...The Case of Kay Lemon Detect/Prevent Fraud in Financial Statements Professor K. Day Angela Born March 1, 2015 Case of Kay Lemon Lemon concealed her larceny by using the technique of false debits. These debits were made to the inventory account overvaluing the assets on the books. She used a billing scheme to cover her theft by inflating the amount of payment made to the vendor on the books. Per the books, the vendor was paid a larger amount than the actual invoiced amount and she was able to hide her theft. Her scheme was simple. However, as she continually debited the inventory account, the assets on the books increased year to year. The article stated the lighting store never took a physical inventory. Due to the lack of physical inventory, Lemon assumed she could hide her theft by inflating the inventory balance on the books. Each year, an external CPA prepared the tax returns each year for the small business. It is interesting that the CPA did not call attention to the increasing cost of goods sold compared to sales each year. A major read flag is a sudden increase in cost of goods sold and comparable sales to the year prior. Lemon was able to hide her fraud for eight years without being discovered despite numerous red flags. These red flags should have been readily seen by the CPA preparing the tax returns. The CPA never performed an audit of the company’s financials, but it would be assumed that the CPA would inform the company that their operating...
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...Consideration of Fraud in a Financial Statement Audit 1719 AU Section 316 Consideration of Fraud in a Financial Statement Audit (Supersedes SAS No. 82.) Source: SAS No. 99; SAS No. 113. Effective for audits of financial statements for periods beginning on or after December 15, 2002, unless otherwise indicated. Introduction and Overview .01 Section 110, Responsibilities and Functions of the Independent Auditor, paragraph .02, states, "The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. [footnote omitted]"1 This section establishes standards and provides guidance to auditors in fulfilling that responsibility, as it relates to fraud, in an audit of financial statements conducted in accordance with generally accepted auditing standards (GAAS).2 .02 The following is an overview of the organization and content of this section: • • • Description and characteristics of fraud. This section describes fraud and its characteristics. (See paragraphs .05 through .12.) The importance of exercising professional skepticism. This section discusses the need for auditors to exercise professional skepticism when considering the possibility that a material misstatement due to fraud could be present. (See paragraph .13.) Discussion among engagement personnel regarding the risks of material misstatement due to fraud. This section requires...
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...Financial Statement Fraud ACCT 710: Assignment 6-2 Shannon Baxley David Welch September 24, 2011 Table of Contents Abstract………………………………………………………………………………………3 Introduction…………………………………………………………………………………..3 Literature Reviews……………………………………………………………………………5 Conclusion…………………………………………………………………………………..16 References…………………………………………………………………………………...18 Abstract This paper describes financial statement fraud (FSF) and how it may occur within companies. The reason of this study was to research FSF detection and prevention. Research was also done to determine any influences that SAS (Statement on Auditing Standards) No. 82 and SAS No. 99 had on audit programs and the analysis from external auditors. Thirteen scholarly journals were reviewed in order to analyze SAS No. 82 and No. 99 and to show ways to detect and prevent fraud. Results found that managers and/or auditors can create fraud intentionally and unintentionally. There are ways to prevent fraud and educating managers and/or auditors is a good way to make sure fraud does not occur. Introduction Financial statement fraud (FSF) involves the premeditated issuing of phony information on a financial statement (financial statement fraud, 2011). FSF occurs when a company exaggerates assets or revenue, or when it devalues liabilities and expenses (financial statement fraud, 2011). The American Institute of Certified Public Accountants or AICPA defines fraudulent financial reporting as “intentional misstatements or omissions...
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...Business Research Ethnics Res/351 Week 2 Business research Ethnics a very extremely valuable operation that every company must conduct from small businesses to large businesses if the business wants to succeed and grow. Understanding the business, many industries will understand the reason why everything should be done before consideration your own business or working for a business. The business Research history has been around for a long time, which all businesses goes through the business research and plays a strict role in managing a business. Business research provides information to make correct decisions, and the best decisions for a company, whether a small company or a large company. In business research a company have to follow the proper guidelines in order for the company to run smoothly. If a business does not follow the proper guidelines then the business could mislead many opportunities such as growth, funds, and most of the company planning could ruin the company to go out of business. There have been many times where unethical issues have occurred, and the reason this has occurred is because the companies are not having the correct business research ethnics. * Summarize the business research project or article. Enron was a very large company which was an American Energy trading and Communication company that was based in Houston Texas. The company was first started in 1985 by Kenneth Lay, which he thought at the time was a good idea to merge with...
