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Fake Surveillance Cameras and Financial Statement Audits

Please use fraud item below to respond.

Which of the following internal controls would likely be most effective in helping to prevent fraud?

a. Hidden surveillance cameras
b. Secret cash counts
c. Covert email monitoring
d. Fake surveillance cameras

I selected (b) secret cash counts but it was incorrect. The correct answer is (d).

According to the article answer (d) Fake Surveillance Cameras: Perhaps the most effective way to prevent a fraudulent act is to increase in the perpetrator's mind the perception that he or she will be caught. Consequently, the mere presence of a perceived detection method—even a non-functioning one, such as fake surveillance cameras—can deter a potential fraudster from following through with a scheme.

Although fully functioning security cameras are certainly the more effective option, organizations lacking the resources to collect and review security footage might consider installing a fake surveillance camera as a deterrent. In contrast, controls that are unseen—for example, hidden surveillance cameras, secret cash counts and covert email monitoring—might increase the likelihood of fraud detection, but they will do little to prevent the fraud from occurring in the first place.

How is this item relevant to the audit of financial statements of a closely-held company? What would be the impact on the audit opinion if the auditor did NOT uncover the fraud? Would this particular item be easily discovered by the auditor in the normal course of their audit? Why or why not?

Solution Preview

In any case where auditing of public companies is involved, observation and outward elements are always more effective than something that is unseen or hidden. In this case, the fake cameras act as an outward element that all of the employees can see. The employees do not realize that the cameras are fake so they adjust their behavior accordingly and do not steal for the fear of being video recorded by the camera. The hidden camera, secret count and email monitoring are all viable tactics but are less effective. The fake video camera can be compared to a manager standing behind an employee while the employee is counting or collecting cash. In the case of the fake camera or the manager standing behind the employee, the employee believes that s/he is being watched and it therefore effectively reduces the chances of the employee committing fraud.

How is this item relevant to the audit of financial statements of a closely-held company?

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Solution Summary

This solution discusses the use of fake surveillance cameras in relation to financial statement audits. Each question presented is thoroughly answered.