Elma Joyce R.

Bondoc 2-BS A ACCA 109 /AC23

Discuss the following comprehensively (5 points)

1. The Integrity Initiative Campaign.

With the aim of strengthening the ethical standards in business, a private sector led
the campaign in 2010 called the Integrity Initiative Campaign. The Integrity Initiative
Campaign is a multisectoral campaign that seeks to institutionalized integrity standards
among various sectors of the society-business, government, judiciary, academe, youth, civil
society, church, and media. The Integrity Initiative Campaign was organized after the
Philippines received a grant from Siemens. Their goal is to help diminish, if not fully
eradicating, the vicious cycle of corruption in the Philippines, which not only brings poverty
but obstruct the competitive business environment in our country. Integrity Initiative hopes to
build trust in government, a more equitable society and fair market conditions by having a
more transparent and honest governance that in turn can make the business environment
competitive (i.e. more jobs, foreign investments etc.). Through this campaign, the dream of
changing the Philippines image from a corrupt country to a highly ethical and progressive
one. Integrity Initiative Campaign organized consultations, roundtable discussions and public
forums that involve business leaders, compliance officers, corporate governance experts,
academics and practitioners from SME to Fortune 500 companies as a step to achieve their
goal. They published “An Integrity Compliance Handbook” containing key documents and
toolkits in Integrity Initiative for the use of organizations to promote ethical business
practices. Because of their effective campaign, more and more organizations and industry
associations take part in their movement.

2. What are some of the means by which corruption can be reduced if not totally eliminates
in the Philippines?

Even though corruption in the Philippines is still rampant, various measures can be
adopted to prevent corruption. One of the measures is having a clear business processes.
Irregularities in a business or in any sector can be diminished by having a defined workflows,
clear directives on financial approving authorities, and standard procurement instructions.
However, it is not to enough to have this policy. A review, a diligent record-keeping and
audits can be done regularly to ensure that the processes are updated and that all the
processes are done in a transparent and honest way. Also, a policy on gifts and entertainment
can prevent corruption. Having a policy on how frequent and what kinds of gifts are accepted
is a must. Giving lavish gifts is tantamount to corruption even if the request is not accepted
by the receiver. Internal and external policy on gifts and entertainment is must to ensure a
clean and honest transaction inside and outside the entity. Conflict of Interest can be
eradicated if a company has a declaration system regarding this matter. Declaration of
conflict of interest makes an individual sever from his/her personal intentions and thus helps
his/her organization flourish. Examples may include but not limited to transferring of
employee to another department, excluding a director when talking about his remuneration,

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informing the company of your directorship in another company to avoid interlocking

directorship. Lastly, a convenient corruption reporting system can be adopted by any entity.
It can control corruption and bribery risks. A whistle-blowing policy can make an employee
raise their concerns without the fear of retaliation. Employees can file anonymously their
concerns through a publicized email or phone number.

3. Describe an ethical dilemma. How does a person resolve an ethical dilemma?

An ethical dilemma is a situation a person faces in which a decision must be made

about the appropriate behaviour. It involves choices wherein an individual is force to make a
decision about the correct and proper behaviour. In resolving an ethical dilemma, a six-step
approach was given. (1) Obtain the relevant facts; (2) Identify the ethical issues from the
facts;(3) Determine who is affected by the outcome of the dilemma and how each person or
group is affected; (4) Identify the alternatives available to the person who must resolve the
dilemma – involves brainstorming, cost-benefit analysis, and seeking advice from those who
could help you; (5) Identify the likely consequences of each alternative and lastly (6) Decide
the appropriate action.

4. Discuss how over-persuasion becomes unethical.

Persuasion a normal practice in a business, however, it becomes unethical when it
was used solely to have a larger profit not considering the interest of the buyer. Some
instances like urging the customer to satisfy a low priority need for merchandise, playing
upon intense emotional agitation to convince a person to buy, convincing a person to buy
what he does not need just because he has the capacity to buy it. Persuasion is useful in a
business but one must know when a persuasion becomes unethical because it may lead to
a more unethical practice. And remember that a business which performs an unethical
practice is bound to fall in the long run.
5. Explain the economic impact of observing business ethics. What are the impacts of
business ethics in to society in general?

Business ethics makes a business economically and socially responsible because it

provides conduct for a good business practice that can benefit the whole society as whole.
Economic impacts may include but not limited to wages to employees, materials from the
suppliers, and prices of products that is charged to their customers. A positive economic
impact can be a result of a proper wage payment, proper and on-time payment of
suppliers and a good value products for the price charged for the customer. All these
good practices can benefit not just the business but the economy as whole. Social impacts
of a corporate governance can contribute to the ethical climate of the society. If a
business engage in bribes, fraud, breach of law and corruption the whole society suffer as
a whole. It can affect the prices of the products that it turns compromise the economical
standing of the whole country.

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6. Enumerate and explain at least five(5) characteristics and values associated with ethical
behaviour.
 Integrity- be principled, honourable, upright, courageous and act on convictions;
do not be twofaced or adopt an end-justifies-the-means philosophy that ignores
principles.
A man with an integrity stand on his convictions and principles and is not
too goal-headed wherein those on his surroundings are ignored and only
his success matters.
 Honesty- be truthful, sincere, forthright; do not cheat, steal, lie, or deceive or act
deviously
An honest man always tells truth in a situation. Although truth hurts (for
someone), it is better to tell it than to live a life of lies and mistrust among
your people.
 Trustworthiness and Promise Keeping – be worthy of trust, keep promises,, full
commitments; do not interpret agreements in an unreasonable manner to create an
excuse or to justify for breaking commitments
A man who knows how to keep secrets and is trustworthy is loved by
everyone. Don’t make any excuses when breaking a promise, just accept it
and look for ways to make it up to someone.
 Loyalty and Confidentiality – be faithful and loyal to family, employers, clients
and country; avoid conflict of interest
Be loyal and committed to the task you accepted. Observe confidentially
in matters which requires a high degree of care. In professional context,
avoid accepting tasked that you know that can compromise your prior
commitments.
 Caring for Others- be caring, kind, and compassionate; share, be giving, be of
service to others; help those in need and avoid harming others
“Man is not an island”. We live with and for others. Value others as you
value yourself. Don’t be selfish and think of others welfare as well.
7. Explain and (or give examples) on how the rights of the stakeholders could be respected
and how to institute effective efforts for the violation of their rights.

