Complete
Solutions for Accounting Information System 12e by Marshall B. Romney Paul J. Steinbart
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CHAPTER 5
COMPUTER FRAUD
5.1 Do you agree that the most effective way to obtain adequate system
security is to rely on the integrity of company employees? Why or why not? Does
this seem ironic? What should a company do to ensure the integrity of its
employees?
5.2 You are the president of a multinational company where an
executive confessed to kiting $100,000. What is kiting and what can your
company do to prevent it? How would you respond to the confession? What
issues must you consider before pressing charges?
5.3 Discuss the following statement by Roswell Steffen, a convicted
embezzler: “For every foolproof system, there is a method for beating
it.” Do you believe a completely secure computer system is
possible? Explain. If internal controls are less than 100%
effective, why should they be employed at all?
5.4 Revlon hired Logisticon to install a real-time invoice and
inventory processing system. Seven months later, when the system crashed,
Revlon blamed the Logisticon programming bugs they discovered and withheld
payment on the contract. Logisticon contended that the software was fine
and that it was the hardware that was faulty. When Revlon again refused
payment, Logisticon repossessed the software using a telephone dial-in feature
to disable the software and render the system unusable. After a three-day
standoff, Logisticon reactivated the system. Revlon sued Logisticon,
charging them with trespassing, breach of contract, and misappropriation of
trade secrets (Revlon passwords). Logisticon countersued for breach of
contract. The companies settled out of court.
Would
Logisticon’s actions be classified as sabotage or repossession? Why?
Would you find the company guilty of committing a computer crime? Be
prepared to defend your position to the class.
5.5 Because improved computer security
measures sometimes create a new set of problems—user antagonism, sluggish
response time, and hampered performance—some people believe the most effective
computer security is educating users about good moral conduct. Richard
Stallman, a computer activist, believes software licensing is antisocial
because it prohibits the growth of technology by keeping information away from
the neighbors. He believes high school and college students should have
unlimited access to computers without security measures so that they can learn
constructive and civilized behavior. He states that a protected system is
a puzzle and, because it is human nature to solve puzzles, eliminating computer
security so that there is no temptation to break in would reduce hacking.
<para>Do
you agree that software licensing is antisocial? Is ethical teaching the
solution to computer security problems? Would the removal of computer
security measures reduce the incidence of computer fraud? Why or why not?
5.1 You were asked to investigate extremely high, unexplained
merchandise shortages at a department store chain. Classify each of the
five situations as a fraudulent act, an indicator of fraud, or an event
unrelated to the investigation. Justify your answers.
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 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.
5.2 A client heard through its hot
line that John, the purchases journal clerk, periodically enters fictitious
acquisitions. After John creates a fictitious purchase, he notifies
Alice, the accounts payable ledger clerk, so she can enter them in her
ledger. When the payables are processed, the payment is mailed to the nonexistent
supplier’s address, a post office box rented by John. John deposits the
check in an account he opened in the nonexistent supplier’s name.
a. Define fraud, fraud
deterrence, fraud detection, and fraud investigation.
1. a. List
four personal (as opposed to organizational) fraud symptoms, or red-flags, that
indicate the possibility of fraud.</para></listitem> Do not confine
your answer to this example.
1. b. List
two procedures you could follow to uncover John’s fraudulent behavior.
5.3 The computer frauds that are publicly revealed represent only the
tip of the iceberg. Although many people perceive that the major threat
to computer security is external, the more dangerous threats come from
insiders. Management must recognize these problems and develop and enforce
security programs to deal with the many types of computer fraud.
Explain how each of the following six types of fraud is committed.
Using the format provided, also identify a different method of protection for each
and describe how it
works
5.4 Environmental, institutional, or
individual pressures and opportune situations, which are present to some degree
in all companies, motivate individuals and companies to engage in fraudulent
financial reporting. Fraud prevention and detection require that pressures and
opportunities be identified and evaluated in terms of the risks they pose to a
company. Adapted from the CMA Examination.
1. a. Identify
two company pressures that would increase the likelihood of fraudulent
financial reporting.
2. b. Identify
three corporate opportunities that make fraud easier to commit and detection
less likely.
