Question

3.8 The fraud triangle Basic Basic LO 4 Francine Rideau, controller of Quatco Company, is reviewing the year-end financial statements with Tonya Kowalski, the company president. The financial statements currently report a net income of $563.480. Tonya is applying for a very substantial bank loan for a plant expansion, and thus would like to report a net income of at least $700,000. Toward this end, Tonya suggests accruing several sales based on orders received, even though the goods will not be shipped until after year end, and thus they are technically sales of the following year. She said, "If we record sales revenue for these two large orders, our net income should be more than $700,000. This should not be a problem next year, as we will never notice the loss of these sales then, since our sales revenue will dramatically increase once the expanded plant is in place." Required Identify the incentives or pressures to commit a fraud, the opportunity to perpetrate a fraud, and the rationalizations used to justify committing a fraud.

Answer 1

Ans : Quatco Company, has currently reported net income of $ 563,480 but the company president wants to report net income of $ 700,000 so that the company can take very substantial bank loan for plant expansion. She suggested to Frabcine Rideau controller of Quatco Company to record the sales on the basis of order received so that the net income can be reported $700,000.

a) Pressure to commit fraud in the given case is company wants to obtain a substantial loan from the bank for expansion of plant.

b) Opportunity to prepetrate a fraud is there are two large order of sales received in the end of the year even though the shipment will not be made until after year end and the loss in sales of following year due to recording sales in these year could not be problem as the drastic increase in sales due to expanded plant in the following year can compensate such loss.

c) Rationalization used for committing a fraud is that the increase in the sales of the following year due to expanded plant would compensate the loss of the sales in the following year which is resulted due to recognition of sales of two large order in the current year.