Stakeholders(customers, employees, suppliers, shareholders, investors, creditors,

the community, environment, etc.) are very important in a business because they can be
affected by the business decisions. The Board should identify the company’s various
stakeholders and promote cooperation between them and the company in creating wealth,
growth and sustainability. Before formulating the company’s strategic and operational
decisions, a company must give due consideration to those who have an interest and can
be directly or indirectly affected by their actions. The Board should establish clear
policies and programs to provide a mechanism on the fair treatment and protection of
stakeholders. Voluntary commitments ensure the protection of stakeholders rights. But

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including it in the company’s Code of Conduct can be an effective way to ensure

compliance. The Board should adopt a transparent framework and process that allow
stakeholders to communicate with the company and to obtain redress for violation of
their rights. Maintaining an open and easy communication with its stakeholders plays an
important role in addressing the stakeholders’ concerns. Having an Investors Relations
Office, Office of the Corporate Secretary, Customer Relations Office and Corporate
Communication Group can be a medium to attain this goal.

8. Why and how does a person become corrupt? What are the ill-effects of corruption?

Because corruption comes from the weakness of human nature (greed, temptation, the
desire to amass wealth, or to obtain business through unfair means), it spreads throughout the
world. Corruption spreads when there is an opportunity to do it, a benefit that is definitely
higher that the cost of being corrupt and when someone is confronted with issues like career
advancements (i.e. promotions), earning of more income, financial problems caused by
illness, loss of property, etc. Those engaged in corruption becomes dishonest and that is why
the next corrupt act they can do is much easier. One who is firmly rooted on solid principles
and has been nurtured in an upright manner found corruption as a difficult approach in
solving things.

9. Why is there a need for a code of conduct? Explain.

A code of conduct is a formal expression of the organization’s value and ethics. It

guides directors and senior executives, as a minimum to practice and maintain confidence
in the organization’s integrity, promote responsibility and accountability of individuals
for reporting and investigating reports of unethical practices and ensure compliance with
legal and other obligations to legitimate stakeholders. A code of conduct is important
because it recognizes the important role that business ethics play in the success of a
business. This encourages the board to actively develop an organizational culture that is
established on transparency, accountability and integrity. A Code of Conduct guards the
interest of the stakeholders in a business. It prevents corruption and unethical business
practices by business that can harm not just the economy but the whole society as a
whole. A Code of Conduct makes a business socially responsible for their actions.

10. Explain the rationale of the BB(Bishop-Businessmen Conference of the Philippines

adoption of the “Code of Ethics” for the Philippine Business.”)
The Code of Ethics for Philippine Business issued by the Bishops-Businessmen
Conference Philippines is actually a combined principle of a bishop and a business man
to a more humane way of doing business. As stated in its preamble “a man has a dignity
that must be respected, and that all the resource of the earth has been created for his
growth and development”, the Code recognizes the nature and responsibilities of man.
Apart from being a “being” of reason, we have the responsibilities to take care of other

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creatures. Respect is also pointed out as it is a foundation of trust and love for others. The
Code also seeks to express systematically and coherently the principles of business
practices accepted and professed by Philippine business at its best, and seeks to apply
these to current and changing needs. This means that this Code serves as a guide for
businesses to adopt an ethical ways while maximizing their shareholders wealth. Also,
the Code was intended to be “influential rather than coercive”. It means that it recognized
the freedom given to an individual but along with this freedom are responsibilities that
one must consciously do. It also see managers as a strategist for human development.
This means that managers are encourage to act on the interest of the society rather than
purely acting on the interest of their employers. Therefore, the Code of Conduct is
created to encourage ethical values and principles that can benefit both the business and
the society.

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CHAPTER 10 INITIATIVE TO IMPROVE BUSINESS ETHICS AND REDUCE

CORRUPTION

REVIEW QUESTIONS pg.160

3. Why should business organizations adopt a Code of Conduct? *note- same question with
#9 on previous exercises

A code of conduct is a formal expression of the organization’s value and ethics. It

guides directors and senior executives, as a minimum to practice and maintain confidence in
the organization’s integrity, promote responsibility and accountability of individuals for
reporting and investigating reports of unethical practices and ensure compliance with legal
and other obligations to legitimate stakeholders. A code of conduct is important because it
recognizes the important role that business ethics play in the success of a business. This
encourages the board to actively develop an organizational culture that is established on
transparency, accountability and integrity. A Code of Conduct guards the interest of the
stakeholders in a business. It prevents corruption and unethical business practices by business
that can harm not just the economy but the whole society as a whole. A Code of Conduct
makes a business socially responsible for their actions.

4. What are the purposes of the “United Code of Conduct for Business” as prepared by
Integrity Initiative Campaign?

The Code’s purpose is two-fold. First, it harmonizes existing ethical standards among
business operating in the Philippines. It ensures that different market players adhere to the
same rules of the game in order to create fair market conditions and promote transparency in
doing business. Second, the Code formally communicates the signatories’ commitment to
upholding high standards of ethics in all business transactions. It articulates the belief that
securing profit at the expense of integrity is an unacceptable and unsustainable way of
conducting business and that measures have been taken to enforce and cultivate integrity
habits within the signatories’ respective organizations.

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THE CHALLENGES OF CORPORATE GOVERNANCE

Corporate Governance is receiving a considerable attention from a number of parties

including regulators, law makers, financial analysts, and the users of financial information.
Because of this increase attention, corporate governance has been widely accepted as a tool to
attain financial market stability and economic growth. However, it is not an easy task to attain
perfect corporate governance in any organization. There is an adage saying that “There is no
simple universal formula for corporate governance”. That is, corporate governance of a company
may be different from another company.

That is why, nowadays, a number of challenges may be faced by companies, either small
or large one. Jim Crocker, CEO of Boardroom Metrics enumerated three challenges of corporate
governance. First, directors don’t know what they don’t know but the CEO and the management
team are the only people in the company who have a hope of knowing what’s happening on a
daily basis. That is why participation and transparency is needed in an organization. Sometimes,
we can just help thinking why other companies blow up even though they have a good Board of
Directors. We sometimes forget that the Management is the one handling the day-to-day
operations of a company and that they are the ones who give information to the Board. That is
why, a medium of communication (such as periodic reports on management activities to the
board) and good relationship in a company is a must. Financial Reports must be transparent and
must represent the economic transactions that had happened. The Board and Management must
work hand and hand for the whole company to attain their objectives. The second challenge is
that business moves too fast but governance takes time. It takes thoughts and time. However, a
company can’t stop the growth of the business industry because they a time to think. That is,
sometimes the best governance decision is too keep moving because that’s what they need
despite the fact that the important thoughts has not been put in a decision. This clearly shows that
there is trade-off between relevance and timeliness. For the company to respond to the
immediate need of the business world, they need to make a decision using the best available
resources and information they have at hand. Waiting for other information might make the
situation turn into a situation a company can’t handle. Third, and last challenge mentioned by
Jim Crocker is that really bright people are also prone to have a bad judgment. Judgement is
always an issue in governance. In business world, there is no assurance of what awaits the
company in the future. That is why judgement must be made. However, these judgements must
be guided by professional competence, skills, experience and the current information art hand.
Because results are not predictable(sometimes), a company must always prepare a risk
management strategy in every internal control system they have. A company that is always ready
and prepared can always maneuver around the situation and can turn unexpected situation into a
situation that can create a good result.