1. c. For
each of the following, identify the external environmental factors that should
be considered in assessing the risk of fraudulent financial reporting
§ · The
company’s industry
§ · The
company’s business environment
§ · The
company’s legal and regulatory environment
1. d. What
can top management do to reduce the possibility of fraudulent financial
reporting?
5.5 For each of the following independent cases of employee fraud,
recommend how to prevent similar problems in the future.
1. a. Due
to abnormal inventory shrinkage in the audiovisual department at a retail chain
store, internal auditors conducted an in-depth audit of the department.
They learned that a customer frequently bought large numbers of small
electronic components from a certain cashier. The auditors discovered that they
had colluded to steal electronic components by not recording the sale of items
the customer took from the store.
b. During an
unannounced audit, auditors discovered a payroll fraud when they distributed
paychecks instead of department supervisors. When the auditors
investigated an unclaimed paycheck, they discovered that the employee quit four
months previously after arguing with the supervisor. The supervisor continued
to turn in a time card for the employee and pocketed his check.
1. c. Auditors
discovered an accounts payable clerk who made copies of supporting documents
and used them to support duplicate supplier payments. The clerk deposited the
duplicate checks in a bank account she had opened using a name similar to the
supplier’s.</para></listitem></orderedlist><source>
5.6 An auditor found that Rent-A-Wreck management does not always
comply with its stated policy that sealed bids be used to sell obsolete cars.
Records indicated that several vehicles with recent major repairs were sold at
negotiated prices. Management vigorously assured the auditor that performing
limited repairs and negotiating with knowledgeable buyers resulted in better
sales prices than the sealed-bid procedures. Further investigation revealed
that the vehicles were sold to employees at prices well below market value.
Three managers and five other employees pleaded guilty to criminal charges and
made restitution.
a. List the fraud symptoms that should have aroused the auditor’s
suspicion.
b. What audit procedures would show that fraud had in fact occurred.
5.7 A bank auditor met with the senior operations manager to discuss a
customer’s complaint that an auto loan payment was not credited on time.
The customer said the payment was made on May 5, its due date, at a teller’s
window using a check drawn on an account in the bank. On May 10, when the
customer called for a loan pay-off balance so he could sell the car, he learned
that the payment had not been credited to the loan. On May 12, the
customer went to the bank to inquire about the payment and meet with the
manager. The manager said the payment had been made on May 11. The
customer was satisfied because no late charge would have been assessed until
May 15. The manager asked whether the auditor was comfortable with this
situation.
The auditor located the customer’s paid check and found that it
had cleared on May 5. The auditor traced the item back through the
computer records and found that the teller had processed the check as being
cashed. The auditor traced the payment through the entry records of May
11 and found that the payment had been made with cash instead of a check.
What type of
embezzlement scheme does this appear to be, and how does that scheme
operate?
5.8
AICPA adapted
a. Prepare a schedule showing how
much the cashier embezzled.
1. a. Describe
how the cashier attempted to hide the theft.
5.9 An accountant with the Atlanta
Olympic Games was charged with embezzling over $60,000 to purchase a
Mercedes-Benz and to invest in a certificate of deposit. Police alleged that he
created fictitious invoices from two companies that had contracts with the
Olympic Committee: International Protection Consulting and Languages Services.
He then wrote checks to pay the fictitious invoices and deposited them into a
bank account he had opened under the name of one of the companies. When he was
apprehended, he cooperated with police to the extent of telling them of the
bogus bank account and the purchase of the Mercedes-Benz and the CD. The
accountant was a recent honors graduate from a respected university who,
supervisors stated, was a very trusted and loyal employee.
1. a. How
does the accountant fit the profile of a fraudster?
How does he not fit the profile?
1. b. What
fraud scheme did he use to perpetrate his fraud?
2. c. What
controls could have prevented his fraud?
3. d. What
controls could have detected his fraud?
5.10 Lexsteel, a manufacturer of steel furniture, has facilities
throughout the United States. Problems with the accounts payable system
have prompted Lexsteel’s external auditor to recommend a detailed study to
determine the company’s exposure to fraud and to identify ways to improve
internal control. Lexsteel’s controller assigned the study to Dolores Smith.
