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?

Q: Expert Answer

(a) To determine Explain the reasons for the procedures that are listed in the chapter are insufficient for stopping the frauds. Explanation 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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Financial Accounting

15th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781337272124

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Answer 2

BuyFind

Financial Accounting

15th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781337272124

Solutions

Chapter

Section

Answer 3

Solutions

Chapter

Section

Answer 4

Chapter

Section

Answer 5

(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...

Answer 6

(b)

To determine

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

Financial Accounting

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