Question

internal project 1

anything helps! thank you!!

Instructions: Study the case that starts on page 3 carefully. Then write concise answers to the following questions regarding the internal control system of Duarf, Inc. Clearly label your responses with proper headings and subheadings. Be very specific and precise. Answers that appear to be beating around the bush will not get any credit. 1. What are the controls in place that under normal conditions should function well to prevent embezzlements or frauds? Identify and list (enumerate distinctly) at least 5 strengths and explain what potential problem(s) each control helps to prevent. (You must separately identify each to get proper credit.) (Hint: Existing preventive measures). 2. What are the additional control strengths of the system that may help uncover problems or deter frauds? Identity and list (enumerate distinctly) at least three. Did they work? (Hint: Existing detective measures to catch on-going events).

Answer 1

What is actually hapenned in this case is Billing Fraud by creating Fake Vendors and Fake Invoices.

1. Following Internal Controls help in preventinf Fraud or embezzlement.

1. Separation of Duties: Concentration of duties in one person will give more scope to commit Fraud. Separation will ensure more checks and balances will ensure comitting of Fraud harder.
2. Access Control: Along with Separation of duties, The system and company assets could be accessed and data could be modified should be according to the level of authority defined which synchronises with the duties assigned.  Giving unrestricted and untracked access to the system will the task of fraudsters easier.
3. Standard Documentation: Creating Standard procedures and related documents will guide the employees in following predefined verifications and procedures which will reduce scope for ambiguity and using situations for embezzlement. All Transactions must carry solid paper trials. It could be a good preventive measure.
4. Document and signature Matching: Matching of documents with source documents, matching of signatures on the documents wth that of authorised signatures stored in secured software before processing them for payment will ensure good preventive measures against payment fraud. Example: Matchng Invoice with Purchase order and Goods received Note and verifying signatures on these with authorised signatures on secured software.
5. Rotation of Key Personnel: This will help in reducing any planning time to commit the fraud. It will also ensure brake for the continuity of fraud and more chance of detection of fraud.

2.)

1. Fraud Hot Line: Setting up Fraud hotline and reporting any suspicious and fraudlent activities will work as preventive measure against Fraud. Keeping unrevealed of Compalinant will make honest employees to report these activities in time. This control is worked well in the present case.
2. Employee Background ChecK: Checking of employee back ground will help in deciding about employee duties and extra measures needed for their monitoring. Though in the present case, Even though company knows about Sandy's life style, it has given him major role which gave him chanceto make fraud.
3. Authorisation Threshholds: Clear defining of Authorisation limits will limit the scope or value of fraud. In the present case, Cap of $50,000 for authorisation had limited the fraud capability of Sandy.

3.)

1. Absence of Audit: Any abnormal activities like addition of vendor without verification, non adherance of matching documents should be regularly audited. So regular internal audit mechanism is a great internal control in prevention of the fraud.
2. Employee trust on their manager is another weakness. Any case for procedure violation must be granted by responsible person only and must be recorded. Employees must go by book.
3. Line hierarchy is disturbed. Bye passing line supervisor for fake check. Byepassng hierarchy should not be allowed.

4) Why system failed:

• Trust - Employees in the department genuinely believing that their manager is doing his duty rather than suspecting his behaviour and assumption of emergency payment. More value for informal relatioships.
• Opportunity: Any system can't be 100% foolproof. Fraudsters will look for deficiencies or opportunities to commit fraud.
• Pressure: Circumstances may force even honest person to commit fraud.

The lesson from the above case is fraud can be commited by anybody and at anytime. From Company perspective, continuous strenghtening of internal controls and From employee perspective, adherence to defined procedures always is necessary.

5)

a)

• Life Style of Sandy
• Behaviour of Sandy - Pressure, request to byepass systems
• Carrying Invoice personally to employees of different roles
• Assigning the work to different employee than defined one
• Not naming the vice-president

b)

As CFE, would recommend data driven Fraud tests or related fraud tools. This will help in better fraud detection.

6)

Segregation of duties are well defined. They needs to be implemented without violations. For this the company must train employees adquately and must be well communicated. Independent perodical checks are needed. The company also needs well designed internal audit system.