Question

1. The following are various potential frauds in the sales and collection cycle:

   1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered.

   2. The allowance for doubtful accounts was understated because the company altered the aging of accounts receivable to reduce the number of days outstanding for delinquent receivables.

   3. The accounts receivable clerk stole checks received in the mail and deposited them in an account that he controlled. He issued credit memos to the customers in the amount of the diverted cash receipts.

   4. The company contacted a major customer and asked them to accept a major shipment of goods before year-end. The customer was told that they could return the goods without penalty if they were unable to sell the goods.

   5. A cashier stole cash receipts that had been recorded in the cash register.

   6. The company recorded “bill-and-hold sales” at year-end. Although the invoices were recorded as sales before year-end, the goods were stored in the warehouse and shipped after year-end.

   7. The company did not record credit memos for returns received in the last month of the year. The goods received were counted as part of the company’s year-end physical inventory procedures.

   8. A cashier stole cash receipts by failing to record the sales in the cash register.

   9. The CFO recorded fictitious credit sales at the end of the year without recording the associated cost of sales and reduction in inventory.

   Required

   1. Indicate whether the fraud involves misappropriation of assets or fraudulent financial reporting.

   2. For those frauds that involve misappropriation of assets, state a control that would be effective in preventing or detecting the misappropriation.

   3. For those frauds that involve fraudulent financial reporting, state an audit procedure that would be effective in detecting the fraud.

Answer 1