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...Business Research Ethnics Business research Ethnics a very extremely valuable operation that every company must conduct from small businesses to large businesses if the business wants to succeed and grow. Understanding the business, many industries will understand the reason why everything should be done before consideration your own business or working for a business. The business Research history has been around for a long time, which all businesses goes through the business research and plays a strict role in managing a business. Business research provides information to make correct decisions, and the best decisions for a company, whether a small company or a large company. In business research a company have to follow the proper guidelines in order for the company to run smoothly. If a business does not follow the proper guidelines then the business could mislead many opportunities such as growth, funds, and most of the company planning could ruin the company to go out of business. There have been many times where unethical issues have occurred, and the reason this has occurred is because the companies are not having the correct business research ethnics. * Summarize the business research project or article. Enron was a very large company which was an American Energy trading and Communication company that was based in Houston Texas. The company was first started in 1985 by Kenneth Lay, which he thought at the time was a good idea to merge with Houston Natural...
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...Business Research Ethnics Res/351 Week 2 Business research Ethnics a very extremely valuable operation that every company must conduct from small businesses to large businesses if the business wants to succeed and grow. Understanding the business, many industries will understand the reason why everything should be done before consideration your own business or working for a business. The business Research history has been around for a long time, which all businesses goes through the business research and plays a strict role in managing a business. Business research provides information to make correct decisions, and the best decisions for a company, whether a small company or a large company. In business research a company have to follow the proper guidelines in order for the company to run smoothly. If a business does not follow the proper guidelines then the business could mislead many opportunities such as growth, funds, and most of the company planning could ruin the company to go out of business. There have been many times where unethical issues have occurred, and the reason this has occurred is because the companies are not having the correct business research ethnics. * Summarize the business research project or article. Enron was a very large company which was an American Energy trading and Communication company that was based in Houston Texas. The company was first started in 1985 by Kenneth Lay, which he thought at the time was a good idea to merge with...
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...1. Justify how the reporting requirements of the PCAOB reduce the chance of financial fraud. Basically, the goal of the Public Company Accounting Oversight Board is to improve quality of audited financial statements, reduce the risk of auditing failures, and increase public trust in financial reporting processes and of the auditing profession. In order for this to happen PCAOB must refocus and remind auditors of the standards required of them regarding fraud and for them to be diligent about their responsibilities relating to fraud. The purpose of auditing a financial statement is to detect material misstatements and false or missing information caused by fraud. The PCAOB reporting requirements place a lot of emphasis on disclosure in financial reporting however the board provides guidance and information that are relevant which should be disclosed within the financial statements. PCAOB also dictates to management and to the auditor their roles and responsibilities in financial reporting. PCAOB requires these standards and duties to be followed reinforces the accounting professionals to be able to reduce fraud in financial reporting at the same time ensuring investors receive accurate financial information. According to Rischall, PCAOB has established auditing, quality control, ethics, and independence standards to be used by registered public accounting firms in the preparation of audited financial statements for publicly traded companies, as required by the Sarbanes-Oxley...
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...Advanced External Auditing [AU2] Examination Blueprint 2013/2014 Purpose The Advanced External Auditing [AU2] examination has been constructed using an examination blueprint. The blueprint, also referred to as the test specifications, outlines the content areas covered on the examination and the weighting allotted to each content area. This document also lists the topics, the level of competence for each topic, and the related learning objectives and competencies. The learning objectives have been designed to ensure that the competencies are met. In addition, information is provided on the proportion of each question type presented in the examination (that is, multiple choice, quantitative problems, and so on). Use Candidates should use the examination blueprint to prepare for the course examination. The blueprint may not include all the topics listed in the course materials; however, candidates are still responsible for acquiring a broad-based knowledge of all topics not listed in the blueprint since these topics will be tested in assignment and review questions. The topics not listed in the blueprint will also provide candidates with a greater depth of understanding of auditing concepts. Examination Objectives The objective of the 4-hour comprehensive examination is to test CGA candidates on the prerequisite knowledge required for advancement into PA1 and PA2, so as to ensure that the candidates have the broad-based knowledge in assurance needed to function properly in the association’s...
