ACTG 440 Case 3
Tae Woong Kwak
Instructor: Bruce Darling
ACTG 440
Case #3
Due: June 1st 2015
1. The treasurer of a small city.
a. The risk is associated with the lack of segregation of duties and the potential of the treasurer to authorize the use of funds without any outside review.
b. Yes, the auditor should have discovered this defalcation. The defalcation would most likely have been uncovered by performing a simple analytical test of multiplying the asset amount (certificate of deposit) by the applicable interest rate and comparing it with interest income.
c. The organization had inadequate segregation of duties. The treasurer did both the investing and the recording. These activities should have been segregated.
2. The purchasing agent of a company
a. This fraud might have detected by
1. Determining the reasons for shortages in inventory.
2. Testing detailed transactions related to the purchase and receipt of merchandise.
3. Reviewing all major vendors with a post office box number instead of a regular mailing address given the nature of the lack of segregation. The auditor then should attempt to verify the existence of the company.
4. Using analytical procedures to identify any unusual fluctuations in account balances and attempting to explain any that are significantly different than expected.
b. Assuming the fraud is material, it should have been detected. However, there is concern here that the fraud amounted to $125,000 per year in a company with $12,000,000 of annual sales. Unless there was a systematic pattern of inventory shortages that could be directly identified with a purchasing agent, it would be difficult to detect.
c. The organization had inadequate segregation of duties because the purchasing agent was able to make up receiving slips. Accounts payable should pay invoices only on the receipt of valid receiving documents signed by someone in the receiving area. Controls should limit access to these documents. Additionally, the documents should be pre-numbered
Instructor: Bruce Darling
ACTG 440
Case #3
Due: June 1st 2015
1. The treasurer of a small city.
a. The risk is associated with the lack of segregation of duties and the potential of the treasurer to authorize the use of funds without any outside review.
b. Yes, the auditor should have discovered this defalcation. The defalcation would most likely have been uncovered by performing a simple analytical test of multiplying the asset amount (certificate of deposit) by the applicable interest rate and comparing it with interest income.
c. The organization had inadequate segregation of duties. The treasurer did both the investing and the recording. These activities should have been segregated.
2. The purchasing agent of a company
a. This fraud might have detected by
1. Determining the reasons for shortages in inventory.
2. Testing detailed transactions related to the purchase and receipt of merchandise.
3. Reviewing all major vendors with a post office box number instead of a regular mailing address given the nature of the lack of segregation. The auditor then should attempt to verify the existence of the company.
4. Using analytical procedures to identify any unusual fluctuations in account balances and attempting to explain any that are significantly different than expected.
b. Assuming the fraud is material, it should have been detected. However, there is concern here that the fraud amounted to $125,000 per year in a company with $12,000,000 of annual sales. Unless there was a systematic pattern of inventory shortages that could be directly identified with a purchasing agent, it would be difficult to detect.
c. The organization had inadequate segregation of duties because the purchasing agent was able to make up receiving slips. Accounts payable should pay invoices only on the receipt of valid receiving documents signed by someone in the receiving area. Controls should limit access to these documents. Additionally, the documents should be pre-numbered