One of the largest losses in history from unauthorized securities trading involved a securities trader for the French bank, Societe Generale (SCGLY). The trader was able to circumvent internal controls and create more than $7 billion in trading losses in slx months. The trader apparently escaped detection by using knowledge of the bank's internal control systems learned from a previous backoffice monitoring job. Much of this monitoring involved the use of software to monitor trades. In addition, traders were usually kept to tight trading limits. Apparently, these controls falled in this case. Answer the following True or False questions about Societe Generale's internal controls. These will assist you in determining the weaknesses. 1. The loss could have been avolded with a number of internal controls. 2. Required vacation time may have alerted managers to the hidden losses. 3. If traders have access to the monitoring software, then the separation of duties control is violated. 4. The trader was not under managerial oversight. All-Around Sound Co. discovered a fraud whereby one of its front office administrative employees used company funds to purchase goods, such as computers, digital cameras, and other electronic items for her own use. The fraud was discovered when employees noticed an increase in delivery frequency from vendors and the use of unusual vendors. After some investigation, it was discovered that the employee would aiter the description or change the quantity on an invoice in order to explain the cost on the bill. Answer the following True or Folse questions about the company's internal controls. These will assist you in determining the weaknesses. Purchases should be initiated by a requisition document. An accounts pavable clerk should match the requisition, purchase order, and invoice before any payment is made. The involice should have been delivered directly to the accounts payable clerk to avoid corrupting the document. Financial Statement Fraud A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victori Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as "sold," and required sales orders to be backdated so that the sale could be moved back to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony. a. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud? b. Would an audit committee made up of representatives from senior management be effective in stopping this type of fraud? Entries for Bank Reconciliation The following data were accumulated for use in reconciling the bank account of Creative Design Co. for August 20Y6: 1. Cash balance according to the company's records at August 31,$42,920. 2. Cash balance according to the bank statement at August 31,$56,300. 3. Checks outstanding, $25,390. 4. Deposit in transit not recorded by bank, $13,325. 5. A check for $150 in payment of an account was erroneously recorded in the check register as $1,500. 6. Bank debit memo for service charges, $35. Journalize the entries that should be made by the company that (a) Increase cash and (b) decrease cash. If an amount box do
