NAME : Pham Quoc Thuy Tran

ID: 31161021792

HOMEWORK

CHAPTER 6

6-33

1. The internal control deficiencies that allowed the fraud to occur and to continue for
such a long period of time :
- No segregation of duties over keeping the accounting records and distributing funds
- Crundwell opened an account in the name of the city of Dixon and RSCDA ( for her
own benefit) . Meanwhile, she was also able to deposit city funds from other sources
into the Capital Development Fund account ( this is the city’s account)
- She wrote checks from the Capital Development Fund to the Treasurer.She then
deposited those funds in RSCDA.
- She was the only authorized check signer for account and she’s the only person
reviewed all city bank statements and the side bank account was no recorded on city
general ledger.

2. The reason to explain why auditors did not detect the fraud
- The CPA firm that did the city’s audit had been the city’s auditor for over 20 years.
- The auditors had also been doing Rita’s personal tax returns for over 20 years on the
side.
- The fraud was additionally caught by a “fill-in” bookkeeper by accident while Rita was
on vacation.
-
DESIGN THE RELEVANT CONTROL TO PREVENT MITIGATE AND DETECT THE
FOLLOWING RISK????
1) Inventory can be stolen -> apply physical control : put inv in the separate in the
locked warehouse, install cameras, only warehouse keeper can manage and enter
the storage. If the shipping staff want to take out any inv, they need to sign the
paper.
2) The customer doesn’t pay the purchase on credit -> a.credit approval : b4 we agree
to sell to customer, we need to know about their info , and set a minimum
payment . Also for longterm customer, we need to justify by looking at the history.
B.The credit approval person need to be independent of the saleperson. C. we
 need someone to write down the acc payable / acc receivable to track the client
and remind them if they haven’t finished paying
3) The company pay salary to a ghost staff
- Double check to verify the existence of the worker
- All staff recruitment need to be announced only HR independently
- Sign contract with the worker
- The bank account (should be require by HR) of worker need to link directly to that
person
- Should transfer directly from the bank to the person.

Homework answer:

1. Internal control deficiencies

a) Trust : not an internal control, however, Dixon totally believes Crundwell =? Give
Crundwell wide rein over city’s finance and set the stage for her massive fraud.
b) Lack of management review: Dixon let Crundwell handle all of the finances for the
city
c) Ineffectiveness of segregation of duties : Crundwell has various responsibilities =>
She is able to receive ,sign, deposit checks with little oversight from city officials =
operate a fairly fraud scheme
d) Lack of independent audits : Dixon relies on annual audits and review by state => no
independently verified
2. The auditor was downright negligent in not recognizing signs that fraud was occurring.
The auditor had a failure to detect clearly fraudulent invoices crundwell produced,
failure to verify that city funds were being used for their intended purpose, and failure
to request appropriate documentation for income that crunewell was receiving outside
of her city job

1. Internal control deficiencies that led to the fraud are :

- Internal control should be in place with provide reasonable assurance that not only one
individual handle a transaction from its inception to its completion
- Lack of risk assessment : no such assessment was carried out in Dixon over the period
- Monitoring of controls: the control in Dixon, were not monitored over the period =>
frauds remain undetected
- Lack of performance review : the control of the entity should independently evaluate
performance with respect to IC => There are no reviews carried with respect to the
performance in Dixon
- Segregation of duties: there is no a complete or adequate segregation of duties that
arise due to legal requirements or limited number of personnel

2. The reason why the auditor did not detect the fraud :
- Fail to develop an understanding of the IC of the entity
- No proper audit plan and strategies implement
- Fail to identify the circumstance indicating the susceptibility of the fraud
- Crundwell has complete authority for making bank transaction -> the auditor should
take additional care for those transactions -> the auditor has acted in negligence

Teacher note:
she open a bank account -> she handles all finances -> only her can sign approve or
withdraw
false invoice
lack of segregation