**QUESTION>>> Refer to Table 11-2 on page 340. Identify facts that you believe may present a risk of fraud at SCS.>>>

Please review Case 11-33 (Kent, CPA) in your textbook.

11-33 (Objectives 11-2, 11-3, 11-4) Kent, CPA, is the engagement partner on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 2011. On May 6, 2011, Smith, the senior auditor assigned to the engagement, had the following conversation with Kent concerning the planning phase of the audit:^Ac€ 

• Kent: Do you have all the audit programs updated yet for the SCS engagement?
• Smith: Mostly. I still have work to do on the fraud risk assessment.
• Kent: Why? Our Ac€A?errors and irregularitiesAc€?? program from last year is still OK. It has passed peer review several times. Besides, we donAc€?ct have specific duties regarding fraud. If we find it, weAc€?cll deal with it then.
• Smith: I donAc€?ct think so. That new CEO, Mint, has almost no salary, mostly bonuses and stock options. DoesnAc€?ct that concern you?
• Kent: No. MintAc€?cs employment contract was approved by the Board of Directors just three months ago. It was passed unanimously.
• Smith: I guess so, but Mint told those stock analysts that SCSAc€?cs earnings would increase 30 percent next year. Can Mint deliver numbers like that?
• Kent: Who knows? WeAc€?cre auditing the 2011 financial statements, not 2012. Mint will probably amend that forecast every month between now and next May.
• Smith: Sure, but all this may change our other audit programs.
• Kent: No, it wonAc€?ct. The programs are fine as is. If you find fraud in any of your tests, just let me know. Maybe weAc€?cll have to extend the tests. Or maybe weAc€?cll just report it to the audit committee.
• Smith: What would they do? Green is the audit committeeAc€?cs chair, and remember, Green hired Mint. TheyAc€?cve been best friends for years. Besides, Mint is calling all the shots now. Brown, the old CEO, is still on the Board, but BrownAc€?cs never around. BrownAc€?cs even been skipping the Board meetings. Nobody in management or on the Board would stand up to Mint.
• Kent: ThatAc€?cs nothing new. Brown was like that years ago. Brown caused frequent disputes with Jones, CPA, the predecessor auditor. Three years ago, Jones told Brown how ineffective the internal audit department was then. Next thing you know, Jones is out and IAc€?cm in. Why bother? IAc€?cm just as happy that those understaffed internal auditors donAc€?ct get in our way. Just remember, the bottom line isAc€¦ are the financial statements fairly presented? And they always have been. We donAc€?ct provide any assurances about fraud. ThatAc€?cs managementAc€?cs job.
• Smith: But what about the lack of segregation of duties in the cash disbursements department? That clerk could write a check for anything.
• Kent: Sure. ThatAc€?cs a material weakness every year and probably will be again this year. But weAc€?cre talking cost-effectiveness here, not fraud. We just have to do lots of testing on cash disbursements and report it again.
• Smith: What about the big layoffs coming up next month? ItAc€?cs more than a rumor. Even the employees know itAc€?cs going to happen, and theyAc€?cre real uptight about it.
• Kent: I know, itAc€?cs the worst kept secret at SCS, but we donAc€?ct have to consider that now. Even if it happens, it will only improve next yearAc€?cs financial results. Brown should have let these people go years ago. LetAc€?cs face it, how else can Mint even come close to the 30 percent earnings increase next year?

QUESTION>>> Refer to Table 11-2 on page 340. Identify facts that you believe may present a risk of fraud at SCS.>>>

TABLE 11-2 Examples of Risk Factors for Misappropriation of Assets

THREE CONDITIONS OF FRAUD
Incentives/Pressures	Opportunities	Attitudes/Rationalization
Management or other employees have incentives or pressures to misappropriate material assets.	Circumstances provide an opportunity for management or employees to misappropriate assets.	An attitude, character, or set of ethical values exists that allows management or employees to intentionally commit a dishonest act, or they are in an environment that imposes sufficient pressure that causes them to rationalize committing a dishonest act.
Examples of Risk Factors	Examples of Risk Factors	Examples of Risk Factors
Personal financial obligations create pressure for those with access to cash or other assets susceptible to theft to misappropriate those assets. Adverse relationships between management and employees with access to assets susceptible to theft motivate employees to misappropriate those assets. Examples include the following: Ac€?c Known or expected employee layoffs. Ac€?c Promotions, compensation, or other rewards inconsistent with expectations.	Presence of large amounts of cash on hand or inventory items that are small, of high value, or are in high demand. Inadequate internal control over assets due to lack of the following: Ac€?cAppropriate segregation of duties or independent checks. Ac€?c Job applicant screening for employees with access to assets. Ac€?cMandatory vacations for employees with access to assets.	Disregard for the need to monitor or reduce risk of misappropriating assets. Disregard for internal controls by overriding existing controls or failing to correct known internal control deficiencies.