For each independent case presented below use Figure 17

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For each independent case presented below, use Figure 17.1 as a guide in explaining the steps
you would take to uncover fraud. Also suggest at least two internal controls that could have
prevented the fraud described.a. KC Group is basically a high-integrity company with sound
approaches to financial reporting. Associates involved in financial reporting are of high
competence and ethical values. KC Group has grown in recent years. There are new systems,
sometimes administered by those who do not fully understand them. KC Group is performance
driven, and managers are under tremendous pressure to make their goals. KC Group has
acquired several new companies. Some of the associates in the acquired companies do not
share certain values inherent in the KG culture. Consequently, reporting and integrity in some of
these subsidiaries have proven to be a problem. At an acquired subsidiary, certain executives
who never traveled had traditionally been allowed $2,000 to $25,000 in travel advances. These
permanent travel advances were essentially noninterest-bearing loans. The subsidiary had been
told to stop the practice. Instead, the subsidiary’s controller obtained repayment checks from
the executives and credited the travel advance account. Rather than actually depositing the
checks at the bank before year-end, he held them until after the end of the year. He then issued
company checks to the executives to replace the travel advances purportedly repaid.The
executives thus could cover their own checks by depositing company checks before their
checks cleared. The controller back-dated the deposit slip reflecting the repayments from the
executives and a fictitious deposit in transit. Although the amount was minor, the controller was
knowingly and intentionally making false entries in the company records. (Source: C.
Thompson, “The Reporting Challenge,” Internal Auditor, December 2002.) b. During a routine
audit of your client, you discover the price the company pays for widgets has doubled in the
past year. Moreover, you notice all of the business is going to a new ven-dor. You check further
and find the price of widgets on the open market is half what your client is currently paying.
Maybe there is a legitimate reason for this anomaly. Or maybe it’s a fraud. (Source: J. Wells,
“Sherlock Holmes, CPA—Part 1,” Journal of Accountancy, August 2003.)View Solution:
For each independent case presented below use Figure 17 1

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