Careful scrutiny of accounting records and financial statements can lead to the discovery of fraud or embezzlement. Each of the following situations may indicate a break- down in internal control. Indicate the nature of the possible fraud or embezzlement in each of these situations. E-11 1. Wages expense for a branch office was 30 percent higher in 20x2 than in 20x1, even though the office was authorized to employ only the same four employees and raises were only 5 percent in 20x2.

2. Sales returns and allowances increased from 5 percent to 20 percent of sales in the first two months of 20x2, after record sales in 20x1 resulted in large bonuses for the sales staff.

3. Gross margin decreased from 40 percent of net sales in 20x1 to 20 percent in 20x2, even though there was no change in pricing. Ending inventory was 50 percent less at the end of 20x2 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.