Although, corporate governance is not an easy task, a company can always put a step
forward to create a corporate governance strategy tailored within their needs. They must,

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however, always remember that the essence of corporate governance is to allow a freedom and
flexibility in management within a framework of effective accountability among stakeholders.

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Ethical Problems in Corporate Governance

Businesses with their goal of increasing the shareholders wealth and for continuous
viability sometimes forget the essence of ethics. Ethics, particularly business ethics was defined
as moral conduct, behaviour and judgment in business which also gives importance to other
stakeholders. The ethical problem of short-termism as discussed by Marc Hodak states that
manager focus too much on short term shareholder’s value (stock price) rather on the long-term
shareholders value which encompasses the through value of the company. This short-term value
may include earnings in profit or loss that may result to a higher dividend payment. Because
shareholders are the owners of the company, the need to satisfy their demands puts a lot of
pressure to the managers. The shareholders demand of return in a form of dividend sacrifices the
growth of the company.

On the survey conducted by Duke University where they surveyed 400 CFOs, 75% (3/4)
chooses to impair the long-term value of the company in order to meet the short-term earnings
the shareholders want. In order to conform to the wants of the shareholders, managers sometimes
took the route of the unethical business behaviour. They might engage in the acts of
misrepresentations, either direct (misbranding, adulteration, short numbering etc.) or indirect
(caveat emptor) in form, and acts of over-persuasion. Because of these acts of corruption, the
shareholders short-term desire can be accomplished. But, can these acts lead to a long term
survival of the company in the future? The answer is No. Remember, that stockholders are not
the ones affected in the picture, other stakeholders too. Stakeholders which include employees,
customers, regulators, creditors, investors and the society as a whole should be considered
because they are the ones who can put the company in a strong position in the future. Because of
this other stakeholders, a company can have the long-term value (goal) they wish to have. A
company/business that ignores the principles of fairness and equality for its shareholders not just
stockholders is bound to fail in the future. And nobody wants that, even the stockholders.

For a company to attain a long-term viability, they must implement codes of conduct that
can guide their managers as well as their employees and directors to act ethically in a situation.
Having a Code of Conduct, a company can always keep their decisions and actions in check in
order to assess the possible effects it might bring to its stakeholders. For example, to gain the
loyalty of a customer, a business should produce high quality products that are reasonable for the
price they charged. Employees should be fairly paid for their service in a timely manner, same
with the suppliers. Being ethical does not mean giving up the goal of the business which is to
earn a profit. These two things must go together and must be balance. If a company/business can
do things ethically while earning a profit it can satisfy the short-term and the long-term growth
their stockholders, as well as their other stakeholders. Therefore, a win-win result.

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CHAPTER 11 RISK MANAGEMENT

REVIEW QUESTIONS: pg.178

1. What is “Risk Management”?

Risk Management is the process of measuring or assessing risk and developing

strategies to manage it. It is the act of practice of controlling risk. It is through risk
management that risks to any specific program are assessed and systematically managed
to reduced risk to an acceptable level.

2. What is the basic approach in managing risks?

It is a systematic approach in identifying, analysing and controlling areas or events with a
potential for causing unwanted change. It includes risk planning, assessing risk areas,
developing risk handling options, monitoring risk to determine how risks have changed
and documenting overall risk management program.

3. What does ISO 31000 define “Risk Management”?

Risk Management is the identification, assessment, and prioritization of risks

followed by coordinated and economical application of resources to minimize, monitor
and control the probability and/or impact of unfortunate events and to maximize the
realization of opportunities.

4. What are the basic principles of risk management?

According to International Organization of Standardization (ISO), risk management

should:

a) Create value- resources spent to mitigate risk should be less than the
consequence of inaction, .i.e. the benefits should exceed the costs.
b) Address uncertainty and assumptions
c) Be an integral part of an organizational processes and decision-making
d) Be dynamic, iterative, transparent, tailorable , and responsive to change
e) Create capability of continual improvement and enhancement considering the
best available information and human factors
f) Be systematic, structured and continually or periodically reassessed
5. Enumerate the steps in the ISO 31000 risk management process?
Steps in Risk Management
1. Establishing the Context
-involves
a) Identification of risks in a selected domain of interest
b) Planning the remainder of the process

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c) Mapping out the following:

a. The social scope of risk management
b. The identity and objectives of stakeholders
c. The basis upon which risks will be evaluated, constraints.
d) Defining a framework for thhe activity and an agenda for
identification.
e) Developing an analysis of risks involved in the process
f) Mitigation or Solution of risks using available technological,
human and organizational resources.
2. Identification of potential risks
- starts with the analysis of the source of problem or with the analysis of
the problem itself. Common risk methods are: Objective-based risk;
Scenario-based risk; Taxanomy-based risk; Common-risk checking; Risk
Charting
3. Risk assessment
-Once risks have been identified, their potential severity of impact and the
probability of occurrence must be assessed. The assessment process is
critical to make the best educated decisions in prioritizing the
implementation of the risk management plan.
6. What are the elements of the risk management process?
The elements of risk management process include:
a) Identification, characterization, and assessment of threats
b) Assessment of the vulnerability of critical assets to specific threats
c) Determination of the risk(i.e the expected likelihood and consequences of
specific types of attacks on specific assets)
d) Identification of ways to reduce those risks
e) Prioritization of risk reduction measures based on a strategy
7. What are the key elements that the company-wide risk management system should
possess?

The key elements includes: Goals and objectives; Risk language identification ;
Organization structure, and ; Risk management process documentation

MULTIPLE CHOICE QUESTIONS ANSWERS

1. B. Business Risk
2. C. Liquidity Risk
3. A. Purchasing Power Risk
4. A. Interest rates volatility
5. D. Environment Risk
6. A. Derivative Risk
7. D. Complete disregard

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8. C. Risk Avoidance
9. D. Risk Retention

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REFLECTION PAPER: COCA-COLA CASE STUDY

A company to achieve success should continue to assess both their current financial and
market situations. One of the world’s famous and trusted brand proved to us the truism of the
adage -“Success always come with Risks”. Standing firmly for 118 years, Coca-Cola has proved
to us that knowing ones company is the first step to attain success.

Coca Cola is the largest beverage company in the world with over 550 brand names.
They produced everything from carbonated beverages, teas, orange juice, bottled water, energy
drinks and diet/low calorie drinks. Coke as a universal company serves different geographic
regions across the world. Coca- Cola started in 1902 and in the last 112 years, become the largest
producer of beverages in the world.

