Fraud 505 - Ch 4 (Complete with Solutions)

Fraud 505 - Ch 4 (Complete with Solutions) Karen, a friend of yours, recently started her own business, The Bike and Boulder Company (B&B). B&B specializes in the sales of mountain bikes and rock-climbing equipment. Karen is putting the finishing touches on her company policies and procedures. She knows you are taking a fraud class and asks you to review what she has completed thus far. You quickly notice that Karen has neglected to address fraud and fraud prevention in her policies and procedures. What policies and procedures would you suggest Karen implement to prevent and detect fraud at B&B? Which of the following fraud prevention policies or procedures would you recommend to Karen with respect to hiring employees? a. Require all applicants to certify that they have never committed employee fraud. b. Verify all information on each applicant's resume and/or application. c. Train those involved in the hiring process to conduct thorough background checks. - Ans: b. Verify all information on each applicant's resume and/or application. Review the Hiring Policies and Practices chart in Chapter 4, top of page 105, and the related discussion under the heading "Hiring Honest People and Providing Fraud Awareness Training." Before hiring an applicant for any position, the employer should verify all information on the applicant's résumé and/or application. The verification should be complete and conducted by an employee who is thorough and persistent in this important procedure. In addition, the employer should require all applicants to certify that the information on their application and/or résumé is accurate. Also, the employer should train those involved in the hiring process to conduct thorough and skillful interviews. Because ABC Company suffered large losses from fraud last year, senior management has decided to be more proactive in implementing a fraud prevention environment. In interviewing employees, they found that many employees were unclear about which behaviors were ethical and which were not. Management is considering ways to better educate employees about ethical behavior. ABC Company's human resources staff should develop a code of ethics to be read and signed by each employee having supervisory responsibilities. a. True b. False - Ans: False Senior management should develop a code of ethics or conduct and communicate it throughout the company. Every employee should be required to read and sign the code each year. Nellie works for a large manufacturing company. She heads the information systems department and works closely with the accounting department. Nellie knows a lot about the company's database systems and accounting practices. Her responsibilities include working with the company's vendors to create data communication lines. The company works with many vendors, including a large number of new vendors that have been added due to the company's rapid growth. Recently, Nellie has become concerned about the effectiveness of the internal controls in ensuring the integrity of the purchasing function. She expressed her concerns to senior management and has been asked to recommend proactive steps the company can take to prevent fraud from collusion between employees and vendors. A periodic letter to vendors explaining an organization's policy of not allowing employees to accept gifts or gratuities is an effective tool for both - Ans: True A periodic letter to vendors that explains an organization's policy of not allowing employees to accept gifts or gratuities helps vendors understand whether buyers and sellers are acting in accordance with the organization's rules. Such letters clarify expectations, which is very important in preventing fraud. Many frauds have been uncovered when, after such a letter was sent, vendors expressed concern about their buying or selling relationships. Robert was the chief teller in a large New York bank. Over a period of three years, he embezzled $1.5 million. He took the money by manipulating dormant accounts. Robert was responsible both for handling dormant accounts and for dealing with complaints from customers. When a customer would complain about his account, Robert was always the one to explain the discrepancy. He usually used the excuse that "it's a computer error." Which of the following control activities would most likely have prevented this fraud? a. Proper authorizations. b. Physical safeguards over customer accounts. c. Documents and records. d. Segregation of duties. - Ans: d. Segregation of duties. Review the discussion in Chapter 4 under the heading "Having a Good System of Internal Controls." There was a serious lack of segregation of duties and independent checks as well as too much supervisory authority in one person in this bank. The bank placed far too much trust and supervisory authority in Robert. If the bank had designated separate supervisors to handle dormant accounts and customer complaints, or even if it had required Robert to take mandatory vacations or rotated him from time to time (so that other employees would periodically deal with customer complaints), the fraud could not have continued for so long or become so substantial.