Question 1. How does the accounting write-off of design and development costs as current expenses affect managers' incentives to incur these costs?
Question 2. Explain the importance of separation of duties to a system of internal controls.
Question 3. Explain inventory overstatement. A merchandising company has asked you to advise it on how to detect fraudulent financial reporting. Management wants your help in detecting inventory overstatement. Further, management wants to know how to find evidence of inventory overstatement.
a. Using your own numbers, make up an example to show management the effect of overstating inventory. Show how inventory overstatement at the end of Year 1 carries through to the beginning inventory overstatement in Year 2.
b. Prepare a brief report to management suggesting ways management could detect inventory overstatement.
Question 4. Three students share a house. Having better things to do than clean house, they hire someone to come in and clean once each week. How should they share the costs of the housekeeper? One simple solution is to share the cost equally. Suppose, however, that one student's bedroom is twice as large as each of the other students' bedrooms. The second student has a small bedroom and uses the house only four days per week. The third student uses the house all week, has a small bedroom, and is generally acknowledged to be the cleanest of the three. Sharing the cost equally is simple, but is it fair?