For Coca-Cola to maintain their success in the beverage industry (or for any company to
reach success), they conducted a SWOT (Strength, Weakness, Opportunities and Threats)
Analysis of their very own company. Among the listed Strengths of Coca-Cola are: best global
brand in the world in terms of value because of its unmatched globalization; world’s largest
beverage company that offers approximately 500 still and sparkling products; strong marketing
and advertising that is evident because of high customer loyalty; bargaining power over suppliers
since they established partnership and have a good long-term relationship with their suppliers;
extensive diversified range of products; well-known sports team sponsorships, brand is featured
in many movies/TV spots in the last 50 years as part of advertisement strategy, and ; Coke and
its bottlers are among the world’s top purchasers of citrus juice, coffee and sugar. Because Coke
knows what areas they excel, they are able to maintain and utilize their resources to have these
resources at their advantage. However, like any other company, Coke also has its ‘Weakness’.
Among its weaknesses are: competition with Pepsi, product diversification is low, absence of
health beverages, water management, high debt level due to acquisition, negative publicity that
resulted to discontinued products, brand failures and insignificant amount of revenues, and the
New Coke formula lead to a backlash which resulted in a bad image of Coca Cola Co. Eighty-
three (83) years after its founding, Coke received a greatest competition from its biggest
competitor Pepsi. They decided to change their formula and roll out New Coke in 1985. Because
of this stock price dropped overnight; people picketing and rioting outside their headquarters in
Atlanta, Georgia. Pepsi saw these opportunity and started promoting the “Taste Challenge” in
mid-1980. In the mid-90’s, Pepsi used Britney Spears for its advertising and cut Coke’s market
share by 15%. This clearly implies that a weakness of one company can turn to an opportunity
for its competitors. The same as Pepsi uses the ‘New Coke’ failure; Coca- Cola also turned some
weaknesses of others as an opportunity for them to improve their product and service. They took
advantage of financial resource and health benefiting opportunities. Among the opportunities
Coke sees in its run are: the $2.15 billion investment in Monster( 16.7% stake), investment in
water replenishment plants to make products through water replenishment strategies, the
intention to drop sugar levels by 2020 (the promise to reduced US beverage calorie consumption
such as smaller size bottles = less sugar, calorie awareness, etc.), to invest into other brands, still

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beverages & soda alternatives, “Share a Coke” marketing strategy, global market means that
emerging markets for different bottled beverages, both sparkling and healthy options can result
to an increase in Coca Cola’s economic system, a high gross-profit margins, a consistently
growing cash flows that could give rise to an increase dividends for investors, expanding supply
chain network that could mean an opportunity to gain a more competitive advantage over its
competitor Pepsi, Coca Cola scholarships, new bottling/ new distribution market. Although some
weakness turned to an opportunity, there still remain as a ‘Threat’. Among the threats mentioned
in the video are: the changing health-consciousness attitude in the market, saturated carbonated
drinks market, Competition (also with indirect competitors), Globalization’s “removal of
barriers”, difficulty in complying with different government regulations and norms in different
countries, raw material sourcing (water scarcity etc.), legal requirements to disclose negative
information on product labels and decreasing gross profit and net profit margins. The SWOT
Analysis is always a great tool to assess the company’s standing in the market. It could tell the
areas they have as an edge against their competitors, the weaknesses they have for them to
improve them, the opportunities they may pursue, and the threats that could threat their position
in the market. A company that is informed of this critical information could come up with
strategies and solutions for them to maintain or stay ahead of their competitors.

Even though Coca-Cola is now experiencing a great amount of success, the question
about maintaining or sustaining their economic growth in an evolving market still stands. They
are currently struggling to find ways to compete in the evolution of beverage market. They need
to be updated to the evolving nature of the market. Because of this, they come up with seven
alternative solutions that could help them sustain economic growth in the evolving market that
has now placed importance on greener practices and healthier living. Alternative No.1 is the
substitution of corn syrup/sugar to stevia; Alternative No. 2 is to maintain water resources
renewal effort; Alternative No. 3 is ‘Recycling’ that involves exploration of bottling alternatives
that increase the recyclable value of the products’ packaging; Alternative No.4 is to branch out
on healthy snacks market; Alternative No. 5 is to invest in beverage company that has already
served strong market; Alternative No.6 is shifting all marketing efforts to show how Coca Cola
cares for the quality of life for its community and the society, and lastly; Alternative No.7 which
is the combination of alternatives 1, 2, 3, 5.

In the Criterion Chart Analysis, all the alternatives are graded using equal weights in
these criteria: Feasibility, Effectiveness, Efficiency, Profitability, Cost, Risks, Time and Ethical
Correctness, having 1 as the lowest degree of desirability and 5 as the highest degree of
desirability. In total, alternative no.7 got the highest weight with 27 overall points, followed by
alternative no. 2 and 5 in the second spot and alternative no.3 in third spot. Alternative no. 3 got
the lowest score of 13 in the overall criterion. Importance is given to the criterion ‘Profitability’
since in order to have a solution that could address the current problem in maintaining economic
growth, that solution must be profitable to Coca Cola Company. Alternative No.4 got the lowest
chance of profitability and Alternative No. 7 got the highest chance of profitability. Aside from

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having a high score of 5 in the Ethical Correctness criterion for promoting healthy eating habits,
alternative no.4 got a very low score in the following criteria: Feasibility, Effectiveness,
Efficiency, Profitability, Cost, Risk and Time. Expanding into Health Snacks alternative got the
lowest rating among the alternatives because of these following reasons: Coca-Cola is a beverage
company – it should focus more in its product rather than expanding because it takes an
incredible amount time and fund (requires huge investment like marketing, etc. and bigger costs
like new department/factories) to have the an established healthy snack line, not to mention the
inconceivable risk Coca-Cola may face if they ventured in this solution.

On the other hand, the best solution for the problem at hand is alternative no. 7:
Combination of Alternatives 1, 2, 3, and 5. It gives solution to the various areas of concern;
health, environment, economic and financial areas. This alternative address the current health
issues by reducing sugar, continue water renewal/ recycling efforts, merging with/invest in other
strong established beverage. They need to balance these following alternatives without
sacrificing the quality (taste) of their products.

The fact that Coca-Cola uses tools such as Criterion Chart Analysis to find the optimal
solution for their problem proves that their management is in good hands. They consider the risk
and resources in selecting the optimal solution. Areas of concern are pointed out and areas that
contain a lot of strengths are given a lot of focus than others. However, alternatives like shifting
all marketing strategy to show how Coca Cola cares for the quality of life for its community and
the society is not completely ignored. Because the optimal solution- Alternative No. 7- caters it
all. It cares for health since it aims to substitute sugar by stevia and cares for the environment
because of the water renewal efforts and recycling strategy. Truly, Coca-Cola can be an epitome
of what we call Corporate Social Responsible Company.

