Question

1. The following are various potential frauds in the sales and collection cycle:

   1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered.

   2. The allowance for doubtful accounts was understated because the company altered the aging of accounts receivable to reduce the number of days outstanding for delinquent receivables.

   3. The accounts receivable clerk stole checks received in the mail and deposited them in an account that he controlled. He issued credit memos to the customers in the amount of the diverted cash receipts.

   4. The company contacted a major customer and asked them to accept a major shipment of goods before year-end. The customer was told that they could return the goods without penalty if they were unable to sell the goods.

   5. A cashier stole cash receipts that had been recorded in the cash register.

   6. The company recorded “bill-and-hold sales” at year-end. Although the invoices were recorded as sales before year-end, the goods were stored in the warehouse and shipped after year-end.

   7. The company did not record credit memos for returns received in the last month of the year. The goods received were counted as part of the company’s year-end physical inventory procedures.

   8. A cashier stole cash receipts by failing to record the sales in the cash register.

   9. The CFO recorded fictitious credit sales at the end of the year without recording the associated cost of sales and reduction in inventory.

   Required

   1. Indicate whether the fraud involves misappropriation of assets or fraudulent financial reporting.

   2. For those frauds that involve misappropriation of assets, state a control that would be effective in preventing or detecting the misappropriation.

   3. For those frauds that involve fraudulent financial reporting, state an audit procedure that would be effective in detecting the fraud.

Answer 1

Ques Fraud Involves Control/Procedure Auditor should check that treatement and disclosure has |1. The company engaged in channel stuffing by shipping goods to customers that had not been been done properly. Also check the supporting Fraudulent finanacial documents and where appropriate talk to the ordered. repoting management for entering into unususal transaction 2. The allowance for doubtful accounts was understated because the company altered the aging of accounts receivable to reduce the number Fraudulent finanacial of days outstanding for delinquent receivables. 3. The accounts receivable clerk stole checks received in the mail and deposited them in an account that he controlled. He issued credit memos to the customers in the amount of the diverted cash receipts. Vetting of agrrements with suppliers. Checking the treatment and appropriate disclosures by the management in the account repoting Check originality of documents. Also the invoice should Misappropriation of be numbered. Signining authority of responsible persons. The maker checker concept should avail. assets 4. The company contacted a major customer and asked them to accept a major shipment of goods before year-end. The customer was told that they could return the goods without penalty if they were Fraudulent finanacial unable to sell the goods Proper accounting treatment and proper disclosures in the financial statements. The disclosre/treatment should correspond to the agreement enteres with suppliers repoting Segreggation of duties: the cashier should not be incharge of issuing receipts.For detecting larger frauds, analytical procedures and other comparisons may be useful 5. A cashier stole cash receipts that had been recorded in the cash register Misappropriation of assets Analytical procedures often signal revenue frauds especially gross margin percentage and accounts receivable turnover. Fictitious revenue overstates the grass margin percentage, and premature reveEnue elated u revenues also ferstates 6. The company recorded "bill-and-hold sales" at vear-end. Although the invoices were recorded as sales before year-end, the goods were stored in the Fraudulent finanacial warehouse and shipped after year-end. tof sales is not lower accounts receivable turnover, because the fictitious revenues are also included in uncollected receivables repoting 7. The company did not record credit memas for returns received in the last month of the year. The goods received were counted as part of the company's year-end physical inventory procedures. repoting Credit memos need to be checked and entries need to Fraudulent finanacial be entered into the accounting system.the auditor should make use of analytical procedures Segreggation of duties: the cashier should not be incharge of issuing receiptsTracing shipping documents the sales journal and accounting for all shipping documents can be used to verify that all sales sales entries Misappropriation o assets A cashier stole cash receipts by failing to record the sales in the cash register have been recorded, Fictitious revenue overstates the gross margin percentage, and premature revenue recognition also overstates gross margin if the related cost recognized. Fictitious revenues also lower accounts f sales is not 9. The CFO recorded fictitious credit sales at the end of the year without recording the associated cost of sales and reduction in inventory Fraudulent finanacial receivable turnover, because the fictitious revenues are repoting |also included in uncollected receivables.