SOLUTIONS
CHAPTER 1
Solutions to Practice Questions
1.
| Recorded acquisitions are for goods received (occurrence) | Acquisitions are recorded (completeness) | Acquisitions are recorded accurately (accuracy) | Acquisitions are classified correctly (classification) | |
| Control Activities | ||||
| Vendors are rotated among purchasing agents | X | |||
| Purchase orders are required for all procurements | X | X | X | |
| Receiving reports are required for all receipts | X | X | X | |
| The numerical sequence of receiving reports are accounted for by accounts payable | X | |||
| There is a separate warehouse that counts goods obtained from the receiving department | X | X | X | |
| A physical inventory is taken periodically | X | X | X | X |
2. Duties should be separated as follows:
• Bookkeeping — Should be performed by accounts payable.
• Access to assets — Should be restricted to authorized personnel (warehouse personnel) and enforced by the use of keys and identification cards that are inspected by security personnel, or by some other means.
• Authorization of transaction — Using the example from this chapter, all departmental supplies requests had to be approved by the departmental manager. In addition, the purchasing department is the only department that should issue purchase orders.
• Independent reconciliation — A physical inventory should be performed with adequate frequency. The physical inventory should be observed by personnel independent of the warehouse department and test counts should be conducted by these independent personnel during the annual physical inventory.
3. The warehouse department makes an independent count of goods and has physical custody of the inventory. Frauds could occur if the warehouse department did not exist. An independent count of the goods that would be placed in storage would not be made. Receiving could steal some of the goods when they are received and not place them in storage. Additionally, receiving would have access to the stored goods and could abscond with the goods.
An error that could occur is that receiving might miscount the received goods and the company might pay for more or fewer goods than were actually received.
A mitigating control for the fraud (theft of inventory) would be to put a surveillance camera in the warehouse storage area to discourage theft of inventory. Additionally, higher-valued inventory might have additional physical access controls, such as segregating these items in a secure separate area of the warehouse.
A mitigating control for the miscount of goods received is to require the goods to be counted twice (by another individual). If there is not another individual, then the same person should count the goods twice.
Solutions to Knowledge Check Questions
1.
a. Correct. The process that does not require vendor invoices in order to make a payment to a supplier is termed an evaluated receipts settlement.
b. Incorrect. Electronic data interchange is a standard method for electronically transmitting business transactions between trading partners.
c. Incorrect. Supply chain management is a method used by retailers and others to manage inventory acquisitions
d. Incorrect. Receiving and warehousing is a process where purchased goods are received and stored in a warehouse.
2.
a. Incorrect. Although access to assets may be reviewed when performing a physical inventory, the physical inventory is an example of independent reconciliation.
b. Correct. The taking of a physical inventory is an example of the control of independent reconciliation.
c. Incorrect. Authorization would be required to move inventory out of a warehouse or to purchase inventory.
d. Incorrect. Bookkeeping is performed by accounts payable and involves the keeping of records; the taking of physical inventory is an example of independent reconciliation.
3.
a. Correct. A purchase requisition is prepared before a purchase order is prepared.
b. Incorrect. A purchase order is prepared after a purchase requisition is prepared.
c. Incorrect. A receiving report is prepared when goods are received.
d. Incorrect. A debit memo is prepared after the goods are received if the goods are determined to be substandard.
4.
a. Correct. The receiving department comparing the purchase order information on the packing slip with the purchase order is a control activity that achieves the accuracy control objective.
b. Incorrect. The receiving department comparing the purchase order information on the packing slip with the purchase order is a control activity that achieves the accuracy control objective. An example of an activity that achieves the completeness control objective is accounting for the numerical sequence of receiving reports, purchase requisitions, and purchase orders.
c. Incorrect. A classification objective is providing assurance that the correct accounts are updated for a transaction, not providing assurance that all transactions are accurate.
d. Incorrect. The receiving department comparing the purchase order information on the packing slip with the purchase order is a control activity that achieves the accuracy control objective. An example of a control activity that achieves the occurrence objective is when large purchase requisitions require a second approval.
CHAPTER 2
Solutions to Practice Questions
1.
| Cash disbursements are for goods received (occurrence) | Cash disbursements are recorded (completeness) | Cash disbursements are recorded accurately (accuracy) | Cash disbursements are classified correctly (classification) | Cash disbursements are recorded in the proper time period (cutoff) | |
| Control Activities | |||||
| Voucher packages are canceled | X | X | X | ||
| The numerical sequence of voucher packages is accounted for by A/P | X | X | |||
| A check register is prepared | X | ||||
| The bank account is reconciled by an independent employee | X | X | X | ||
| Checks are prepared based upon the voucher package cover sheet | X | ||||
| The receiving department inspects and counts the goods | X |
2. Duties should be separated as follows:
• Bookkeeping — Performed by the accounts payable and general ledger departments. These departments should be under the controller's division.
• Access to assets — Checks should be prepared by the cashier's department. Checks should be signed by an approved check signer. Checks over a certain dollar amount should require dual signatures. Checks should be mailed by either the check signer or his or her subordinate. Both the cashier and the check signer should be under the treasurer's division.
• Authorization of transactions — All transactions should be approved both by the requesting department and the purchasing department. A list of approved vendors should be maintained and purchases should only be made from vendors on this list.