The selection of the optimal solution for Coca-Cola’s problem does not end the problem.
They have should have concrete measures for the implementation process. As mentioned in the
video, for Coca-Cola to invest in companies that already serve a strong market (Alternative
No.1), they need to thirst for more acquisitions and strategic partnerships like what they did in
Monster. They need to find possible investment options: Starbucks or SodaStream. Steps for
taking the “all natural” approach that appeals to organic grocers and high-end markets such as
Reid’s, Premal Water should be done. As for Alternative No. 2- substitution of sugar by Stevia
as a natural sweetener, they need to find the appropriate formula through multiple testing and
sampling. If they find that stevia is the best alternative they have to look for stevia suppliers.
They also need supplier test groups for them to hear the consumers comments to make the
desired improvements. They need to modify the manufacturing processes and have a huge
advertising fund to support the improvements. As for Alternative No.3- Water Renewal Resource
Efforts, they need to team up with environmental groups in order to restore the creek in New
Mexico that flows into Rio Grande. They also need to help from these groups to repair the
damages in Osborne Creek in Michigan. A watershed restoration project located in Sierra
Neveda mountains, restoration of Colorado’s Trail Creek watershed are also two of their

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resource efforts that could address environmental problems. Coca Cola has spent $660,000 on
USDA projects so far for this implementation. Lastly, Alternative No. 5- Bottling Alternative/
Increase Recycling, they need to look for lightweight recyclable, paper based cartons instead of
using chemically produced bottles that could harm the environment and the health of the
consumers. They need to work with packaging designers/specialists to mobilize various
packaging types. They also need to utilize novel shapes and smart graphics that could still attract
the consumers (shelf appeal of the products). Segmenting the market and using focus groups for
objectives feedback can also help them attain this goal. Feedback mechanism is also
implemented through the efforts of the people that work for Coca-Cola Company. If sugar levels
are dropped and plastic levels are reduced, there will be feedback from the top chain all the way
down. The consumers will give feedback on the taste, cost, and presentation of the product
change. The clerk has to listen to what the customer has to say and relays that information to the
store manager, then the store manager will relate that information to the delivery drivers then to
the sales department/representative, then to the corporate directors and then lastly to the CEO.

These set of implementation strategies proved that Coca-Cola is really dedicated to

address their problems with efforts. They planned all the possible measures and have a lot fund
to finance it. I think Coca-Cola views Implementation efforts as an Investment rather than Cost.
Since all these efforts will give Coca-Cola a good reputation, a higher market share and a higher
profit. This shows that they are not just after profit; they are also after the welfare of the society
and the environment. This means that even though businesses principal goal is to earn profit,
they don’t need to sacrifice ethics. Good Business Conduct still determines the success of a
company.

REFLECTION PAPER: RISK MANAGEMENT – CHALLENGER

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Risk is always present in every situation. We cannot (sometimes) control the way things
move but we can anticipate the situations that may arise and therefore have an alternative or back
up measures that can solve the problem.

What happened to space shuttle Challenger in the morning of January 28, 1986 in North
America, Florida was very drastic and unfortunate. It was mentioned in the video, that the key
engineer had a haunch that something bad might happen if they continue to launch the space
shuttle that morning. He was right. Seventy-three seconds after the launching of the space
shuttle, a horrendous event happened. Seven astronauts who boarded the space shuttle died
because of the explosion witnessed by their family members, live audience and television
viewers. The question is: Could this disaster be prevented at that time? Could the shuttle and its
crew could have made it to space safely?

The answer is a big “Yes”. Risk Management is an effective way of measuring or

assessing the risk and developing strategies to manage it. Understanding the nature of the risk/s,
the acceptable level of risk and understanding the reasons why risks become reality are important
in risk management. Nowadays, the use of technology, hiring professionals/experts in the field
can lessen the risks. It’s better to use money in prevention rather than using it when the risks
happen. It could save any company or any organization from the pain of losing a lot of things
(like the lives sacrificed for the failure of Challenger space shuttle launch). The reports state that
30 minutes before the lift off, a commercial jet flew above the launch site. It was hit by a
headwind over 300 km/h. This means that the space shuttle could have passed the same layer of
air that is comparable to hurricane Katrina. The Kennedy Space Center could have gathered the
information because they should have monitored the environment/ the condition of the air that
time. Given that a commercial jet was hit by a 300 km/h wind, they could have stop or postponed
the launching of the space shuttle until the disturbance disappear. I think that, the lack of
preparations and monitoring in the last moment before the launching is the cause of the said
disaster. I think that an organization should always check all the possibilities that could happen,
especially in this case since lives are at stake. However, this event happened in the past and we
can never change it. All we can do is learn from it and form ways on how to prevent such risk
from happening again.

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CHAPTER 12 PRACTICAL GUIDELINES IN REDUCING AND MANAGING

BUSINESS RISKS

REVIEW QUESTIONS pg.194

1. Explain the difference in attitude to risk between European and US Companies.

In a study conducted by an internationally-known accounting firm in late 90’s,

European companies’ attitude towards risks focus on avoiding and hedging risk. While
Anglo-American companies’ attitude towards risks focus on making the risk an
opportunity and accepting risk management as necessary to achieve their goals. Even
now, this kind of attitude (for both the American and European companies) is still the
same.

2. What is the advantage of defining the categories into which risks fall?

Identifying and defining the categories into which risks fall gave the management
the ability to identify if risks would occur outside or within the organization, therefore,
they are able to make informed decisions. Because they already have the measures to
counter the risks identified, it makes it easier for them to avoid unnecessary surprises.
Defining the categories also allows for a more structured analysis and reduces the
chances of risk being overlooked.

3. Explain how the following types of risk catalyst might trigger risk
a. Technology

The development and the continuous evolution of technology pose significant

risks in the business environment. New demand rises on existing information systems
and technology. Congestion or Information traffic may lead to risk such as data loss
and data security problems.

b. Organizational charge

When reorganization happens in a business firm, risks such as new

management structures or reporting lines, new strategies and commercial agreements
may happen. Changes in normal operation lines and engaging in new types of
strategies makes it harder for the company to adjust and therefore possible risks can
also appear.

c. Processes

One of example of the change of process that resulted to risk is the “New
Coke” project by Coca-Cola. A change in process may change the product quality to
the worse. It may affect the customer loyalty and profitability of a business firm. An
intense risk management should be applied to avoid unexpected situations.

