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Internal auditing fraud prevention typical projects

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1 - Consider the following two situations and describe the recommendations the internal auditors should make to prevent the problems presented:

a. Many employees of a firm that manufactures small tools pocket some of the tools for their personal use. Because the quantities taken by any one employee are immaterial, the individual employees do not consider the act as fraudulent or detrimental to the company. The company is now large enough to hire an internal auditor. One of the first things she did was to compare the gross profit rates for industrial tools to the gross profit for personal tools. Noting a significant difference, she investigated and uncovered the employee theft.

b. A manufacturing firm's controller created a fake subsidiary. He then ordered goods from the firm's suppliers, told them to ship the goods to a warehouse he rented, and approved the vendor invoices for payment when they arrived. The controller later sold the diverted inventory items, and the proceeds were deposited to the controller's personal bank account. Auditors suspected something was wrong when they could not find any entries regarding this fake subsidiary office in the property, plant, and equipment ledgers or a title or lease for the office in the real-estate records.

2 - What are the three types of auditing projects the internal audit function can perform? Give an example of each. If you could choose one of these three (as your job), which would you prefer, and why?

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Solution Summary

Your discussion is 423 words and gives the central problem for the first two issues and an approach to fixing it. Three projects are discussed and one is chosen.

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1 - Consider the following two situations and describe the recommendations the internal auditors should make to prevent the problems presented:

a. Many employees of a firm that manufactures small tools pocket some of the tools for their personal use. Because the quantities taken by any one employee are immaterial, the individual employees do not consider the act as fraudulent or detrimental to the company. The company is now large enough to hire an internal auditor. One of the first things she did was to compare the gross profit rates for industrial tools to the gross profit for personal tools. Noting a significant difference, she investigated and uncovered the employee theft.

This case indicates that employees do not realize that petty theft is a problem. This typically starts with the tone-at-the-top so I would recommend a policy about theft and fraud, a employee contract that spells out the expectations about ethical actions and controls, and a whistle-blower hotline to report theft, even minor levels. ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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