Careful scrutiny of accounting records and financial statements can lead to the discovery of fraud or embezzlement. Each of the situations that follow may indicate a breakdown in internal control. Indicate the nature of the possible fraud or embezzlement in each of these situations.
1. Wages expense for a branch office was 15 percent higher in 2014 than in 2013, even though the office was authorized to employ only the same four employees and raises were only 2.5 percent in 2014.
2. Sales returns and allowances increased from 2.5 percent to 10 percent of sales in the first two months of 2014, after record sales in 2013 resulted in large bonuses for the sales staff.
3. Gross margin decreased from 20 percent of net sales in 2013 to 10 percent in 2014, even though there was no change in pricing. Ending inventory was 25 percent less at the end of 2014 than it was at the beginning of the year. There is no immediate explanation for the decrease in inventory.
4. A review of daily records of cash register receipts shows that one cashier consistently accepts more discount coupons for purchases than do the other cashiers.