Case 1 Cal Smith Jr. is the night manager at a local doughnut shop that is doing very well. The shop sells doughnuts 7 days a week, 24 hours a day. day. Cal runs the graveyard shit !y himsel, since none o the other employees want to work at night. Since opening si" months ago, Cal has not !een a!le to #nd anyone to work or him and thereore has never missed one day o work. Cal makes his deposit every morning !eore going home. Cal eels that he is overworked and underpaid. The ranchise owner, $enny Jones, has praised Cal or his hard work and dedication to the company. $enny%s only concern is that, once or twice a week, an entire !atch o traditional gla&ed doughnuts has !een thrown away !ecause o over'!aking. (espite these pro!lems, Cal maintains a clean work environment and is considered a valua!le employee. )ecently, Cal has yelled at people on shits !eore and ater him or seemingly insigni#cant reasons. *e was hired as manager !ecause he gets along with everyone and is usually easygoing. *is recent irrita!ility could stem rom the act that !usiness is slowing down and he does not have much interaction with anyone at night. *e also has !een complaining that he has not !een getting very much sleep. +ne day, Cal came to work in a new - -/, the car o his dreams. Cal said that his dad helped him !uy the car. 1. hat areas o the !usiness are most at risk or raud0 2. dentiy any symptoms o raud that appear to e"ist at the doughnut shop. /. hat steps could !e taken to reduce opportunities or raud0
nswer 3
1. The !usiness !usiness is at risk risk !ecause !ecause there is no separati separation on o duties. duties. Cal Smith, Jr. Jr. works the night shit alone and then accounts or and deposits the money at the !ank in the morning 2. ossi!l ossi!le e symp symptom toms3 s3 Cal has never missed a day o work. Cal eels he is overworked and underpaid. 5umerous doughnuts are thrown away or over !aking. Cal was hired !ecause he was riendly6 he is now oten angry and rustrated. Cal has not !een getting very much sleep. Cal recently purchased the car o his dreams. /. ossi!l ossi!le e steps to reduce reduce opportu opportunities nities or raud3 raud3 *ave other employees work at night. (o not allow Cal to make the deposits or handle cash. orce Cal to take some time o8 periodically. ay Cal more money so he does not eel overworked and underpaid. • • • •
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Case 2 James (avis owns a small nternet service provider !usiness. )ecently, customers have !een complaining that they are overcharged and are not receiving timely customer service. illing rates seem to increase without notice. ive years ago, James used unding rom several di8erent investors in order to start his nternet service. Currently, he has 17 outstanding !ills to !e paid, all with late charges. ive o the !ills include notices stating that lawsuits are pending. lso, he has not paid dividends to investors i nvestors in two years. 9very day, James drives either his -ercedes en& or his new :e"us to work. eore starting the !usiness, James drove only one car, a Su&uki Samurai. James now lives in a palatial home and owns very e"pensive urniture. 9mployees constantly ask James or new e;uipment, !ut the
weeks ago, James was irate and #red one o his accounting clerks or not depositing some checks on time. James is known or losing his temper. 1. (iscuss any raud symptoms that are present in this case. 2. hy would complaints rom customers !e a raud symptom0 nswer 3
It is possible that James could be committing fraud.
1. raud symptoms3 +utstanding !ills need to !e paid. :awsuits are pending rom lack o payment. James drives nice cars. James has a very e"pensive home. James will not update e;uipment. James is known or losing his temper. -any customers are complaining. 2. -ost !usinesses e"perience customer complaints. hile customer complaints are common, they can !e possi!le raud symptoms, especially i customers do not !elieve their accounts or charges appear appropriate. henever tips or complaints are received, they must !e treated with care and considered as possi!le raud symptoms !ut not as actual evidence o raud. • • • • • • •
Case Study 1 The !alance sheet and income statement or C Company or the years 2>11 and 2>12 are as ollows3
?uestions 1. erorm vertical and@or hori&ontal analysis o the statements and identiy two things that appear to !e unusual and could !e possi!le symptoms o raud.
nswer The following are four possible symptoms:
1. 2. /. 4.
C%s revenues increased !y A/B in 2>>7, while inventory decreased !y 27B. C has increased revenues in 2>>7, while receiva!les decreased !y 2/B. C has increased revenues in 2>>7, while paya!les decreased !y 47B. arehousing costs have increased while inventory !alances have decreased.
