TURNER, WEICKGENNANT & COPELAND_ ACCOUNTING INFORMATION SYSTEMS PROCESSES AND CONTROLS
TUTORIAL 3 CHAPTER 3
FRAUD, ETHICS AND INTERNAL CONTROLS
1. Describe why the control environment is regarded as the foundation of a business’s
system of internal control.
2. Identify the steps involved in risk assessment. Do you think it would be effective for
an organization to hire external consultants to develop its risk assessment plan? Why
or why not?
3. Discuss whether any of the following can be examples of customer fraud:
a. An employee billed a customer twice for the same transaction.
b. A customer remitted payment in the wrong amount.
c. A customer received merchandise in error, but failed to return it or notify the
sender.
4. Distinguish between internal and external sources of computer fraud.
5. Identify and explain the three types of internal source computer fraud.
6. Describe three popular program manipulation techniques.
7. What are the objectives of a system of internal control?
8. Distinguish among the three types of internal controls: preventive, detective and
corrective.
9. Identify the COSO report’s five interrelated components of internal controls.
10. Name the COSO report’s five internal controls activities.
11. Distinguish between general and specific authorization.
12. What are the factors that limit the effectiveness of internal controls?
13. Discuss the accuracy of the following statements regarding internal control:
The more computerized applications exist within a company’s accounting
system, the lower the risk will be that fraud or errors will occur.
The more involved top management is in the day-to-day operations of the
business, the lower the risk will be that fraud or errors will occur.
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TURNER, WEICKGENNANT & COPELAND_ ACCOUNTING INFORMATION SYSTEMS PROCESSES AND CONTROLS
14. Identify whether each of the following accounting positions or duties involves
authorization, recording, or custody:
cashier
payroll processor
credit manager
mailroom clerk
data entry clerk
deliver paychecks
deliver the bank deposit
prepare the bank reconciliation
check signer
inventory warehouse supervisor
staff accountant
15. Identify whether each of the following activities represents preventative controls,
detective controls, or corrective controls:
job rotation
preparation of a bank reconciliation
segregation of duties
recalculating totals on computer reports
use of passwords
preparing batch totals for check processing
establishing a code of ethics
use of a security guard
verifying source documents before recording transactions
matching supporting documents before paying an invoice
independent review of accounting reports
performing comparisons of financial statement items
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TURNER, WEICKGENNANT & COPELAND_ ACCOUNTING INFORMATION SYSTEMS PROCESSES AND CONTROLS
16. 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.
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.
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.
d. Accounts payable paid the vendors for the total quantity shown on the receiving
report.
e. Based on the receiving department supervisor’s instructions, quantities on the
receiving reports were not counted by sales personnel.
Required: Based on the above situations, identify fraudulent act(s), red flag(s) or
fraud symptom(s) and internal control weakness. Justify your answers.
17. Explain how the principle of separation of duties is violated in the following situation
and suggest one or more procedures to reduce the highlighted risk: “A payroll clerk
recorded a 40-hour work-week for an employee who had quit the previous week. He
then prepared a paycheck for this employee and cashed the check.”
18. During a recent review, ABC Corporation discovered that it has a serious internal
control problem. It estimated that the impact associated with this problem is $1
million and that the likelihood is currently 5%. Two internal control procedures have
been proposed to deal with the problem. Procedure A would cost $25 000 and
reduce likelihood to 2%. Procedure B would cost $30 000 and reduce likelihood to
1%.
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TURNER, WEICKGENNANT & COPELAND_ ACCOUNTING INFORMATION SYSTEMS PROCESSES AND CONTROLS
Required:
a. What is the estimated expected loss associated with ABC Corporation’s internal
control problem before any new internal control procedures are implemented?
b. Compute the revised estimate of expected loss if procedure A were implemented
and if procedure B were implemented.
c. Compare the estimated costs and benefits of procedures A and B. Based only on
cost/benefit estimates, which procedure should be implemented?
19. Management notice that an unexplained decrease in the gross profit percentage has
occurred.
a. Describe a possible cause of the condition observed by management.
b. Recommend controls to be implemented that would correct the observed
condition.