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...Advanced External Auditing [AU2] Examination Blueprint 2013/2014 Purpose The Advanced External Auditing [AU2] examination has been constructed using an examination blueprint. The blueprint, also referred to as the test specifications, outlines the content areas covered on the examination and the weighting allotted to each content area. This document also lists the topics, the level of competence for each topic, and the related learning objectives and competencies. The learning objectives have been designed to ensure that the competencies are met. In addition, information is provided on the proportion of each question type presented in the examination (that is, multiple choice, quantitative problems, and so on). Use Candidates should use the examination blueprint to prepare for the course examination. The blueprint may not include all the topics listed in the course materials; however, candidates are still responsible for acquiring a broad-based knowledge of all topics not listed in the blueprint since these topics will be tested in assignment and review questions. The topics not listed in the blueprint will also provide candidates with a greater depth of understanding of auditing concepts. Examination Objectives The objective of the 4-hour comprehensive examination is to test CGA candidates on the prerequisite knowledge required for advancement into PA1 and PA2, so as to ensure that the candidates have the broad-based knowledge in assurance needed to function properly in the association’s...
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...AN EVALUATION OF THE INTERNAL CONTROLS SYSTEM FOR CASH FOR THE CASE OF NAIROBI SMALL BUSINESSES BY CLEOPHAS MUSINGA A Management Research Project Submitted In Partial Fulfillment For The Requirements Of The Award Of Bachelor Of Commerce (BCOM), School Of Business, University Of Nairobi JULY, 2008 DECLARATION This research project is our own original work and has not been submitted for academic purposes in any institution of higher leaning. Name Number Sign CLEOPHAS MUSINGA D33/6646/05 ………………………….. This research project has been submitted for examination with my approval as the university supervisor Signed……………………………. Date…………………………………………. Mr. Abdulatif Essajee Lecturer University of Nairobi TABLE OF CONTENTS DECLARATION i CHAPTER ONE 1 INTRODUCTION 1 1.1 Background of the study 1 1.2 Statement of the problem 5 1.3 Objectives of the study 6 1.4 Research questions 6 1.5 Scope of the study 6 1.6 Justification of the study 7 CHAPTER TWO 9 LITERARURE REVIEW 9 2.1 Evolution of internal controls 9 2.2 Components of Internal Controls 12 2.4 Relationship between a firm’s age and internal control 18 2.6 Internal controls in small businesses 19 CHAPTER THREE 21 RESEARCH METHODOLOGY 21 3.1 Research design 21 3.2 Population 21 3.3 Sample and Sampling Technique 21 3.4 Data collection methods 22 3.5 Data analysis 22 CHAPTER FOUR 23 DATA ANALYSIS AND FINDINGS 23 4.1 Introduction...
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...community, investors, and vendors affect the behavior of his employees. The employees look to the CEO to set the standard. “Observing high ethical standards is sound business strategy -- resulting in customer loyalty, higher employee retention and a positive image in the industry and within the community” (Hill, 2015). One of the most well known companies that did not live up ethical standards was Enron. Ethics come into play on many fronts. When developing a strategic plan ethics must be considered from the earliest stages. If it is the first or the last plan that a company develops does not matter. Long term plans and visions must take into consideration what the ethical base of the mission statement will be. A company that does not take ethics into consideration during the earliest stages of planning opens itself up for failure. It is also important to create a code of conduct to provide direction about how employees should act in situations they may encounter. Ethical choices can sometimes be personally challenging because adhering to a high ethical standard may mean not achieving goals set for them. Another front where ethical standards are important is customer relations. During the planning process it is important to develop strategies to increase customer satisfaction. This will then lead to repeat business and customer loyalty. Once a customer feels that they have been cheated or treated poorly they will tell others. If...
