166 Part 3: Fraud Detection with late charges

166 Part 3: Fraud Detection
with late charges. Five of the bills include notices stat- Case 5
ing that lawsuits are pending. Also, he has not paid You are a staff auditor on a very important audit
dividends to investors in two years. engagement. You are assigned to audit two parts of
Every day, James drives either his Mercedes-Benz your client’s purchasing department. After several
or his new Lexus to work. Before starting the business, days of studying purchase orders and sales invoices,
James drove only one car, a Suzuki Samurai. James _you notice that three vendors have identical addresses.
now lives in a palatial home and owns very expensive = After further examination, you notice that the docu-
furniture. Employees constantly ask James for new _— ments only have one of the two required signatures
equipment, but the “boss” refuses to update the old —_—for purchases of those accounts. You decided to inter-
equipment. Two weeks ago, James was irate and view the purchasing manager in charge of those
fired one of his accounting clerks for not depositing accounts, but you discover that he is “out to lunch.”
some checks on time. James is known for losing his | While you are waiting for him, you notice through
temper. his office window a very nice Bose™ stereo system. It’s
; the same system you have been wanting, but will onl
'. ee fraud symptoms that are present in be able to afford after you get promoted to vartner.
2. Why would complaints from customers be a fraud What symptoms of fraud exist?
symptom? Case 6
Case 3 You have been hired by a small firm to analyze its
Joan Longhurst, along with three of her best friends, | 4©counts receivable department and assess how sus-
started her own ranching operation in Hawaii. The ceptible it is to fraud. The company operates a table
business began with two bulls and 20 heifers. After | ™anufacturing facility. The only employee in
their first year, the partners were turning profits, and 4¢counts receivable is Joanne, an employee of
everything seemed to be going well. The heifers were 10 years. Joanne opens all cash receipts, credits
bred each year by using a patented new technique, and _— the clients’ accounts, and deposits the money at
the steer population grew to 100 in two years. Most the bank. What fraud-related risks does this com-
heifers would produce twins, and 90 percent were  Pany face? What changes, if any, should be made?
male. This allowed for future breeding of the remaining
10 percent. Case 7
New investment was needed, so limited partners | Many people feel that it is the job of auditors to detect
were invited to join the partnership with an initial fraud. What circumstances make it difficult for audi-
investment of $20,000 each. The partnership interests _ tors to detect fraud? Who is more likely to be in a
were advertised as “hot in the hands” and “very _ better position than auditors to detect fraud?
exclusive.” In interviews, Joan described the invest-
ments as a “double-your-money, sure thing.” She Case 8
stated that the best way to get in was to act within 1. According to the chapter, which groups (auditors,
10 days of the initial offering of the investment. The managers, co-workers, company accountants, or
annual report of the company showed enormous friends) are in the best position to observe fraud
growth, with the pro forma statements predicting symptoms in each of the three elements of fraud?
phenomenal success. Because of the exorbitant food 2. Which group is surprisingly absent in each element?
prices in Hawaii, Joan says she can demand a pre-
mium for all cattle sold. Based on this scenario, what Case 9
symptoms of fraud exist? Sally was aware of a fraud being committed by one of her
co-workers, but she never reported it. What are some pos-
Case 4 sible reasons for her hesitancy to come forward?
The text states that tips and complaints are not evi-
dence of actual fraud but instead should only be con- Case 10
sidered fraud symptoms. Do you agree with this John Adams is the manager at a local store. The store
statement? Why? opened four years ago and has been doing very well.

Chapter 5: Recognizing the Symptoms of Fraud 167
With current business growing, John decided to hire | CASE STUDY 1.
Peter O'Riley to work as an accountant. When Peter ~ BALANCE SHEET 2015 LIEK
started working at the store, he found several things Cash $ 460 $ 300
that appeared unusual. For example, six receiving
documents have been lost, the general ledger is out of Accounts receivable 620 480
balance, one customer has complained that he is con- Inventory _1,000 __730
tinually being overcharged, and another customer com- Total assets $2,080 $1510
plained that he does not receive timely service. John — —
lives in an expensive house and has several beautiful Accounts payable $ 580 $ 310
sports cars. Notes payable 500 100
Discuss whether fraud could be occurring. Does
evidence of fraud exist, or are only fraud symptoms Common stock
present? Retained earnings __600 __700
Total liabilities and $2,080 $1,510
Case 11 stockholders’ equity a a
Consider the three aspects of the fraud motivation tri- Income Statement
angle. If you were hired by the board of directors to tell
them what they could do to prevent fraud, what general Net sales $ 950 5 40
activities would you tell them to engage in? List four or Cost of goods sold __120 __160
more activities for each of the three dimensions of the Gross margin $ 430 $ 680
fraud triangle listed here. OO —
Expenses:
¢  Attitude/Rationalization Salaries $ 100 $ 150
¢ Motivation/Pressure
- Opportunity Warehousing costs 80 120
Advertising 60 90
Case 12 Taxes 45 __75
A “Big 4” accounting firm was auditing a limited Total expenses $ 285 $ 435
real estate partnership that had three general part- a a
ners (all brothers) and 2,000 limited partners. The Net income $_145 $_ 245
limited partnership owned real property that was
leased by Arby's, Sizzler, and other restaurants in Questions
various states, all under “triple net leases,” meaning
that the lessee is responsible for property taxes, util- 1. Perform vertical and/or horizontal analysis of the
ities, and other such operating costs. The auditors statements and identify two things that appear to
decided to look for liens on the property to make be unusual and could be possible symptoms of
sure property taxes were being paid and were cur- fraud.
rent. In doing so, they found some liens for bank
loans on the properties in a state where the partner- Cage Study 2
ship had no properties. Is this a fraud symptom or —[y his own words, Daniel Jones was “The Dude.” With
red flag? What should the auditing firm do about pi, waist-long dreadlocks, part-time rock band, and
this revelation? well-paid job managing a company’s online search
directory—he seemed to have it all. Originally from
Germany, Jones, now age 32, earned his doctorate
CASE STUDIES and taught at the University of Munich before coming
to the United States, where he started his career in
Case Study 1 computers. When Jones started working with the
The balance sheet and income statement for ABC company as a director of operations for U.S.-Speech
Company for the years 2015 and 2016 are as follows: Engineering Service and Retrieval Technology—he