Page 168 - Accounting Information Systems

CHAPTE R 3 Ethics, Fraud, and Internal Control 139

24. What is lapping? 34. What are the four modifying assumptions that guide
25. What is collusion? designers and auditors of internal control systems?
26. What is bribery? 35. Give an example of a preventive control.
27. What is economic extortion? 36. Give an example of a detective control.
28. What is conflict of interest? 37. Give an example of a corrective control.
29. Define check tampering. 38. What are management’s responsibilities under
Sections 302 and 404?
30. What is billing (or vendor) fraud?
39. What are the five internal control components
31. Define cash larceny.
described in the SAS 78/COSO framework?
32. What is skimming?
40. What are the six broad classes of physical control
33. What are the four broad objectives of internal activities defined by SAS 78/COSO?
control?

Discussion Questions

1. Distinguish between ethical issues and legal issues. 10. Discuss the nonaccounting services that external
2. Some argue against corporate involvement in auditors are no longer permitted to render to
socially responsible behavior because the costs audit clients.
incurred by such behavior place the organization 11. Discuss whether a firm with fewer employees than
at a disadvantage in a competitive market. Discuss there are incompatible tasks should rely more
the merits and flaws of this argument. heavily on general authority than specific authority.
3. Although top management’s attitude toward ethics 12. An organization’s internal audit department is usu-
sets the tone for business practice, sometimes ally considered an effective control mechanism for
it is the role of lower-level managers to uphold a evaluating the organization’s internal control
firm’s ethical standards. John, an operations-level structure. The Birch Company’s internal auditing
manager, discovers that the company is illegally function reports directly to the controller. Com-
dumping toxic materials and is in violation of envi- ment on the effectiveness of this organizational
ronmental regulations. John’s immediate super- structure.
visor is involved in the dumping. What action 13. According to SAS 78/COSO, the proper segrega-
should John take? tion of functions is an effective internal control
4. When a company has a strong internal control procedure. Comment on the exposure (if any)
structure, stockholders can expect the elimination caused by combining the tasks of paycheck prepa-
of fraud. Comment on the soundness of this state- ration and distribution to employees.
ment. 14. Explain the five conditions necessary for an act to
5. Distinguish between employee fraud and manage- be considered fraudulent.
ment fraud. 15. Distinguish between exposure and risk.
6. The estimates of losses annually resulting from 16. Explain the characteristics of management fraud.
computer fraud vary widely. Why do you
17. The text identifies a number of personal traits of
think obtaining a good estimate of this figure is
managers and other employees that might help
difficult?
uncover fraudulent activity. Discuss three.
7. How has the Sarbanes-Oxley Act had a significant
18. Give two examples of employee fraud, and explain
impact on corporate governance?
how the thefts might occur.
8. Discuss the concept of exposure and explain why
19. Discuss the fraud schemes of bribery, illegal gratu-
firms may tolerate some exposure.
ities, and economic extortion.
9. If detective controls signal error flags, why
20. Distinguish between skimming and cash larceny.
shouldn’t these types of controls automatically
make a correction in the identified error? Why 21. Distinguish between a shell company fraud and
are corrective controls necessary? pass through fraud.