HOLY NAME UNIVERSITY

College of Business and Accountancy

Department of Accountancy
ACC 106: Accounting Information System – Online Blended Learning

Chapter No. 02
Chapter Title Ethics, Fraud, and Internal Control
Assignment No. 03
Submission Date 10 September 2020
Date Submitted
Student Name FUDALAN, Dea Viktoria C.
Instructor Mr. Remark M. Montalban
Instructions: Briefly explain what is asked. Five sentences at most.

1. Although top management’s attitude toward ethics sets the tone for business practice,
sometimes it is the role of lower-level managers to uphold a firm’s ethical standards. John, an
operations-level manager, discovers that the company is illegally dumping toxic materials and is
in violation of environmental regulations. John’s immediate supervisor is involved in the
dumping. What action should John take?

o The situation that John got into I think is out of his control. Because of the
involvement of John’s supervisor which holds a high level position. It is
appropriate for John to take this matter to the higher level management. Let
John tell the higher level management regarding their company’s issue and the
involvement of the supervisor. Thus, the decisions regarding this matter is up to
the higher level management.

2. When a company has a strong internal control structure, stockholders can expect the
elimination of fraud. Comment on the soundness of this statement.

o I agreed that a company who had a strong structure eliminate fraud. Because a
string structure of internal control protects the company from the risk of fraud.
However, it is not enough that a company only had a strong internal control
secure the company against fraud. Because when an employee or high level
management involved it could weaken the strong structure of internal control.
Thus, a company should have a strong structure of internal control associate
with employee who had a good morals and ethics.

3. Distinguish between employee fraud and management fraud.

o Employee fraud is done by employees by stealing the company’s asset and is

difficult to conceal from the company’s internal control system. This level of
fraud do not engage in manipulating financial statements. However,
management fraud intentionally manipulates the financial statement of the
company. It involves members of the management who’s in charge of
supervising the entity. This is to increase stock price or may increase the
incentive-based compensation.

4. If detective controls signal error flags, why shouldn’t these types of controls automatically make
a correction in the identified error?

o If the error is detected by the detective control it should not be automatically

corrected. The error should undergo further evaluation in order to provide
additional information. Because when an error was detected the tendency is
that there will be multiple solutions to the problem. And if the detective control
automatically correct the error there will be a possibility to worsen the problem.
 Hence, through comprehensive assessment the detective control can apply the
best solution to the error.

5. An organization’s internal audit department is usually considered an effective control

mechanism for evaluating the organization’s internal control structure. The Birch Company’s
internal auditing function reports directly to the controller. Comment on the effectiveness of
this organizational structure.

o It is inappropriate for the internal auditor to disclose the report to the

controller. It because the controller might be involved in fraud and might have
an access to conceal the violation. Also the controller is an underlying position
which should not have an access to the report of the internal auditor. Further,
the internal auditor may lose the job due to its lack of caution. Thus, an internal
auditor should directly give the report to the audit committee or board pf
directors.

6. Discuss the fraud schemes of bribery, illegal gratuities, and economic extortion.

o Bribery is an act of fraud engage in soliciting authorities in exchange of favors.

This usually happen in a private or government institutions. Illegal gratuities is a
kind of fraud which is similar to bribery however the deal occurs after the act
has been done. Economic extortion engage in forcing someone to attain
economic benefits. These fraud scheme is committed to obtain personal desire.

7. Explain why collusion between employees and management in the commission of a fraud is
difficult to both prevent and detect.

o Managers or management supposedly supervise their subordinates to prevent

and detect fraud among them. However, if the collusion of management and
employees of fraud exist the misconduct will be difficult to detect. It is because
due to the involvement of the management the control system of the company
becomes vulnerable. If only the employees are involve it will be easy to detect
and prevent. Then again, the involvement of management could conceal the
misconduct since they have the access to manipulate the significant data of
information such financial reports in the company.

8. Explain the problems associated with lack of auditor independence.

o The auditor’s lack of independency could arise problems especially on their

reports. For the reason that, the problem found would not be fairly reflected in
their report. And may result of having a biased information because it could be
influenced by other factors. Further, if the investors who are relying on their
reports find out that the auditor’s report is made with lack of independency
they might not extend their investments in the company. It may arise the
problem regarding investments in the company.
9. Why is an independent audit committee important to a company?

o Audit committee is a significant part of a company which monitors and guides

the financial matters of a company to ensure accurate financial reporting.
Further, they provide transparency, accountability and establish policies in the
company to prevent the risk of fraud. Through these the financial reports would
be reliable and trustworthy for the investors and potential investors. Lastly, as
SOX required that all audit committee bears independency includes hiring
external auditors.

10. In this age of high technology and computer-based information systems, why are accountants
concerned about physical (human) controls?

o Despite of being computer-based information system there is still a need of

human control. This is due to the engagement of human activities in the
accounting system. These activities may include updating the accounts or actual
supervision of assets. Thus, physical control do not associate with computer
logic.