• Independent reconciliation — Periodically, the subsidiary accounts receivable should be reconciled to the control account. The bank account should be reconciled by an independent employee.
3. Check tampering ($143,000), Billing ($100,000), and Payroll ($48,000).
4. Positive Pay is an automated fraud detection tool offered by most banks. The bank matches the account number, check number and dollar amount of each check presented for payment against a file of checks that was electronically transmitted to the bank by the bank's customers. If the account number, check number, and dollar amount for each check that is presented for payment do not match the file previously submitted by the bank's customer, then the bank will not honor (pay) the check.
Solutions to Knowledge Check Questions
1.
a. Incorrect. The cashier should be under the treasurer's division.
b. Correct. The accounts payable and general ledger departments should be under the controller's division.
c. Incorrect. The accounts payable and general ledger departments should be under the controller's division, not the chief executive officer.
d. Incorrect. The accounts payable and general ledger departments should be under the controller's division, not the chief legal officer.
2.
a. Correct. A voucher package is forwarded from the accounts payable department to the cashier.
b. Incorrect. A completed check, except for signature, is forwarded from the cashier to the check signer.
c. Incorrect. A sales order is prepared by the sales department.
d. Incorrect. A bill of lading is a document forwarded from the shipping department to the accounts receivable department.
3.
a. Incorrect. According to a study by the Association of Certified Fraud Examiners, the largest median loss of cash disbursement frauds was due to check tampering. Payroll schemes ranked third on their list.
b. Correct. According to a study by the Association of Certified Fraud Examiners, the largest median loss of cash disbursement frauds was due to check tampering.
c. Incorrect. Cash on hand median loss of cash disbursement frauds did not rank first on the Association of Certified Fraud Examiners' list.
d. Incorrect. Expense reimbursement cash disbursement frauds did not rank first on the Association of Certified Fraud Examiners' list.
4.
a. Correct. BEC is a fraud scheme that uses email to deceive an employee to make fraudulent payments
b. Incorrect. ATM is an automated teller machine.
c. Incorrect. Check 21 is a law that permits the electronic processing of paper checks.
d. Incorrect. EDI, electronic data interchange, allows businesses to process transactions electronically in a standardized format.
CHAPTER 3
Solutions to Knowledge Check Questions
1.
a. Incorrect. A deposit ticket is a document provided by the bank as proof that a deposit was made.
b. Correct. A pay stub is a negative confirmation to the employee of current and year-to-date payroll information.
c. Incorrect. A payroll check is a document issued for payment of salary and wages.
d. Incorrect. A payroll register is a summary of all the payroll activity during a period.
2.
a. Correct. The only department that should be able to modify the fields in each employee's personnel file is the human resources department.
b. Incorrect. The payroll department should not be able to modify fields in an employee's personnel file.
c. Incorrect. The production department should not be able to modify fields in an employee's personnel file.
d. Incorrect. Accounts payable should not be able to modify fields in an employee's personnel file.
3.
a. Correct. A preventive control that only allows charges for certain travel-related activities and has limits is a procurement card.
b. Incorrect. Matching receipts with credit card statements is a detective control for appropriate expenses that might not be authorized under entity policy (type and amount of expense not allowed); it does not prevent the employee incurrence of certain travel-related charges.
c. Incorrect. Investigating travel expense budget variances is a detective, not preventive, control and does not prevent the employee incurrence of certain travel-related charges.
d. Incorrect. Reviewing travel expense charges to certain jobs for accuracy is a detective, not preventive, control that does not prevent the employee incurrence of certain travel-related charges.
CHAPTER 4
Solutions to Knowledge Check Questions
1.
a. Correct. According to the Association of Certified Fraud Examiners' study, most fraud cases were detected by tip (39.1 percent).
b. Incorrect. According to the Association of Certified Fraud Examiners' study, most fraud cases were detected by tip,(39.1 percent), not management review (13.4 percent)
c. Incorrect. According to the Association of Certified Fraud Examiners' study, most fraud cases were detected by tip (39.1 percent), not internal auditors (16.5 percent).
d. Incorrect. According to the Association of Certified Fraud Examiners' study, most fraud cases were detected by tip (39.1 percent), not external auditors (3.8 percent).
2.
a. Incorrect. Haphazard sampling is not a form of statistical sampling.
b. Correct. MUS statistical sampling method is biased toward selecting physical units with large recorded balances.
c. Incorrect. Block sampling is not a form of statistical sampling.
d. Incorrect. Simple random sampling is a technique where each item in the population has an equal chance of being selected and is not biased towards selecting physical units with large recorded balances.
3.
a. Incorrect. An employee being told that he or she is under surveillance is a preventive, not a detective, control. A surveillance detective control example would be a retail store mystery shopper who is unknown to entity personnel.
b. Correct. An employee being told that he or she is under surveillance is a preventive control. Hopefully, the employee will make fewer errors and not perpetrate a fraud if he or she is aware of the surveillance.
c. Incorrect. Although segregation of duties can be classified as a preventive or detective control or both, this control does not rely upon surveillance.
d. Incorrect. Analytical procedures are typically used to detect anomalies which are the subject of additional investigation.