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d. People

A business firm cannot control people. People have their own decisions and
actions that a firm cannot control. Examples of event that may result to risk are hiring
new employees, losing key employees, poor succession planning and weak people
management. A change of behaviour towards work of an employee can drastically
affect the performance of a firm. The danger of fraud, laziness, human error,
exhaustion and other considerations that can affect a person can lead to risks in a
business.

e. External factors
Changes to regulations and political. Economic or social developments can
also cause risks. These risks may be hidden but eventually may appear and may cause
unexpected results. The current issue of New Corona Virus spread (NCOV) can affect
the business firm as the opportunity of other people to purchase is limited.
4. The typical areas of financial risk includes the following except
a. Poor brand management (answer)
b. Treasury risks
c. Accounting decisions and practices
d. Fraud
5. What are the stages in managing the enterprise wide risk?

First, assess and analyze the risks resulting from a decision by systematically
identifying and quantifying them (Risk Assessment and Analysis). Second, consider how
best to avoid or mitigate them (Risk Management and control. Third, in parallel with the
second stage, take action to manage, control and monitor risks (Controlling and
Monitoring Enterprise-Wide Risk).

6. What factors should be considered when setting and reviewing financial strategy?

Profitability, cash flow, long-term shareholder value all need to be considered

when setting and reviewing strategy. These factors must be considered because finance
can affect all the levels inside the business. Without finance, a business cannot run.

7. What are some of the financial tools that can be applied in making strategic financial
decision affecting profitability?

Financial tools such as the use of variance analysis which interpret the differences
between actual and planned performance. These tool can be use to monitor and manage
the results of past decisions, access the current situation and highlight solutions. Another
financial tool is the assessment of market entry and exit barriers. When a business know
the market barriers, both entry and exit, they can see how vulnerable they are when a new
entrants appear, and how can they strengthen and maintain their current market position.

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The third tool is the use of Break-Even Analysis. Break-even is a point wherein sales
cover the cost and neither profit nor loss is incurred. This tool can help a business to
decide whether to continue developing a product, alter the price, provide or adjust
discount, or change supplier to reduce costs. The cost structure, sales mix and production
capacity as well as forecasting and budgeting can also be enhance through the use of
CVP analysis.

8. Enumerate and explain at least 7 practical techniques to improve profitability.

a. Focus decision-making on the most profitable areas – a business must concentrate
on the product/service that provides the greatest margin. Redirecting efforts such
as advertising can improve the sales of the product/service that provides the
highest amount of profit.
b. Decide how to treat the least profitable products- shelf-life and appeal of the
products must be considered when deciding whether to continue or to discontinue
its production. If a product provides more costs than benefit, its discontinuance
must be considered or a step to lessen its cost can also be applied.
c. Make sure new products enhance overall profitability – The new product must be
focused on the either the market needs or the production process. A considerable
consideration must be given to the new product’s cost, price, sales volume and
overall profitability. Adjustments can be made in order to enhance the product’s
profitability without sacrificing its quality.
d. Manage development and production decisions – The decisions involving product
management should consider the amount that should be spent and the priorities
that should be set forth. An investment of too little may increase cost in the long
run.
e. Set the buying policy – Attention should be considered in these following
decisions: number of suppliers, controlling delivery charges, monitoring exchange
rates, improving quality control, reducing inventory and improving production
lead times. Handling costs and opportunity costs must be balance to have a
minimum amount of costs.
f. Consider how to create greater value from existing customers and products to
enhance profitability- Information about customer loyalty, competitive sales
proposition, existing markets and barriers, sales and administrative costs
reduction as well as marketing techniques and costs should be acquired by the
entity. These information can help them create a greater value for the customers,
increasing competitive advantage among competitors.
g. Consider how to increase profitability by managing people- successful leadership
is the key to increase profitability. The people inside the business firm needs to be
motivated and supported through rewards, trainings, fair remuneration and ethical
treatment. If employees are treated with respect, the whole business will flourish

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as these employees will not only think of themselves but also the welfare of the
business.

CHAPTER 13 OVERVIEW OF INTERNAL CONTROL

REVIEW QUESTIONS pg. 211

1. What is meant by the control environment? What are the factors that the auditor must
evaluate to understand it?

Control environment is one of the components in Internal Control. Control

Environment means the overall attitude, awareness and actions of directors and
management regarding the internal control system and its importance in the entity. It has
an effect on the effectiveness of the specific control procedures. Factors reflected in the
control environment include: the function of Board of Directors and its committees;,
management’s philosophy and operating style; the entity’s organizational structure and
methods of assigning authority and responsibility, and; management’s control system
including the internal audit function, personnel policies and procedures and segregation
of duties. Also, several factors comprise the control environment, including:
Communication and Enforcement of Integrity and Ethical Values; Commitment to
Competence; Participation by those Charged with Governance; Management’s
Philosophy and Operating Style; Organizational Structure; Assignment of Authority and
Responsibility, and; Human Resource Policies and Procedures.

2. What is the relationship among the five components of internal control?

There is an interconnected relationship between the five components of internal

control. They work together to make the internal control of the company much stronger.
The control environment is overall attitude, awareness and actions of directors and
management regarding the internal control system and its importance in the entity. It is
followed by Risk assessment which is a process for identifying and responding to
business risks relevant to the preparation of financial statements. Information System
makes the accounting system of the company efficient and much easier. Control activities

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are policies and procedures that help ensure that management directives are carried out.
Monitoring of controls assess the quality of internal control over time. These five
components, if worked hand-in-hand, can enable the company to achieve their goals and
objectives.

3. The separation of operational responsibility from record keeping is meant to prevent

different types of misstatements than the separation of the custody of assets from
accounting. Explain the difference in the purposes of these two types of separation of
duties.

Separation of operational responsibility from record keeping and separation of

custody of assets from accounting served a two different purpose. The first mentioned
separation responsibility served the purpose referring to before-preparation of statements.
This separation of responsibility prevents different types of misstatements or fraud that
would allow a person to commit an error or perpetuate fraud through concealment of
records. For example, the same person should not be assigned for receiving cash
payments and for recording cash payments at the same time. On the other hand, the
separation of custody of assets and accounting served different areas. Custody of assets or
safeguarding assets involves physical barriers like storeroom however accounting area is
more on financial aspect of business. They aid the organization to adequately control the
movement of assets however the physical care of the assets are not there responsibility.
This separation of responsibility is very effective for the specialization of areas in
business and also for a transparent and reliable information.

