QUESTION 1

1. Company Blue is thinking about implementing various internal control procedures. Two of these procedures are as follows:

Control I - Daily cash collections are deposited into the business bank account on a daily basis

Control II - Sales returns are shipped to the sales department (separate from the accounting department) for preparation of a receiving report instead of the inventory warehouse as a way to reduce cost and paper work

After, reading these two controls, you are required to advise Company Blue whether the two controls listed is a strength or risk related to internal controls in the revenues and cash collection processes.

	a.	Control I Control II Strength Strength
	b.	Control I Control II Risk Risk
	c.	Control I Control II Strength Risk

d.

Control I Control II Risk Strength

10 points

QUESTION 2

1.

Company Financial Analysis
	1	2	3	4	5	6
Net sales	5,043,000	76,591,000	123,606,000	113,951,000	184,861,000	362,467,000
Cost of goods sold	5,757,000	62,571,000	110,577,000	111,445,000	137,936,000	269,828,000
Inventory	3,181,000	29,133,000	33,022,000	22,501,000	45,106,000	85,172,000
Accounts receivable	2,929,000	16,941,000	19,290,000	16,041,000	39,766,000	57,144,000
Net income	(3,247,000)	4,788,000	(5,744,000)	(16,773,000)	22,711,000	31,147,000
Gross margin Percentage	-14%	18%	11%	2%	25%	26%
Accounts receivable Turnover		7.709209864	6.823217687	6.450482579	6.625011199	7.48048705
Inventory turnover		3.872686761	3.558104738	4.014372422	4.080524206	4.142341761

Analyze the following analysis above, paying close attention to net sales, and determine if you see any unusual patterns or changes above and if so during what year(s)?

	a.	Periods 1 and 2
	b.	Period 3
	c.	Periods 2 and 3
	d.	Periods 3 and 4
	e.	Periods 5 and 6

10 points

QUESTION 3

1. What are some of the characteristics indicating risk with respect to the sales process?

	a.	Many key customers
	b.	Shipment controlled directly by the company
	c.	Frequent changes made to sales prices
	d.	Pricing structure has small volume of transactions a
	e.	Product mix can easily be differentiated

10 points

QUESTION 4

1. How might a company use GAAP to overstate revenues or to conduct earnings management?

	a.	Recognize revenue even though services or goods have not been provided
	b.	Shipping inventory right before the end of the calendar
	c.	Understating or not recording expenses to show higher profits
	d.	Not recording or accounting for sales returns
	e.	All of the above

10 points

QUESTION 5

1. Customer A owed $15,000 from a prior sale to the Orange Company. The established credit limit for this customer is $18,000. Customer A is purchasing an additional $5,000 of inventory on credit with the Orange Company. What will happen to this purchase order request (answer should be relevant to the additional $5,000 purchase on credit)?

	a.	Customer As request for additional inventory will be approved at that moment, processed and shipped to their place of business
	b.	Customer As request requires the credit approval department to override controls to increase the credit limit of Customer A.
	c.	Customer As request for additional inventory will not be approved at that moment due to their credit limit.
	d.	Customer As order will be approved only when they have paid the $15,000 balance owed
	e.	Customer As order will be approved at that moment, but only for $3,000 worth of inventory will be shipped

10 points

QUESTION 6

Company Financial Analysis
	1	2	3	4	5	6
Net sales	5,043,000	76,591,000	123,606,000	113,951,000	184,861,000	362,467,000
Cost of goods sold	5,757,000	62,571,000	110,577,000	111,445,000	137,936,000	269,828,000
Inventory	3,181,000	29,133,000	33,022,000	22,501,000	45,106,000	85,172,000
Accounts receivable	2,929,000	16,941,000	19,290,000	16,041,000	39,766,000	57,144,000
Net income	(3,247,000)	4,788,000	(5,744,000)	(16,773,000)	22,711,000	31,147,000
Gross margin Percentage	-14%	18%	11%	2%	25%	26%
Accounts receivable Turnover		7.709209864	6.823217687	6.450482579	6.625011199	7.48048705
Inventory turnover		3.872686761	3.558104738	4.014372422	4.080524206	4.142341761
Using the financial analysis above, if you determined that this company was conducting fraud around what year (consecutive such as 1 and 2, etc) do you think the company started engaging in such activities ?

