Chapter 3 - Assignment - Marcellana, Ariel P. - Bsa-31

MARCELLANA, ARIEL P.
BSA-31
ESSAY
1. The text describes six internal control activities. List four of them and provide a specific
example of each one.
- Establish a document trail
Prepare the proper documents (source documents) to support business activities that have
occurred. Use prenumbered purchase orders for purchases. Use prenumbered invoices to bill
customers and account for any missing invoices. Use a preestablished chart of accounts. all
accounts in the general ledger
- Establish responsibilities
Assign responsibilities to persons accountable for functions within an organization. A bank
teller or cashier is responsible for reconciling his or her assigned cash tray and ensuring that
there is no cash or fund shortage at the end of a shift. The manager is responsible for
authorizing expenditures within his or her own operating department or cost center.
Disbursement checks greater than $2,500 must have two signatures.
-Establish policies and procedures

Establish and communicate well-designed and clear policies and procedures. Provide fair and
equitable hiring policies and practices. Provide fair and equitable guidelines for promotions
and salary increases. Clearly communicate and provide access to policies, including a code of
ethics. Make it mandatory for employees to take vacation time, and rotate duties and
responsibilities.
- Review operating performance

Conduct operational reviews and operational audits with an internal audit team. The team
reports to the audit committee to enhance objectivity of the reviews. The team conducts a
biannual review of operating departments and reports its findings to the audit committee. The
team periodically reviews the efficiency and effectiveness of operations and controls. The
team recommends corrective action.
2. Contrast management fraud with employee fraud.

- The management fraud is more insidious than employee fraud because it often escapes
detection until the organization has suffered irreparable damage or loss. Management fraud
usually does not involve the direct theft of assets while employee fraud is fraud by non-
management employees. It is generally designed to directly convert cash or other assets to the
employee’s personal benefit. If a company has an effective system of internal control,
defalcations or embezzlements can usually be prevented or detected.
3. Why are the computer ethics issues of privacy, security, and property ownership of interest to
accountants?
- The use of information technology in business has had a major impact on society and thus
raises significant ethical issues regarding computer crime, working conditions, privacy, and
more to protect the data. So that, not anyone will access in the data and not anyone will do
fraud.
4. According to common law, there are five conditions that must be present for an act to be
deemed fraudulent. Name and explain each.
- The five conditions that must be present for an act to be deemed fraudulent are False
Representation, There must be a false statement or a nondisclosure. Material fact, a fact must
be a substantial factor in inducing someone to act. Intent, there must be the intent to deceive
or the knowledge that one’s statement is false. Justifiable reliance, the misrepresentation must
have been a substantial factor on which the injured party relied. Injury or loss, the deception
must have caused injury or loss to the victim of the fraud.
5. Management fraud is regarded as more serious than employee fraud. Three special
characteristics have been discussed for management fraud. What are they? Explain.
- The three special characteristics are the: First, fraud is perpetrated at levels of management
above the one to which internal control structures generally relate. Second, the fraud
frequently involves using the financial statements to create an illusion that an entity is
healthier and more prosperous than, in fact, it is. Lastly, if the fraud involves misappropriation
of assets, it frequently is shrouded in a maze of complex business transactions, often involving
related third parties.
6. Four principal types of corruption are discussed. Name all four and explain at least two.
- The four types of corruption are bribery, illegal gratuity, conflict of interest, and economic
extortion. In bribery, involves giving, offering, soliciting, or receiving things of value to
influence an official in the performance of his or her lawful duties. In illegal gratuity, involves
giving, receiving, offering, or soliciting something of value because of an official act that has
been taken. This is similar to a bribe, but the transaction occurs after the fact.
7. Misappropriation of assets can involve various schemes: expense reimbursement fraud,

lapping, and payroll fraud. Explain each and give an example.
- The expense reimbursement fraud involve false or inflated expense reimbursements.
Example, a company salesperson files false expense reports. The cash larceny involves
schemes in which cash receipts are stolen from an organization after they have been recorded
in the organization’s books and records. Example, lapping. The payroll fraud is the
distribution of fraudulent paychecks to existent and/or nonexistent employees. Example,
worker misclassifications.
8. Distinguish between skimming and cash larceny. Give an example of each

- Skimming involves stealing cash from an organization before it is recorded on the
organization’s books and records. Example, an employee who accepts payment from a
customer but does not record the sale while cash larceny involves schemes in which cash
receipts are stolen from an organization after they have been recorded in the organization’s
books and records. Example, lapping.
9. Explain why collusion between employees and management in the commission of a fraud is
difficult to both prevent and detect.
- Management supposed to know the risks and check if there is a fraud. It is difficult to find
the fraud if the management is participated in fraud because, they protect the employees who
is doing the fraud.
10. Since all fraud involves some form of financial misstatement, how is Fraudulent Statement
fraud different?
- All fraud involves some form of financial misstatement, to meet the definition under this
class of fraud scheme the statement itself must bring direct or indirect financial benefit to the
perpetrator. In other words, the statement is not simply a vehicle for obscuring or covering a
fraudulent act.
11. Standards requires auditors obtain an understanding of an organization’s control environment.