She interviewed Accounts Payable employees and created the flowchart of the
current system shown in Figure 5-3.
Lexsteel’s purchasing, production control, accounts payable, and
cash disbursements functions are centralized at corporate headquarters. The
company mainframe at corporate headquarters is linked to the computers at each
branch location by leased telephone lines.
The mainframe generates production orders and the bills of
material needed for the production runs. From the bills of material, purchase
orders for raw materials are generated and e-mailed to vendors. Each purchase
order tells the vendor which manufacturing plant to ship the materials to. When
the raw materials arrive, the manufacturing plants produce the items on the
production orders received from corporate headquarters.
The manufacturing plant checks the goods received for quality,
counts them, reconciles the count to the packing slip, and e-mails the
receiving data to Accounts Payable. If raw material deliveries fall behind
production, each branch manager can send emergency purchase orders directly to
vendors. Emergency order data and verification of materials received are e-mailed
to Accounts Payable. Since the company employs a computerized perpetual
inventory system, periodic physical counts of raw materials are not performed.
Vendor invoices are e-mailed to headquarters and entered by
Accounts Payable when received. This often occurs before the branch offices
transmit the receiving data. Payments are due 10 days after the company
receives the invoices. Using information on the invoice, Data Entry calculates
the final day the invoice can be paid, and it is entered as the payment due
date.
Once a week, invoices due the following week are printed in
chronological entry order on a payment listing, and the corresponding checks
are drawn. The checks and payment listing are sent to the treasurer’s office
for signature and mailing to the payee. The check number is printed by the
computer, displayed on the check and the payment listing, and validated as the
checks are signed. After the checks are mailed, the payment listing is returned
to Accounts Payable for filing. When there is insufficient cash to pay all the
invoices, the treasurer retains certain checks and the payment listing until
all checks can be paid. When the remaining checks are mailed, the listing is
then returned to Accounts Payable. Often, weekly check mailings include a few
checks from the previous week, but rarely are there more than two weekly
listings involved.
When Accounts Payable receives the payment listing from the
treasurer’s office, the expenses are distributed, coded, and posted to the
appropriate cost center accounts. Accounts Payable processes weekly
summary performance reports for each cost center and branch location.
Adapted from the CMA Examination
1. 1. Discuss
three ways Lexsteel is exposed to fraud and recommend improvements to correct
these weaknesses.
1. 2. Describe
three ways management information could be distorted and recommend improvements
to correct these weaknesses.
1. 3. Identify
and explain three strengths in Lexsteel’s procedures
5.11 The Association of Certified Fraud Examiners periodically prepares
an article called “What Is Your Fraud IQ?” It consists of 10 or more
multiple choice questions dealing with various aspects of fraud. The answers,
as well as an explanation of each answer, are provided at the end of the
article. Visit the Journal of Accountancy site
(http://www.journalofaccountancy.com) and search for the articles. Read
and answer the questions in three of these articles, and then check your answers.
5.12 Explore the Anti-Fraud and Forensic
Accounting portion of the AICPA Web site
(http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/Pages/default.aspx),
and write a two-page report on the three most interesting things you found on
the site.
5.1
1.
How does Miller fit the profile of the average fraud perpetrator?
1. 2. Explain
the three elements of the opportunity triangle (commit, conceal, convert) and
discuss how Miller accomplished each when embezzling funds from Associated
Communications. What specific concealment techniques did Miller use?
1. 3. What
pressures motivated Miller to embezzle? How did Miller rationalize his actions?
1. 4. Miller
had a framed T-shirt in his office that said, “He who dies with the most toys
wins.” What does this tell you about Miller? What lifestyle red
flags could have tipped off the company to the possibility of fraud?
1. Why do companies hesitate
to prosecute white-collar criminals?
1. What could the victimized
companies have done to prevent Miller’s embezzlement?
5.2
1. 1. Figure
5-4 shows the employees and external parties that deal with Heirloom.
Explain how Heirloom could defraud the bank and how each internal and external
party except the bank could defraud Heirloom.
2. 2. What
risk factor, unusual item, or abnormality would alert you to each fraud?
3. 3. What
control weaknesses make each fraud possible?
4. 4. Recommend
one or more controls to prevent or detect each means of committing fraud.
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