Audit accounting unit 5
After reading Chapter 9 of your Forensic Accounting and Fraud Examination textbook, complete the following cases, which will help you apply your knowledge to detecting potential fraudulent activities:
Case 46 on page 282.
Case 48 on page 283.
46. Cary and Elle Bronson had been married for 15 years when trouble arose in their marriage. Cary’s long hours of working had taken a toll on it; he was rarely around even for family functions. The last straw came when Elle found lipstick on the collar of Cary’s shirt and the unmistakable scent of a very expensive woman’s perfume; this wasn’t the first time she had noticed the telltale signs of what appeared to be a clandestine affair. The next day, Elle visited an attorney to begin divorce proceedings. After some small talk, the attorney, Mark Smithson, asked Elle about the major assets accumulated during the marriage.
Oh, there are the carsa Jeep Cherokee, a Chevy Suburban, and a Bentley, she answered.
A Bentley? he queried, somewhat surprised.
Yes, said Elle. Our restaurant, The Roasted Duck, has done very well over the years. We began the business with almost nothing and both worked there until Karen, our second child, was born. At that point, I became a stay-at-home mom and left everything to Cary.
I’ve eaten at The Roasted Duckthe food is excellent, Mark said.
Thank you, replied Elle.
Is this the only source of income for you and your husband, Mrs. Bronson? he asked.
Yes, other than some interest and dividends, she answered.
She and the lawyer discussed other matters pertaining to the divorce. He told Elle that he would obtain information from Cary’s attorney so that an equitable division of assets could occur and the issue of the custody of their children would be settled.
Two weeks later, Elle received a call from Mark. Through the discovery process, Cary’s attorney had submitted a valuation of the restaurant that seemed unusually low and had not listed any other assets that could account for the house and vehicles that the Bronsons had acquired and the private education that they had provided for their children.
That can’t be right! Elle exclaimed.
Well, it certainly doesn’t look right, Mark said, I’ll look into this some more and let you know what I find.
After he hung up the phone, Mark called Cary’s attorney. This value placed on the restaurant doesn’t make any sense. What’s your take on this?
After a short pause, the attorney replied, Cary told me that the restaurant business is not doing well and, thus, the value has declined.
After Mark hung up the phone, he pondered the situation: There must be an answer to this mystery. One thing’s for sure; if Cary isn’t telling the truth, he might as well change the name of his restaurant to The Cooked Goose.
a. What evidence (i.e., physical, documentary, and observational) could be collected to determine whether the valuation is correct? How could you go about collecting this evidence?
b. Assume for a moment that the valuation is correct. What other sources of money could Cary have to maintain his family’s lifestyle? How would you test your theories?
48. Talia Finn is working as an analyst for the Drug Enforcement Agency (DEA) and has been assigned to a case in which the suspect is believed to be engaged in a rather large drug-dealing operation behind the sham business Nutritional Supplements. Her first assignment is to perform a net worth method on Clyde Barrow Jr., the sole proprietor of the unincorporated business.
a. Talia prepared a net worth method using the information she had collected that follows.
a. After Talia completed her analysis, Clyde’s attorney raised an objection. Talia asked to meet with Clyde again, and at that meeting Clyde told her that he believes that the cash on hand amounts that were used in the projection were too low. Although he had provided the amount to her earlier, he now believes that it was much higher than the amounts used and seems to recall that he had about $200,000 stashed away in case the economy crashed. When Talia asked him about the source of the $200,000, Clyde shrugged and said, Part of it was an inheritance from my dear old Aunt Hattie, and the balance was just some money I had saved.
b. How should Talia respond to this new information (i.e., would she want additional information from Clyde), and what are the sources of evidence that she needs to follow up on his assertion?
After reading Chapter 10 of your Forensic Accounting and Fraud Examination textbook, complete the following problems, which will help you apply your knowledge of detecting a potential fraudulent activity:
Case 54 on page 322.
Case 55 on page 324.
54. Quality-Best, the company for which Christie Bowers works, manufactures and sells components for the aerospace industry. In her position as chief internal auditor, she has investigated several suspected frauds over the years and she was reviewing a new one. The current case began when a tip was submitted through an anonymous hotline. The tipster said that Johnnie Grant, an employee in the purchasing department, was receiving money from a supplier of Quality-Best.
Christie’s first step was to review the personnel structure of the purchasing department. Just as she suspected, Johnnie was the person in charge of ordering components for all manufacturing processes. She wasn’t surprised; Johnnie had been at Quality-Best for more than 20 years and had risen in the ranks to become supervisor.
Johnnie had three assistant buyers. Christie decided to interview these buyers before she interviewed Johnnie. The first buyer, Donna Malone, who was the most recent hire in the purchasing department, was rather quiet and seemed to answer questions in a straight-forward manner. The second buyer, Alan Fuentes, had been at Quality-Best for six years. He explained that each buyer had been assigned 10 unique parts to order. Each buyer was to purchase an adequate amount of high-quality parts that are used in the manufacturing processes. His supervisor, Johnnie, reviewed the purchases of these buyers and must sign off on the orders to indicate that he approved them.
