Instructions: You must email your completed exam to me no later than 9:00 pm on Friday, August 7 or another time that we have agreed upon. Type your answers in a word file. You need not type the exam questions. The purpose of this exam is to test your knowledge of concepts learned during the semester in applied situations. Make sure your answers are concise and clear—grammar counts. Be specific. If your answer contains a lot of “fluff” it indicates that you have not read the material. There is no page limit. The exam is worth 100 points. Note the points allocated to each question.
Question One (20 points)
Arena Corporation is a high technology company that produces miniature computer processing chips. The company is one of the most successful in its industry because it is always developing faster and more efficient processors in order to maintain a competitive advantage. Sales and earnings increased significantly in recent quarters causing the company’s stock price to rise.
Lowell Reed was recently appointed to be the new internal auditing manager. He was promoted because he has an excellent understanding of the company’s business and its industry. At the close of the third quarter, Joe Nebraska, CEO of the company asked Lowell and other senior managers of the company to discuss year end earnings projections. During the meeting, it became apparent to Lowell that the team was anxious because the company lost several key contracts with a major customers to an overseas competitor. Lowell noticed more closed door meetings than usual and people were more stressed than ever. Moreover, the long time corporate controller, Beth McElroy, CPA, was transferred to London as an IT manager. She was replaced by Jerry Rogers who spent most of his career in HR. An announcement to all employees indicated Beth’s and Jerry’s transfers were designed to broaden their overall career developments. In November, more bad news came out as a Chinese competitor announced a significant improvement in the chip industry, one that might revolutionize the industry. Arena’s stock tumbled as the market perceived the company’s future prospects less favorably.
At the end of the fourth quarter, the company announced earnings and beat all the estimates set by outside analysts. In fact, it reported its highest earnings to date! Lowell had a feeling all was not right somehow and began to reflect on all he had observed over the last couple of months.
Questions:
1. List and briefly describe the six different types of fraud symptoms.
2. Describe the fraud symptoms that might be present at Arena Corporation.
3. Assume Lowell has access to the company’s year end financial statements. What types of analyses can he perform on the statements to see if the “books were cooked”
Question Two (20 points)
Brannigan, Inc. and Chester Corporation are forming a jointly owned company to operate specialty chemical businesses now owned separately by Brannigan and Chester. The business proposition is to find operating efficiencies and to reduce costs by pooling together those operations into a single company. Brannigan and Chester will each own 50% of the stock of the newly formed company. The new company will employ over 1,000 employees, have assets with a fair value of $5 billion, and will operate independently of Brannigan and Chester to the greatest extent possible.
Ray Ponder will serve as the CEO of the new company. His vision is that the company must have a good system of internal controls, high ethical standards, and must treat its employees with dignity and respect. Because of your knowledge of fraud detection and prevention, you are a member of a task force assembled by Ray to further his vision for the company. What suggestions will you make to the team to prevent fraud from occurring at the company? Be specific with your suggestions.
Question Three (10 points)
A bank manager’s responsibility was to make loans to customers. Auditors discovered that several loans he made over a five year period had not been repaid. A fraud investigation revealed that the manager had been receiving kickbacks from risky clients in exchange for extending loans to them. His actions cost the bank millions of dollars in uncollectible loans that should never have been made. You have been asked to offer ideas on the following:
1. How might the bank determine the amount of kickbacks received by the manager?
2. What advice would you offer so the situation does not repeat itself with another manager?
Question Four (10 points)
You are an auditor for the Acme Eats Food Company. The eastern division operations manager is concerned that significant volumes of food products (dairy goods, baked goods, and various types of produce) have been misappropriated by employees. The division is based in Philadelphia. The office/warehouse buildings consist of a number of departments including sales, warehouse operations, shipping, transportation, and accounting. You meet with your supervisor and the operations manager and you all agree that there is sufficient predication to warrant an investigation. Your supervisor asks you to plan the investigation and meet with her later in the day to discuss your plan of action. What types of investigative techniques might you use? Explain. How would the preparation of a vulnerability chart assist you in planning the investigation? What might the chart reveal in this situation?
Question Five (5 points)
You are an auditor for Fried Company and during the course of an accounting systems audit, you have predication to believe that a high level accounting manager has engaged in a fraud with an important company vendor. You think the accounting manager has been approving invoices for goods invoiced by the vendor but never actually received by the company. What should you do? Whom shall you contact?
Question Six (8 points)
Discuss the difference between preventive controls and detection controls. Assume that you are an auditor for a new company and your company wants to avoid fraud from occurring in the Purchasing Organization. What would be a preventive control for that organization and what might be a detective control for that organization?
Question Seven (7 points)
Discuss the elements of fraud and distinguish civil fraud from criminal fraud.
Question Eight (20 points)
Jiffy Corporation has seen its earnings increase steadily each quarter from 2012(its founding) to 2016. Jiffy has struggled to provide investors with the same growth because of increasing competition. Jiffy’s CEO, COO, and CFO whose wealth are heavily leveraged by Jiffy stock options are trying to focus on how to keep the company on a growth climb despite the competition and the start of a global recession.
Jiffy’s business model is to ship its products to customers on account with payments due within 30 days after delivery. Jiffy’s products are manufactured in two plants, one in Columbus, Ohio and the other in Houston, Texas. Jiffy’s production is stored in 20 different warehouses located in 15 states. Many of Jiffy’s smaller customers are startup companies. Surprisingly, Jiffy has a low rate of uncollectible receivables relative to others in its industry.
Anderson & Cooper are jiffy’s external auditors. You are the new partner assigned to Jiffy’s audit. Please respond to the following questions:
1. What are some of the red flags indicating possible management (accounting) fraud based on this client’s profile?
2. Identify three types of accounting fraud that might be attempted in this situation. What red flags will you look into to identify the frauds and how might the frauds be attempted?
