Question

The ABC Company has two divisions, the sales and manufacturing divisions. The president (Randy Savage) manages the sales division. Savage delegated responsibility for management of the manufacturing division to Jane Thomas. The company has a competent accounting staff and an internal audit department. Unlike Savage's procedures, however, Thomas and her assistant: Supervise construction, Maintain the physical inventory Receive manufacturing job bids, Approve all bid updates, Purchase materials, Contract shipping needs, Bill the customer, and Collect payments. With Savage's approval, Thomas has asked the internal auditor not to interfere with her busy schedule. In the current way of doing things, what are potential frauds that may happen? Suggest several improvements to reduce the risk of fraud and improve internal controls? How would you implement these improvements? Your initial posting should be 250-500 words and must be submitted by Thursday, 11:59 pm, MST of this week.

Answer 1

Since there are no internal auditors regular checking, the following are the potential frauds that may happen:

(i) Purchase of materials at high price and taking kickbacks: Since the materials are purchased are purchased and no controls on them, potential frauds of kickbacks are there.

(ii) Inventory stocking : Due to above reasons, stocks can be on the accumulating spree and there could end up cash being locked up in Inventories.

(iii) Terms of Payment: Since there is no Internal Audit, terms of payment, is not verified and there can end up cash outflow not matching to inflow.

(iv) Credit period to customers: Inefficiency in credit period negotiation results in adverse cash inflow.

(v) Are all payments collected reported properly. There can be Teeming and Lading practices by staff.

(vi) Comparative quotation analysis and the bid being offered to the L1 party.

(vii) Approving of price list updates ...who is verifying the same currently. Is it being done properly?

(ix) The biggest potential is the Cash Fraud which can happen in many ways and the same going undetected.