above can be stopped.

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Chapter 8 Solutions

Financial Accounting
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