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...Ethics are a big concern in making business decisions. Applied ethic in business occurs when ethical and moral issues arise in the business environment. As individuals, we live in increasingly conscience-focused marketplace. One such example, the Body Shop supports fair trade in manufacturing and sourcing its body and bath products. Starbucks, as part of its marketing approach is supporting social responsibility in buying resources and products that benefit disenfranchised individuals in poverty-stricken areas in the world. One such example is, Starbucks supports co-ops in Kenya and Colombia, selling specific blends in their global stores and part of the profits are returned to the community that plant and harvest the coffee. There are general ethics companies follow. They are normative and descriptive in their nature. Following the philosophy of business, which is, established when a company first comes into existence, it determines the basic process and goals of the company. For example: if a co-operative was established to support the interest of farmers who pooled together their resources for the purpose of competitiveness, it is unethical for the co-op officials or leaders to work at achieving their own self-interest goals by way of the facilities of the co-op. The issues of the moral right and duties of the company and its shareholders is also a great area of ethical concern. In the same scope of general business ethics are the following: misuse of corporate ethics for...
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...2009 BDO Consulting’s Fraud Prevention practice is pleased to present the 2009 Segregation of Duties Checklist. We have developed this tool to assist organizations in identifying fraud risks due to a lack of segregation of duties. We appreciate this opportunity to provide guidance on segregating duties and recommended practices. We welcome the opportunity to discuss these concepts and our other fraud prevention services with your organization. When duties cannot be segregated, compensating controls should be considered. Compensating controls can be preventative, detective or monitoring controls that are executed by an independent, supervisory-level employee who does not have custody, record-keeping, authorization or reconciliation responsibilities for the process. In the checklist below, we have provided examples of several such compensating controls. Ideally, no individual employee should handle more than one of the above-noted functions in a process. When an organization separates these functions among its employees, it has implemented a strong internal control, which may deter and prevent employee fraud. Segregation of duties is one of the key concepts of internal controls. It is also one of the most effective internal controls in combating employee fraud. Segregation of duties contributes to an organization’s system of checks and balances. The concept of segregation of duties is to separate the following responsibilities in each business process: • Custody of assets...
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...comparable in size and complexity to its major U.S. rivals, and thus quickly call “Europe’s Enron.” In Italy in 1961, Calisto Tanzi took over family preserved-meat business, which he went on to found as Parmalat. After going public in 1990, Parmalat expanded at a breakneck pace during the rest of the decade, acquiring operations in the United States, Germany, France, Brazil, and South Africa. From 1995 through 2003, Parmalat went to the bond market 35 times, accumulating over $5 billion in new liabilities. With over 36,000 employees around the world, Parmalat is one of the world's largest food businesses and is the eighth largest company in Italy. (Soltani, & Soltani, 2008) In mid-November 2003 Parmalat defaulted on a $187 million bond payment. That pressed auditors and banks to inspect company accounts. Grant Thorton SPA served as auditors for Parmalat from 1990 to 1999. The scandal may have stayed undetected if not for Italian law which required that companies must to change audit firms every nine years. In 1999 Deloitte & Touche replaced a Grant Thornton company and was the first company who started scrutinizes the nonexistent accounts. Parmalat continued to retain the Grant Thornton as auditor firm for the Cayman Islands subsidiary called Bonlat and that aroused questions about role of Grant Thornton in the fraud. That subsidiary was supposedly held the $4.9 billion in Bank of America account in the Cayman Islands. “Auditors first inquired about the Cayman Islands account...
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...of Power in Financial Statement Fraud Schemes Chad Albrecht • Daniel Holland • Ricardo Malaguen˜o • Simon Dolan • Shay Tzafrir Received: 24 June 2011 / Accepted: 12 December 2013 Springer Science+Business Media Dordrecht 2014 Abstract In this paper, we investigate a large-scale financial statement fraud to better understand the process by which individuals are recruited to participate in financial statement fraud schemes. The case reveals that perpetrators often use power to recruit others to participate in fraudulent acts. To illustrate how power is used, we propose a model, based upon the classical French and Raven taxonomy of power, that explains how one individual influences another individual to participate in financial statement fraud. We also provide propositions for future research. Keywords Financial statement fraud Organizational corruption Recruitment Collusion Power and influence Introduction In recent years, fraud and other forms of unethical behavior in organizations have received significant attention in the business ethics literature (Uddin and Gillet 2002; Elias 2002; Rockness and Rockness 2005; Robison and Santore 2011), investment circles (Pujas 2003; Albrecht et al. 2011), and regulator communities (Farber 2005; Ferrell and Ferrell 2011). Scandals at Enron, WorldCom, Xerox, Quest, Tyco, HealthSouth, and other companies created a loss of confidence in the integrity of the American business (Carson 2003) and even caused the...
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