The third buyer, Karen Rosen, has been at Quality-Best for 12 years. Portions of the interview with her follow.
After introducing herself, Christie proceeded to ask Karen about her work.
I work here at Quality-Best in the internal audit department, Christie said. It’s the one that usually does the analysis of whether to buy equipment around here. Today, I’ve been looking into the ordering function to determine whether it can be improved, so I’d like to talk with you about your position and what you and others in ordering Page 323department do. If you have any suggestions for improving its function, let me know.
Even after our chat, my door is always open, and I’d be interested in your views.
First, please describe your duties here in the department.
I’d be happy to. I’m one of four buyers here at Quality-Best. Alan, Karen, and I are responsible for purchasing 10 different parts for various manufacturing processes. We have an approved vendor list that we use and can’t purchase from any company not on the list unless we ask for approval from Johnnie.
You mentioned four buyers. Who is the other one?
Oh, that would be Johnnie. A few years ago, he took on some of the parts I was handling and then, as new ones were added, he took responsibility for those, too.
How many unique parts do you think he purchases?
Now? asked Karen.
Yes, Christie replied.
Well, I think he orders for about 15 different parts. I’m not really sure because only he knows.
You mentioned that Johnnie must approve your purchases. Have there been any times that Johnnie hasn’t approved them?
Well, yes, replied Karen, as she shifted positions.
Would you tell me about one of those times?
Could we talk about this later? I really have a lot of work to do.
Just a couple more questions, Karen. I promise. Now, would you tell me about one of the times that Johnnie has not approved your purchases?
Ok, ok. It’s usually about quality. Sometimes Johnnie says that a particular vendor doesn’t provide a part that has the quality that another vendor has. Sometimes he’s even recommended a vendor who’s not on the approved list.
And did you question him about ordering from a vendor who’s not on the approved list?
Yes, and he always says he’ll add the vendor later.
Does he?
Most of the time, yes, but there were a couple of times that he did not. I didn’t ask him about these. After all, he’s my boss, and he’s the one who does my personnel evaluation.
You mentioned that sometimes the issue is the quality of a part provided by a particular vendor. Would you tell me about that?
Yes, said Karen. Christie could sense a feeling of reluctance to answer. I know Johnnie is trying to save money, but I don’t think these parts have nearly the quality that the parts that I had chosen have.
What about the costhow does that compare between the items?
Now that’s the strange part. The parts that I don’t think are as good as those I’ve recommended cost more, not less.
Abruptly, Karen says, I’ve talked enough. I have to get back to my work.
May I talk with you again if I have additional questions?
I I yes, I suppose that would be fine. But I really don’t know anything more, so I don’t think I could help you.
One last thing, Karen: Please don’t mention what we’ve talked about here today to anyone. Can you do that?
Yes, I suppose I can, replied Karen.
Christie left Quality-Best that day thinking that Karen knew more than she was saying but was reluctant to talk.
a. Before interviewing Johnnie, is there any information from his personnel file that you would like to know?
b. Before interviewing Johnnie, would you like to ask Donna and Alan any additional questions?
c. Before interviewing Johnnie, what documentation would you like to see and why? (Hint: Think of information that might indicate vendor fraud.)
d. Before interviewing Johnnie, is there anything else you might have wanted to know about him that perhaps Donna, Alan, and Karen could tell you because they see him almost daily?
55. Edsel Edison, an employee of Go Fast & Play Hard, has been with the company since it opened four years ago. Go Fast is a company that is still experiencing growing pains, and current management believes that the company can make money if costs are kept low. This is the reason Easy Smith, the operating manager, has given for not implementing more internal controls. In particular, he has rejected the recommendation to add additional employees to produce better separation of duties as unnecessary. As a result, Edsel is the only person who does the accounting, including the billing and collection, for Go Fast.
Easy had become a bit uneasy lately. He’d noticed that within the last two years, cash collections on accounts receivable do not seem to have been as high as he would have expected. Business, though, had been booming, and Easy has been able to negotiate several new contracts over the last year. He’d asked Edsel about the lower level of collections and told Victoria Bass, a forensic accountant, Edsel says it’s the economy. You know times are tough. I’ve experienced tough times even when the economy is going well.
Easy filled Victoria in about various aspects of the business such as the fact that there are three other persons who work in the shop: Theresa Parks, the receptionist/secretary; Andre Green, the assistant salesperson; and Patrick Fine, who is in charge of promotions and advertising. She learned that on Fridays, Edsel, Theresa, Andre, and Patrick, who have all been with the company since it began, go out to lunch together.
a. What documents/files would Victoria want to see before interviewing anyone?
b. What other procedures from Chapter 9 (the evidence chapter), if any, should Victoria consider using to determine whether her suspicions of Easy are valid?
c. Should she consider interviewing Theresa, Andre, and Patrick? Why or why not?
