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Exercise 3:
Frank Dizon, a highly competent employee of Breezewater Sales Corporation, had been responsible for
accounting related matters for two decades. His devotion to the rm and his duties has always been
exceptional, and over the years, he had been given increased responsibility. Both the president of
Breezewater and the partner of an independent CPA rm 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?

Exercises 4:

Cash
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The auditor has always received good cooperation from a particular client and has no reason to You can ask 1 question (will expire 숅)
question management's integrity. The controller has requested that the auditor inform her about which
warehouse locations that the auditor will visit during the upcoming inventory count. In addition, the
controller has requested copies of the auditor's observations on the physical inventory because
she wants to make sure that a good inventory was taken. Should the auditor comply with these
requests? State your rationale, including a discussion of professional skepticism.

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Step-by-step explanation

Exercise 3:
The reason for such embezzlement is due to the following :
1. Absence of segregation of duties -
If one single person is entrusted with the whole responsibility, there are chances for him to
commit fraud. It is advised that the following activities / responsibilities relating to a single
transaction should be performed by di erent people :
a) recording of the transaction

b) authorising of the transaction

c) safekeeping/ physical custody of any related asset

d) Reconciliation

In the above situation , if there was segregation of duties the embezzlement wouldn't have been
possible.

2. Lack of close supervision on the employee

When there is no close supervision, the chances of employees to embezzle money is high and
vice versa.

3. Lack of proper internal control system in place

A good internal control system puts a formal policies and procedures in place , which establishes
a de ned ow of activities which helps to prevent any fraud from occurring. Example usage of
sequentially prenumbered invoices etc.

4. Lack of proper inventory controls / physical stock checks -

If the organisation had good control over its physical inventory and kept a regular veri cation
process in place, such misappropriation could not have happened for so long.

5. Absence of strong internal audit function within the organisation-

A strong internal audit function or team within the organisation could easily detect and prevent
such misappropriation of funds without much delay.

Regardless of how trustworthy Frank Dizon appeared, no employee has to be given the combined
responsibility of accounting the assets and custody of those assets.

Exercise 4:

The auditor is always expected to exercise professional skepticism. Lack of professional

skepticism often leads to errors and frauds. The major reason for lack of professional skepticism
is excessive friendly relation with the clients and also the trust on clients.
The auditor should not reveal the warehouse location of place that the auditor will visit during the
upcoming inventory count. Physical veri cation should be done on surprise basis to ensure no
previous arrangements have been done. By revealing the location the basic purpose of physical
veri cation and would be defeated.
The auditor should not comply with the request of the client. The observation on the inventory
represents an independent evidence source that is to be used by the auditor to reach the
judgement about the quality inventory compilation of the client.
The test count of the auditor's inventory will be traced to the nal inventory of the client's
compilation to determine that all the items have been recorded properly. If there is a probability
that the client will share the information with the controller, the data can be used bye the
controller to make sure that the items that have been reviewed by the auditor are recorded
correctly. The evidence established by the auditor wouldn't be useful for the assessment of
overall reliability of the count of inventory.

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Subject: Accounting, Business

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