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Case 1

Cal Smith Jr. is the night manager at a local doughnut shop that is doing very well.
The shop sells doughnuts 7 days a week, 24 hours a day. Cal runs the graveyard shift by
himself, since none of the other employees want to work at night. Since opening six
months ago, Cal has not been able to find anyone to work for him and therefore has
never missed one day of work. Cal makes his deposit every morning before going home.
Cal feels that he is overworked and underpaid. The franchise owner, Kenny Jones,
has praised Cal for his hard work and dedication to the company. Kennys only concern is
that, once or twice a week, an entire batch of traditional glazed doughnuts has been
thrown away because of over-baking. Despite these problems, Cal maintains a clean work
environment and is considered a valuable employee.
Recently, Cal has yelled at people on shifts before and after him for seemingly
insignificant reasons. He was hired as manager because he gets along with everyone and
is usually easygoing. His recent irritability could stem from the fact that business is
slowing down and he does not have much interaction with anyone at night. He also has
been complaining that he has not been getting very much sleep. One day, Cal came to
work in a new BMW M3, the car of his dreams. Cal said that his dad helped him buy the
car.
1. What areas of the business are most at risk for fraud?
2. Identify any symptoms of fraud that appear to exist at the doughnut shop.
3. What steps could be taken to reduce opportunities for fraud?
Answer :
1. The business is at risk because there is no separation of duties. Cal
Smith, Jr. works the night shift alone and then accounts for and
deposits the money at the bank in the morning
2. Possible symptoms:
Cal has never missed a day of work.
Cal feels he is overworked and underpaid.
Numerous doughnuts are thrown away for over baking.
Cal was hired because he was friendly; he is now often angry and
frustrated.
Cal has not been getting very much sleep.
Cal recently purchased the car of his dreams.
3. Possible steps to reduce opportunities for fraud:
Have other employees work at night.
Do not allow Cal to make the deposits or handle cash.
Force Cal to take some time off periodically.
Pay Cal more money so he does not feel overworked and
underpaid.

Case 2
James Davis owns a small Internet service provider business. Recently, customers
have been complaining that they are overcharged and are not receiving timely customer
service. Billing rates seem to increase without notice.
Five years ago, James used funding from several different investors in order to
start his Internet service. Currently, he has 17 outstanding bills to be paid, all with late
charges. Five of the bills include notices stating that lawsuits are pending. Also, he has
not paid dividends to investors in two years.
Every day, James drives either his Mercedes Benz or his new Lexus to work.
Before starting the business, James drove only one car, a Suzuki Samurai. James now
lives in a palatial home and owns very expensive furniture. Employees constantly ask
James for new equipment, but the boss refuses to update the old equipment. Two
weeks ago, James was irate and fired one of his accounting clerks for not depositing
some checks on time. James is known for losing his temper.
1. Discuss any fraud symptoms that are present in this case.
2. Why would complaints from customers be a fraud symptom?

Answer :
It is possible that James could be committing fraud.
1. Fraud symptoms:
Outstanding bills need to be paid.
Lawsuits are pending from lack of payment.
James drives nice cars.
James has a very expensive home.
James will not update equipment.
James is known for losing his temper.
Many customers are complaining.
2. Most businesses experience customer complaints. While customer
complaints are common, they can be possible fraud symptoms, especially
if customers do not believe their accounts or charges appear appropriate.
Whenever tips or complaints are received, they must be treated with care
and considered as possible fraud symptoms but not as actual evidence of
fraud.

Case Study 1
The balance sheet and income statement for ABC Company for the years 2011 and 2012
are as follows:
Questions
1. Perform vertical and/or horizontal analysis of the statements and identify two
things that appear to be unusual and could be possible symptoms of fraud.
Answer
The following are four possible symptoms:
1. ABCs revenues increased by 53% in 2007, while inventory
decreased by 27%.
2. ABC has increased revenues in 2007, while receivables decreased by 23%.
3. ABC has increased revenues in 2007, while payables decreased by
47%.
4. Warehousing costs have increased while inventory balances have
decreased.

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