Chapter 7 Quiz

established system for storing and counting physical inventory

An electronics shop employee physically counts items on a random basis and compares the count to the perpetual inventory record

files containing copies of invoices rather than originals

Copies are a red flag of altered documents. A supplier's invoice may be altered to match a false receiving report resulting in underpayments and supplier complaints. This kind of theft may go undetected for some time.

list five ways to prevent hiring the wronge employee and how each measure helps to accomplish this

1. Check past employment. Knowledge of problems with prior employers can help avoid the cost of hiring someone who is likely to be fired for cause. 2. Check criminal convictions. Knowledge of prior convictions for job- or nonjob-related crimes can help avoid hiring an ex-offender for a position where assets are at risk. 3. Drug testing. Addictions often create money pressures that lead to theft. 4. Check references. Never assume that references must be good or the applicant would not offer them. Thieves count on this assumption. Call everyone. 5. Verify degrees, certifications, and licenses. Again, never assume that these are valid or an applicant would not present them—thieves count on this assumption.

Correct. The insurer may sue for the entire loss, insured and uninsured. Recovery in excess of the policy limit goes to the company.

A company may recover more than the policy amount.

An audit for possible fraud can uncover employee theft or wrongdoing. Who can perform a fraud audit? Who should not perform the audit

A fraud audit can be performed by the owner, owner's spouse, outside bookkeeper or outside CPA. The key requirement is that the audit NOT be performed by an employee who handles the accounts being audited

analytical review

A graph of each month's gross margin percentage for the last year is reviewed monthly

give specific ways this involvement can help

A spouse who hears the owner discuss daily business operations will pick up internal control problems of which the owner is not aware. Spouses tend to be more suspicious of employees than owners—especially those of the same sex as the spouse.

cover his or her theft by recording a shortage or defective goods.

A warehouse employee falsifies a receiving report to__________ by recording a shortage or defective goods

an unexplained increase in sales returns

Goods are sold to a confederate at a greatly reduced price—or an employee only pretends to ring up sales to an accomplice, who may keep the goods or return them for cash.

proper documentation monitored properly

In a restaurant, the kitchen does not prepare a dish until a sales order is entered in the computer

In theft insurance, subrogation means that the insured is liable for amounts not recovered from employees who have stolen

Incorrect. Subrogation in a theft policy means that your right to recover from or take action against an employee passes to the insurer covering the loss.

A fidelity bond covers unexplained losses of inventory even if there is no indication of how the losses occurred.

Incorrect. The burden of proof is on the insured company to provide a suspect in the loss.

an increase in past-due accounts

Indicates fictitious sales orders that lead to fictitious A/R that will not be paid, increasing the number of past due accounts (unless the employee has a way to alter A/R).

multiple payees with the same mailing address

Indicates fraudulent shipments sent to one or more accomplices at the same address.

counterfeit paper currency or money orders forged deposits forged credit cards and/or compute forgery

Optional coverage may include losses from _______________

segregation of duties

Sales orders are written by salespeople who have no access to the goods, which are released only by warehouse personnel

what are the potential risks to internal controls if the spouse becaomes an employee

Spouses who become employees work under few or no controls because they are the owner's husband or wife. So if the spouse leaves the company, the relaxed controls are unintentionally passed on to the replacement who can then easily steal.

no centralized department for receiving and storing merchandise

The greatest danger that a company faces in the theft of inventory is having ____________________ . THus, if theft is occurring, there may be no way for anyone to discover it.

physical safeguard

The warehouse is always locked and access is limited to authorized persons who have keycards

most employees try to hide their thefts by stealing after hours or on weekends when no one is around. They are often the employees who have keys to the warehouse or storeroom

Unconcealed Larceny during nonwork hours

every kind of loss, from routine theft and embezzlement to commercial bribery and stock fraud

a fidelity bond covers _______________

whom the company will employ

a key step in preventing employee fraud is deciding ____________________

fraudulent write offs

altering physical inventory counts to cover theft

background

at a minimum, the company should check the ___________ of any employee will have constant access to cash, checks, credit cards numbers, inventory, or any other items easily stolen

charging the sale to existing subsidary accounts receivable that are so large the cost will not be noticed, creating a bogus subsidiary accounts receivable charging the sale to an overdue accounts receivable that will soon be written off, effectively making the stolen inventory disappear written off the bogus receivable to discounts and allowances or bad debt expense or writing off the stolen inventory or other assets to accounts such as inventory shortage

because nonpayment might reveal the theft, perpetrators may conceal it by:

falsified receiving and shipping reports

goods are stolen, than a receiving document is created showing fewer goods received

Fraudulent Shipments

goods shipped to an accomplice, company delivering it assets to the thief or an accomplice which can result in the theft of large quantites of inventory

controls againest employee fraud in a very small company

involve the spouse

fidelity bond

many organizations from the one-employee startup to giant corporations carry insurance policies against fraud in the form of a fidelity bond, generally referred to simply as bonding

Unconcealed larceny, falsified receiving and shipping reports, fraudulent shipments, fraudulent write-offs

most common methods of stealing inventory

forced reconciliation of accounts

one of the simplest methods for stealing inventory and concealing the theft is forced reconcilaiation of the ledger inventory account.

by someone other than the employee responsible for inventory records to spot larger than normal shrinkage

periodic physical counts of all storeroom or warehouse stocks reconciled agaienst perpetual inventory records by _____________________________

unconcealed larceny

the most common kind of noncash theft, occurs when an employee steals company property and makes no attempt to cover the theft, by writing off the missing items as damaged or in some other way.

an insolvable problem, a way to steal items and the ability to justify the theft to him/himself

the typical factors that can add up to an employee stealing are

in many cases, employees steal inventory or other noncash assets openly, during business hours and in plain view. Coworkers often think nothing of it because most people assume that their friends and acquaintances are honest and have a legitimate reason for taking the equipment or merchandise.

why daytime unconcealed larceny often is not reported

A shipping employee is shipping goods to an accomplice and creating fictitious sales orders for the shipments. Which category of internal controls is being violated? Specifically, which missing control in each category permits these thefts?

· Proper documentation properly monitored and within this category: ü Not requiring matching of all shipping documents to sales tickets ü No investigation of shipping documents not associated with a sale · Segregation of duties, and within this category: ü No procedure for authorizing sales ü No control of inventory disbursement