information systems course

Internal Control Cases 1. Bern Fly Rod Company Bern Fly Rod Company is a small manufacturer of high- quality graphite fly-fishing rods. It sells its products to fly-fishing shops throughout the United States and Canada. Bern began as a small company with four salespeople, all family members of the owner. Because of the high popularity and recent growth of fly-fishing, Bern now employs a seasonal, nonfamily, sales force of 16. The salespeople travel around the country giving fly- casting demonstrations of their new models to fly-fishing shops. When the fishing season ends in October, the temporary salespeople are laid off until the following spring. Once the salesperson takes an order, it is sent directly to the cash disbursement department, where commission is calculated and promptly paid. Sales staff compensation is tied directly to their sales (orders taken) figures. The order is then sent to the billing department, where the sale is recorded, and finally to the shipping depart...

Problems 1. FRAUD SCHEME A purchasing agent for a home improvement center is also part owner in a wholesale lumber company. The agent has sole discretion in selecting vendors for the lumber sold through the center. The agent directs a dis- proportionate number of purchase orders to his company, which charges above-market prices for its products. The agent’s financial interest in the supplier is unknown to his employer. Required What type of fraud is this and what controls can be implemented to prevent or detect the fraud? 2. FRAUD SCHEME A procurement agent for a large metropolitan building authority threatens to blacklist a building contractor if he does not make a financial payment to the agent. If the contractor does not cooperate, the contractor will be denied future work. Faced with a threat of economic loss, the contractor makes the payment. Required What type of fraud is this and what controls can be implemented to prevent or detect the fraud? 3. MAIL ROOM FR...

Multiple-Choice Questions 1. Management can expect various benefits to follow from implementing a system of strong internal control. Which of the following benefits is least likely to occur? a. reduction of cost of an external audit b. prevention of employee collusion to commit fraud c. availability of reliable data for decision-making purposes d. some assurance of compliance with the Foreign Corrupt Practices Act of 1977 e. some assurance that important documents and records are protected 2. Which of the following situations is NOT a segregation of duties violation? a. The treasurer has the authority to sign checks but gives the signature block to the assistant treasurer to run the check-signing machine. b. The warehouse clerk, who has custodial responsibility over inventory in the warehouse, selects the vendor and authorizes purchases when inventories are low. c. The sales manager has the responsibility to approve credit and the authority to wri...

Discussion Questions 1. Distinguish between ethical issues and legal issues. 2. Some argue against corporate involvement in socially responsible behavior because the costs incurred by such behavior place the organization at a disadvantage in a competitive market. Discuss the merits and flaws of this argument. 3. Although top management’s attitude toward ethics sets the tone for business practice, sometimes it is the role of lower-level managers to uphold a firm’s ethical standards. John, an operations-level manager, discovers that the company is illegally dumping toxic materials and is in violation of environmental regulations. John’s immediate super- visor is involved in the dumping. What action should John take? 4. When a company has a strong internal control structure, stockholders can expect the elimination of fraud. Comment on the soundness of this statement. 5. Distinguish between employee fraud and manage- ment fraud. 6. The estimates of losses annually resulting f...

Summary This chapter began by examining ethical issues that societies have pondered for centuries. It is increasingly apparent that good ethics is a necessary condition for the long-term profit- ability of a business. This requires that ethical issues be under- stood at all levels of the firm, from top management to line workers. In this section, we identified several ethical issues of direct concern to accountants and managers. SOX legislation has directly addressed these issues. The next section examined fraud and its relationship to auditing. Fraud falls into two general categories: employee fraud and management fraud. Employee fraud is generally designed to convert cash or other assets directly to the employee’s personal benefit. Typically, the employee circumvents the company’s internal control structure for personal gain. However, if a company has an effective system of internal control, defalcations or embezzlements can usually be pre- vented or detected. Management fraud ty...

Fraud and Accountants Perhaps no major aspect of the independent auditor’s role has caused more controversy than their responsibility for detecting fraud during an audit. In recent years, the structure of the U.S. financial reporting system has become the object of scrutiny. The SEC, the courts, and the public, along with Congress, have focused on business failures and questionable practices by the management of corporations that engage in alleged fraud. The question often asked is, ‘‘Where were the auditors?’’ The passage of SOX has had a tremendous impact on the external auditor’s responsibilities for fraud detection during a financial audit. It requires the auditor to test controls specifically intended to prevent or detect fraud likely to result in a material misstatement of the financial statements. The current authoritative guidelines on fraud detection are presented in Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit. The ob...