4. For each of the following, give example of a physical control the client can use to protect
the asset or record:
a. Petty cash – authorization for petty cash fund from petty cash custodian only.
b. Cash received by retail clerks – periodic counting and comparison with amounts
shown on control records.
c. Accounts receivable records – authorization for access to computer programs and
data files given to the treasurer.
d. Raw materials inventory – periodic counting like in periodic accounting, use of
FIFO method.
e. Perishable tools – physical security of assets – secured facilities with authorized
person (only 1) as the one who permits and records the use of the tools (log book).
f. Manufacturing equipment – periodic maintenance and check-up
g. Marketable securities – authorized personnel and periodic counting and
comparison with amounts shown on control records.

CHAPTER 14 FRAUD AND ERROR

REVIEW QUESTIONS pg.227

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1. Distinguish between the terms errors and fraud.

Errors are not intentional acts that results to misstatements but fraud is an intentional
act involving the use of deception that results in a material misstatements of financial
statements. The intent to deceive is what distinguishes fraud from errors.

2. Distinguish between fraudulent financial reporting and misappropriation of assets.

Discuss the likely difference between these two types of fraud on the fair presentation of
financial statements.
Asset misappropriation occurs when a perpetrator steals or misuses an
organization’s assets. This type of fraudulent act is common in small business and the
perpetrators are usually employees. Mostly done because of personal gain. The company
is negatively affected as a whole. These affect the company in a lesser way than the
fraudulent financial reporting since it was mostly committed by employees who do not
have the capacity to create the financial statement of the company. So, the presentation
of financial statements of the management is in the blind spot, thinking that they have the
correct information. Examples of asset misappropriation include: embezzling cash
receipts, stealing assets, or causing the company to pay for goods or services that were
not received. This act common occurs when the employees: gain access to cash and
manipulate accounts to cover up cash thefts; manipulate cash disbursements through fake
companies, and; steal inventory or other assets and manipulate the financial records to
cover up the Fraud.
While fraudulent financial reporting is an intentional manipulation of reported
financial statements to misstate the economic condition of the organization. This kind of
fraudulent act seeks gain through the rise in stock price that would result in an increase in
personal wealth. Sometimes, the intention is not directed to personal gain but to the gain
of the company, helping the company to avoid bankruptcy and other negative financial
outcome. This is bigger in scale than asset misappropriation. Financial statements created
by the management are intentionally manipulated to make the financial condition of the
company good.
3. Define fraud, and explain the two types of misstatements that are relevant to auditor’s
consideration of fraud.
Fraud is an intentional act involving the use of deception that results in material
misstatements of financial statements. Asset misappropriation occurs when a perpetrator
steals or misuses an organization’s assets. This type of fraudulent act is common in small
business and the perpetrators are usually employees. Mostly done because of personal
gain. While fraudulent financial reporting is an intentional manipulation of reported
financial statements to misstate the economic condition of the organization. This kind of
fraudulent act seeks gain through the rise in stock price that would result in an increase in
personal wealth. Sometimes, the intention is not directed to personal gain but to the gain
of the company.

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4. What are the most common approaches that perpetrators use to commit fraudulent
financial reporting?
Three common ways in which fraudulent financial reporting can take place
include: Manipulation, falsification, or alteration of accounting records or supporting
documents; misrepresentation or omission of events, transactions, or other significant
information, and; intentional misapplication of accounting principles.

5. You are asked to be interviewed by a student newspaper regarding the nature of

accounting fraud. The reporter says, “As I understand it, asset misappropriations are more
likely to be found in small organizations, but not in larger organizations. On the other
hand, fraudulent financial reporting is more likely to be found in larger organizations.”
How would you respond to the reporter’s observation?

This statement is generally true but asset misappropriations and fraudulent

financial reporting can happen in any size of an organization with employees and
management team. Although most cases of asset misappropriation happen in small
organizations, we can’t deny the fact that big organizations may also have these
fraudulent act but in lesser degree because the security and internal control is much more
strict. Same with fraudulent financial reporting, small organizations can have this
fraudulent act but in a lesser degree than big organizations because of their owned
property is much lesser than big organizations, nevertheless these two acts may happen in
big or small organizations.

6. The fraud triangle identifies incentives, opportunities, and rationalizations as the three
elements associated with most frauds. Describe how each of these elements is necessary
for fraud to occur.
Incentives are event or circumstance that pressured the perpetrator to commit
fraud. These circumstances serve as a goal for the perpetrator, the benefit they will
achieved if they successfully committed the fraudulent act. Opportunities are things that
the perpetrator have to consider when they are about to commit fraud. This may include
the low chance to be caught, lack of controls or security, lack or inconsistent internal
control. When the perpetrator/s see these chances as favourable to their plan (to commit
fraud), there is a high chance that they may proceed. Rationalization is the justification
from doing the fraudulent act: either personal or company-wide reason. These are the
circumstance that perpetrators used to justify their act.

7. If one of the three elements of fraud triangle is not present, can fraud still be perpetrated?
Explain.

I believe that the answer is No. In order for fraud to be committed by any
personnel of a company there is a need for a goal (Incentives) that serves as a spark to

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commit such act. There should also a means (opportunity) to do such act and a reason
(rationalization) for doing such act. All acts, even the ethical once, has a reason, a goal
and a means for someone to do it. If someone does not have a reason, a goal and a means
to commit a fraudulent, thus a fraudulent act is impossible to commit.

8. Identify factors (red flags) that would be strong indicators of opportunities to commit
fraud.

Some of the opportunities to commit fraud that the top management should
consider include the following: significant related-party transactions, a company’s
industry position, management’s inconsistency, simple transactions that are made
complex through an unusual recording process, complex or difficult to understand
transactions, ineffective monitoring of management by the board, complex or unstable
organizational structure, and weak or non-existent internal control.

9. Is the ability to rationalize the fraud an important aspect to consider when analysing a
potentially fraudulent situation? What are some of the common rationalizations used by
fraud perpetrators?

Yes, the ability to rationalize the fraud is an important aspect to consider when
analysing a potentially fraudulent situations because everyone has a reason from doing
such act. Common rationalizations used by fraud perpetrators are: to save a family
member or loved one from financial crisis, no help from outside, this is “borrowing” and
we intent to pay it back attitude, “the company owes me!” attitude, “this is a one-time
thing” mind-set, “everybody cheats on financial statements a little” mind-set, and “this is
for the company’s well-being not mine” attitude.

10. Define and illustrate kiting. What controls should the client institute to prevent it?

Kiting is a technique used to cover cash shortage or to inflate cash balance. It is a

technique to misappropriate assets. It involves counting the cash twice by using float in
the banking system. Float is the gap between the time the check is deposited or added to
an account and the time the check clears or is deducted from the account it was written
on. Controls like analysing and verifying cash transfers during the days surrounding year-
end should reveal this type of fraud.

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CHAPTER 15 ERRORS AND IRREGULARITIES IN THE TRANSACTION CYCLES

OF THE BUSINESS ENTITY

REVIEW QUESTIONS pg. 239

1. Define what is meant by a control and weakness in internal control. Give two examples
of each in the sales and collection cycle.

