(CMA adapted, December 1992) In each of the following independent situations, identify internal control deficiencies and make suggestions regarding their correction/improvement.
a. Many employees of a firm that manufactures small tools pocket some of these tools for their personal use. Since the quantities taken by any one employee were immaterial, the individual employees did not consider the act as fraudulent or detrimental to the company. As the company grew larger, an internal auditor was hired. The auditor charted the gross profit percentages for particular tools and discovered higher gross profit rates for tools related to industrial use than for personal use. Subsequent investigation uncovered the fraudulent acts.
b. A company controller set up a fictitious subsidiary office to which he shipped inventories and then approved the invoice for payment. The inventories were sold and the proceeds deposited to the controller’s personal bank account. Internal auditors suspected fraud when auditing the plant’s real estate assets. They traced plant real estate descriptions to the assets owned and leased and could not find a title or lease for the location of this particular subsidiary.
c. The manager of a large department was able to embezzle funds from his employer by carrying employees on the payroll beyond actual termination dates. The manager carried each terminated employee for only one pay period beyond the termination date so the employee would not easily detect the additional amount included on the W-2 reporting of wages to the Internal Revenue Service. The paymaster regularly delivered all checks to the department manager, who then deposited the fraudulent checks to a personal checking account. An internal auditor discovered the fraud from a routine tracing of sample entries in the payroll register to the employees’ fi les in the personnel office. The sample included one employee’s pay record whose personnel fi le showed the termination date prior to the pay period audited. The auditor investigated further and discovered other such fraudulent checks.
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