Question

Question 2

a. The following misstatements are included in the accounting records of Johnson’s Manufacturing Company:

1. A purchase order was in error by $2 000 as a result of a key-entry mistake.
2. A credit sale was unintentionally posted as a cash sale. Instead of debit to account receivable, it was mistakenly debited to cash account.
3. The customer payment cheque was stolen by the mailroom clerk when the mail was opened.
4. The employee inflated his timesheet by 10 hours and he ended up being paid $300.

Required: Identify whether each misstatement is likely to be an error or a fraud.

b. There are two types of fraud: misappropriation of assets and fraudulent financial reporting. Identify if the following is misappropriation of asses or fraudulent financial reporting?

1. Setting up false vendors and paying the vendors for fictitious goods

2. Overstating expense reimbursement requests

3. Misrepresentation or omission of transactions

4. intentional misapplication of accounting principles

Answer 1

DETAILS GIVEN IN QUESTION:

4 MISSTATEMENTS ARE PROVIDED.

ANSWER:

FRAUD: WHEN A MISTAKE IS DONE INTENTIONALLY, IT IS TERMED AS FRAUD. HENCE, TO DECIDE WHETHER A MISSTATEMENT IS FRAUD OR MISTAKE, INTENTION BEHIND IS IMPORTATNT.

MISTAKES ARE UNINTENTIONAL.

MISSTATEMENT	FRAUD / MISTAKE
1. A purchase order was in error by $2 000 as a result of a key-entry mistake.	MISTAKE. This is a Key entry mistake done at the time of entering data in the system.
2. A credit sale was unintentionally posted as a cash sale. Instead of debit to account receivable, it was mistakenly debited to cash account.	MISTAKE. It is unintentional. Hence it is a mistake and not a fraud.
3. The customer payment cheque was stolen by the mailroom clerk when the mail was opened.	FRAUD. This is a case of FRAUD as the cheque was stolen with the intention of collecting money from the customer.
4. The employee inflated his timesheet by 10 hours and he ended up being paid $300.	FRAUD. This is a case of FRAUD as the timesheet was intentionally inflated to recieve higher salary.

b. Whether following is misappropriation of asses or fraudulent financial reporting?

Misappropriation of assets : Misappropriation of assets involves theft of entity's assets by employees in small and immaterial amounts.

Fraudulent financial reporting : Fraudulent Financial reporting involves intentional misstatements including omissions of amounts or disclosures to decieve the users of Financial statements.

1. Setting up false vendors and paying the vendors for fictitious goods - Misappropriation of assets

2. Overstating expense reimbursement requests - Fraudulent financial reporting

3. Misrepresentation or omission of transactions - Fraudulent financial reporting

4. Intentional misapplication of accounting principles - Fraudulent financial reporting