Control activities are policies and procedures that help ensure that management
directives are carried out. Categories like performance reviews, information processing
controls and physical control are some of the controls a company can do. These controls
can prevent or detect errors or irregularities or fraudulent acts within the company.
Weakness in internal control means that proper policies and procedures in internal control
are not properly implemented resulting irregularities and errors that causes misstatements
within the company. Examples of weakness in sales and collections cycle are errors in
recording sales and collections transactions and lapping. Routine testing of details of
collections compared with validated bank deposit slips should uncover these. Educating
the bookkeeper the accounting procedures used should also minimize errors in recording
sales and collection transactions.

2. Frank Dizon, a highly competent employee of Breezewater Sales Corporation, had been
responsible for accounting-related matters for two decades. His devotion to the firm and
his duties has always been exceptional, and over the years, he had been given increased
responsibility. Both the president of the Breezewater and the partner of an independent
CPA firm in charge of the audit were shocked and dismayed to discover that Dizon had
embezzled more than P5,000,000 over a 10-year period by not recording billings in the
sales journal and subsequently diverting the cash receipts. What major factors permitted
the defalcation to the place?

I think the increase control due to increase responsibility given to Dizon exposed
him to do unethical things like embezzlement. Lose of controls because the president and
the CPA firm trusted Dizon. But Dizon is still a human, fallible and capable to do
unethical things. Maybe, reasons like family matters, or personal luxury enable Dizon to
deceive his company. But the fact that Dizon had embezzled for 10 years and it was only
discovered recently means that the firm’s internal control is lose or inefficient to detect
fraudulent act. They must have checked all the sales journal and cash receipts, not relying

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on purely trust for an employee. Various controls should have been implemented in order
that this kind of act cannot be committed again.

CHAPET 16 INTERNAL CONTROL AFFECTING ASSETS

REVIEW QUESTIONS pg. 260

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Cash

1. List the five primary activities involved in the acquisition and payment cycle.

The five primary activities involved in acquisition and payment cycle are (1)
requisition for goods and services, (2) purchase of goods and services, (3) receipts of and
accounting for goods and services, (4) approval of items for payment and (5) cash
disbursements.

2. List at least five common fraud schemes in the acquisition and payment cycle.

Five common fraud schemes in the acquisition and payment cycle may include:
paying for fictitious purchases, receiving kickbacks, purchasing goods for personal use,
overstatement of price of the acquisition and inappropriate purchase of goods with
substandard quality.

3. Describe the following types of cash accounts:

a. General checking accounts
This account held fund in a bank which allows withdrawals and deposits.
They are very liquid and can be accessed using checks, automated teller
machines and electric debits. It allows numerous withdrawals and
unlimited deposits.
b. Cash management accounts
Is a cash account that combines services and features that are similar to
checking, saving and/or investment accounts under one product. It has
higher interest rates than some financial institutions like banks, however
benefits are still similar to checking and savings accounts.
c. Imprest payroll accounts
Separate accounts used by corporation to track and distribute payroll
amounts without compromising timeliness or fund safety. This is set
strictly for employee payroll use. When payroll comes due, rather than
withdrawing from company’s main account, they withdraw in Imprest
account assigned for payroll.
d. Petty cash accounts
Small amounts of cash to meet small miscellanwous payments such
stationary costs or transportation costs in small amounts.
4. List at least three common controls for petty cash.

Following controls may be applied over petty cash are: Petty cash must be kept at
a secure place (e.g. a cash box), locked away in a safe when not in use, cashier must be
responsible to keep supporting invoices in respect of payments made through petty cash,
surprise cash accounts must be conducted time to time to ensure the accuracy of the cash

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balance stated in the petty cash register and amount of petty cash float should not be set
too high.

PPE

5. Identify potential fraud schemes related to long-lived assets.

Potential fraud schemes related to long-lived assets may include misstatements of

acquisitions of PPE (i.e. expenditures for repairs and maintenance recorded as PPE
acquisitions to overstate income), intentionally not recording retirements of PPE, intentional
reporting of unusual transactions such as overstatements and understatements.

6. Consider the risks typically associated with tangible long-lived assets and identify the
internal controls over these assets that you would expect a client to have in place.

Risks Internal Controls

Fraud on records of retirements
of PPE, depreciation provision,
maintenance expense
Fraud on recording
authorizations
Fraud on amounts of
expenditures
Fraud on acquisition of PPE
Fraud on inspection and
maintenance of PPE
-subsidiary ledger consisting of
separate record for each unit of
property
-system of retirement procedures,
including serially numbered
retirement work orders (bottom),
stating reasons for retirement and
bearing appropriate approvals.
-system of authorization
requiring advance executive
approval of all PPE acquisitions,
serial numbered capital work
orders
-reporting procedure assuring
prompt disclosure and analysis of
variances
-authoritative written statement
of company policy disguising
between capital expenditures and
revenue expenditures
-policy requiring all purchases of
PPE to be handled through the
purchasing department and
subjected to a standard routine
for receiving, inspection and
payment
-periodic physical inventories
designated to verify the

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existence, location, and condition

of all PPE listed in the accounts
and to disclose the existence of
any unrecorded units.

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CHAPTER 17 INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY

REVIEW QUESTIONS pg.271

1. What are the relevant accounts related to debt obligations?

Relevant accounts related to debt obligations include: accounts payable, accrued

liabilities, notes payable, bonds payable, tax payable, salaries payable, interest payable,
utilities payable, other long-term debt and short-term debt.

2. What are the relevant accounts related to stockholders’ equity transactions?

Relevant accounts related to stockholder’s equity transactions are Share Capital,

Dividends, Retained Earnings (appropriated or unappropriated), withdrawals, the
resulting profit/loss for the period, treasury shares, share receivable, and others.

3. Identify common transactions affecting stockholders’ equity accounts.

Common transactions that affect the shareholders’ equity accounts are: selling
stocks, buying or repurchasing issued stocks, issuing ad paying dividends, share
recapitalization, share options and others.

4. Identify fraud risks associated with debt obligations.

Fraud risks associated with debt obligations may include but not limited to:
inaccurate recording of a purchase or disbursement, misappropriation of purchases,
duplicate recording of purchases and late (early) recording of cost of purchase – “cutoff
problems”.

5. Identify fraud risks associated with stockholders’ equity accounts.

Fraud risks associated with stockholders’ equity accounts may include but not
limited to: intentional misstatements of share capital issued, withholding dividend
payments that are already issued, not recording asset revaluations to reflect the market
prices, unjust recapitalization, new share capital not permitted by shareholders and board
of directors and others.

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