easel

Luxury Auto Leases, Inc. of New J.!exkx>, USA, has offices in Tucumcari. Santa Fe, and A.lbuquerque. Lisa Docke{)', the company
president has an office in Santa Fe and visits the other offices periodjcalty for internal audits. Ms. Dockery is concerned about the honesty
of her employees. She contacted Bacx & Front CPAs. and informed them that she wanted lhem to recommend a computer system that
would prohibit employees from embenJing cash. She also told Back & Front that before starting her own business she managed a
nationwide auto leasing companywith over 200 off~es and was familiar wrth their accounting and internal control systems. She suggested
thai Back & Front could base her requested system on the nationwide one.
Required:
1. How shou1d Back & Front advise P-is. Docke{)' regarding the installation of a system similar to the natioowide one? Explain.
2. What should Back & Front acMse "1s. Dodcery regarding a system that will absolutely prevent theft? Discuss.
3. If Back & Front takes Luxury Auto Leasing as an audit client, what procedures should they peñorm to detect fraud? Would they
guarantee that their aud.l couSd discover fraud? Wtr¡?

Case4
An example of a tack of intemal controls with a disastrous result was the bond trading loss in the New Yõtt Office of Daiwa Bank in 1995.
Over 11 years 30,000 unauthorized trades were made resulting in a $1.1 billion loss (an average of $400.000 in losses for every trading
day). Daiwa al1<1.ved Toshihide lguchi. a bond trader. to authorize sales. have custody of the bond assets. and record these transactions.
As a novice trader. lguchi mrsjudged the bond manet. racking up a S200.000 loss. To raise cash to pay Daiwa"s brokers. lguch, would
order Bankers Trust New York to sell eooes held in Oarwa·s account. The stalemenls from Banke(s Trust came to l9uch1 who forged
duphcales. complete with bond numbers and matlllty dates. to make it look as if Banker's Trust Sbll held !tie bonds he had sold. When
he confessed to his misdeeds. the Daiwa thought thei:r bond account was S4.6 billion when in fact only S3.5 billion was lefl lnadeq~te
review o1 internal controls was also to blame. Dar..va·s irltemal audítors had reviewed the New York branch several times since the fraud
began. but Banker's Trust was never contacted for confirmation of Daj,.va's bank statements. If they had, lguchrs fraud would have been
exposed. Diawa's external auditor never audited the New Yortc branch.
Required;
1. What type of control procedures were ignored at Oarwa?
2. For each internal conlrol procedure missing. what damage was caused?
3. What kind of controls could have been instituted that would haw prevented the problems at Daiwa?
4. For each of the five inlemal control procedures discussed above, applying each to a baM trading operation, identify a specific
error that is likely to be prevented if the procedure exists and is effective.
5. For each of the five internal control p rocederes disœssed in this chapter, applying each to a bank traœng operation, list a specific
intentional or unintentional error lhat might result from the absence of the control.

Scanned with CamScanner