1.

	a.	Periods 2 through 3
	b.	Periods 3 and 4
	c.	Periods 5 and 6
	d.	Periods 1 and 2
	e.	Period 1 only

10 points

QUESTION 7

1. The form, or source document, that conveys the details about a customers order, prepared by the customer/buyer, is referred to as:

	a.	Purchase Order
	b.	Sales Order
	c.	Vendor Invoice
	d.	Sales Order details
	e.	Sales Invoice

10 points

QUESTION 8

1. In 1971, at the age of fourteen, I began my employment at Crazy Eddie as a stock boy. From the very beginning, I was involved in cash skimming and overstating insurance loss claims. This was how the company did business, and I never once questioned our methods. As a private company from 1969 to 1979, Crazy Eddie's primary frauds were:

(1) Tax evasion (skimming cash sales from customers to avoid income and sales taxes)

(2) Evading payroll taxes by paying employees in cash "off the books" rather than reporting income to the Internal Revenue Service, and

(3) Reporting phony or exaggerated insurance claims to increase profits.

Which control procedure would have detected this kind of fraud?

	a.	Review A/R to see the appropriate reduction to outstanding customer balance after the payment has been received
	b.	Match cash receipts with original sales invoice
	c.	Send third party confirmation to the customer(testing A/R balance) requesting their total outstanding balance due to the company
	d.	Review customer purchase order, recalculate sales invoice, reviewing shipping log and review cash receipts for customer payment
	e.	All of the above

10 points

QUESTION 9

1. The following circumstances may indicate risks related to cash collections, except:

	a.	Centralized cash collections
	b.	High volume of cash collections
	c.	Lack of consistency in the volume or source of cash collections
	d.	Presence of cash collections denominated in foreign currencies
	e.

10 points

QUESTION 10

1. Auditors normally perform what is known as "fill in the blank" at year-end to insure that revenues in the current year are not improperly shifted to the next year and revenues from the next year are not improperly shifted to the current year. For example, unusually large amounts of funds from sales claimed in the days before the end of the fiscal year, but not deposited into company bank accounts until after the fiscal year ended, may indicate an early recognition of revenues by shifting sales from the following year to the current year.

The term that best completes the fill in the blank is:

	a.	Channel stuffing test
	b.	Sale-cut off test
	c.	Deposits in transit test
	d.	A/R Reconciliation
	e.	Vulnerability testing

10 points

QUESTION 11

1. Based on question # 2, what happened at MiniScribe, how would you develop an effective audit plan that would uncover this fraud? Listed below are some audit steps, determine which of the following steps would provide the most audit evidence.

i. Obtaining a third party confirmation of the amount of goods that were in transit or currently held by the distributor

ii. Randomly selecting a sales transaction, tracing the sales from the initial recording of the transaction to the actual shipment of goods, obtain and review the payment of this sales transaction, determine the cost of goods sold and verify the appropriate reduction to inventory

iii. Determine if the customer(s) actual exist

iv. Determine if there was an approved sales order

	a.	iii and iv
	b.	i and iii
	c.	i, ii, and iii
	d.	iii and iv
	e.	ii only

10 points

QUESTION 12

1. What Happened At MiniScribe

Many of the problems of MiniScribe started well before the 1988 problems with inventory and lower sales due to the industry conditions. In September 1987 the company took a companywide physical inventory and it was discovered that actual inventory was $15,100,000 short of the recorded inventory. After discussions at Longmont headquarters a group of managers came up with several schemes to cover up the shortfall for 1987 the schemes require the cooperation of a substantial number of company personnel. The effects of these activities allowed MiniScribe to meet its announced annual profit goal for 1987. The measures the group took to cover up the shortfall included:

False inventory was generated by packaging bricks as finished products and shipping them to distributors at the end of the year, so that they would be in transit at the time of the 1987 fiscal inventory. A computer program was created that would generate fictitious inventory serial numbers for the boxes of bricks. The program was named Cook Book. After the inventory the company called the distributors and requested that they return the products that have been shipped to them by mistake.

The example listed above is an example of:

	a.	Fraud
	b.	Channel stuffing
	c.	Revenue inflation techniques
	d.	Earnings Management
	e.	All of the above

10 points

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