Accounting Information System

1. You were asked to investigate extremely high, unexplained merchandise shortages at a department store chain. Classify each of the five situations as a fraudulent act, an indicator of fraud, or an event unrelated to the investigation. Justify your answers (5.1)

a. The receiving department supervisor owns and operates a boutique carrying many of the same labels as the chain store. The general manager is unaware of the ownership interest.

This is an indication of possible fraud. This conflict of interest is a fraud symptom that alerts auditors to the possibility of fraud. The receiving department supervisor’s ownership of the boutique may also be in conflict with the organization's code of ethics and conduct.

b. The receiving supervisor signs receiving reports showing that the total quantity shipped by a supplier was received and then diverts 5% to 10% of each shipment to the boutique.

This is a fraudulent act because there is a theft accompanied by:

1. A false statement, representation, or disclosure (signing the receiving report)

2. A material fact, (the signature on the receiving report causes the company to act; that is, to pay the vendor)

3. An intent to deceive (The supervisory deceives the company so that it will pay for the goods he steals)

4. A justifiable reliance (The store relies on the misrepresentation to pay the vendor)

5. An injury or loss (The supervisor steals goods the store pays for)

c. The store is unaware of the short shipments because the receiving report accompanying the merchandise to the sales areas shows that everything was received.

This is a weakness in internal control. Sales personnel should count the goods received and match their counts to the accompanying receiving report. Failure to do so allows the theft to go undetected.

d. Accounts Payable paid vendors for the total quantity shown on the receiving report.

Proper internal control says that Accounts Payable should match the vendor’s...