Previous Page Next Page Page 3 of 9 ze 4: Question 3 (12 points) MARION CORPORATION: Consider the following two separate situations at Marion Corporation: age 5: UP Page 6: 6 7 8 SITUATION A: There are a group of middle-level non-managerial employees in Marion's accounting department who are very dissatisfied with their salaries. They are often heard to say that "Senior Managers get thousands of dollars in bonus payments, but our salaries are so low. We deserve more from the company!". This same group of accounting employees are responsible for disbursing several charitable donations from Marion in Cash every month (i.e. Marion donates cash to the Charities in currency and bills, rather by using a cheque or e-transfers payments) and these accounting employees are also responsible for recording the cash disbursements in the accounting information system. However, the Accounting Manager will always verify that the payments were made by communicating with each charity directly. The Accounting Manager never fails to ask each charity, even in months when she takes a vacation. -- 9 --- SITUATION B: The Senior Management team at Marion works very hard, often 80 or more hours per week. At a recent golf tournament, every member of this Senior Management team agreed that "despite the fact we all receive thousands of dollars in honns navments. we could earn even more for other companies in the same acer c ON O @ 2 # 3 $ 4 % 5 A 6 & 7 00 0 W e r t u 1 O S d g h j V b n m alt : SITUATION B: The Senior Management team at Marion works very hard, often 80 or more hours per week. At a recent golf tournament, every member of this Senior Management team agreed that "despite the fact we all receive thousands of dollars in bonus payments, we could earn even more for other companies in the same industry. We deserve more from the company!". The bonus plan under which the Senior Managers are compensated increases bonus payments for increases in Marion's reported Net Income in its audited financial statements, with no limit (i.e. the higher the audited reported Net Income, the higher the payments to the Senior Managers). This same group of Senior Managers are responsible for the financial reporting system and internal controls at Marion. Before the recently concluded audit, the Senior Managers (through the Chief Financial Officer) decided to estimate the useful life of a newly purchased piece of specialized equipment to be 100 years, despite the fact everyone knew the equipment never lasts more than 10 years. This decision increased Marion's audited reported Net Income significantly and for some unknown reason, the auditors did not question it. 6: 7 8 REQUIRED: (a) In your own words, identify and explain the three components of the fraud triangle. Further, explain what is highly likely to occur if all three components exist in a given situation? 7 (b) Which of Situation A or Situation B is most likely to experience fraudulent activity? Explain WHY with reasons. acer ** A $ 4 9% 5 & 7 3 6 8 9 0 t 0 p S d 9 h k b n