Discuss two techniques that may be used to obtain such understanding.
- If you’re a firm believer in the adage that “you get what you measure.” If you have met with
some organizations that consider their annual audit to be that measuring stick. If you find
yourself in that boat, it is time to change course.
- A strong internal audit and/or compliance function is critical to assessing and maintaining
your control environment. Personnel with the experience and skill-sets specific to your
organization should be secured. If that is not possible, external entities should be engaged
periodically to assess the environment to provide management with an accurate picture of the
organization’s control environment. Please see our blog discussing the value of internal
auditors.
12. Standards requires auditors to obtain sufficient knowledge of the organization’s risk
assessment procedures to understand how management identifies, prioritizes and manages
financial reporting risk. List five circumstances that can cause risks to arise or change.
- Strategic Risk: They are the risks associated with the operations of that particular industry.
These kind of risks arise from:
a. Business Environment: Buyers and sellers interacting to buy and sell goods and services,
changes in supply and demand, competitive structures and introduction of new technologies.
b. Transaction: Assets relocation of mergers and acquisitions, spin-offs, alliances and joint
ventures.
c. Investor Relations: Strategy for communicating with individuals who have invested in the
business.
- Financial Risk: These are the risks associated with the financial structure and transactions of
the particular industry.
- Operational Risk: These are the risks associated with the operational and administrative
procedures of the particular industry.
- Compliance Risk (Legal Risk): These are risks associated with the need to comply with the
rules and regulations of the government.
- Other risks: There would be different risks like natural disaster (floods) and others depend
upon the nature and scale of the industry
13. Explain the problems associated with inappropriate accounting practices.

- Management fraud is more insidious than employee fraud because it often escapes detection
until the organization has suffered irreparable damage or loss.
It usually occurs at levels above the normal internal control system. There is typically an
intent to present a better picture of the business than is valid, often to deceive creditors and/or
shareholders.
If assets are misappropriated, the route is quite devious involving a maze of business
transactions.
14. Define and describe the importance of physical controls.

- Physical controls do not relate to the computer logic that actually performs accounting tasks.
Rather, they relate to the human activities that trigger and utilize the results of those tasks.
These activities may be purely manual, such as the physical custody of assets, or they may
involve the physical use of computers to record transactions or update accounts
15. Define and describe a conflict of interest.

- Conflict of interest occurs when an employee acts on behalf of a third party during the
discharge of his or her duties or has self-interest in the activity being performed. When the
employee’s conflict of interest is unknown to the employer and results in financial loss, then
fraud has occurred
16. Describe the factors that constitute the fraud triangle. Why is it important to auditors?
- The factors that constitute the fraud triangle are: First, situational pressure, which
includes personal or job-related stresses that could coerce an individual to act dishonestly.
Second, opportunity, which involves direct access to assets and/or access to information that
controls assets. Lastly, ethics, which pertains to one’s character and degree of moral
opposition to acts of dishonesty. It is important to auditors, it is shown that the auditor’s
evaluation of fraud is enhanced when the fraud triangle factors are considered.
17. Define each of the following input controls and give an example of how they may be used:
a. Missing data check - identifies blank or incomplete input fields.
b. Numeric/alphabetic data check - identifies data in the wrong form

c. Limit check - identify fields that exceed authorized limits.
d. Range check - verify that all amounts fall within an acceptable range
e. Reasonableness check - verify that amounts that have based limit and range checks are
reasonable.
f. Validity check - compare actual fields against acceptable values.
18. If input and processing controls are adequate, why are output controls needed?
- Output controls are needed, it address what is done with the data and should compare output
results with the intended result by checking the output against the input. Output controls find
the errors and verify the accuracy and reasonableness of output data after processing is
complete.

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MARCELLANA, ARIEL P.

-Establish policies and procedures

- Review operating performance

2. Contrast management fraud with employee fraud.

7. Misappropriation of assets can involve various schemes: expense reimbursement fraud,

8. Distinguish between skimming and cash larceny. Give an example of each

11. Standards requires auditors obtain an understanding of an organization’s control environment.

13. Explain the problems associated with inappropriate accounting practices.

14. Define and describe the importance of physical controls.

15. Define and describe a conflict of interest.

b. Numeric/alphabetic data check - identifies data in the wrong form

f. Validity check - compare actual fields against acceptable values.

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