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Auditors and detecting illegal activities

One of your audit clients is a large jewelry store. The primary reason for the audit is to document sales for a lease agreement, and for a small bank loan. The store has been in business for over 20 years, run by a couple (Jan and Jim) who are close to retirement.

Last year, a new manager was hired. Profits soared as the new manager put in charge of buying precious stones and metals. Unfortunately, it turned out that the new manager was buying much of this material from fictitious companies, and was really acting as a fence for stolen goods. Both the new manager and the store have been charged with criminal activities and the store faces a huge fine that could put it out of business. Jan and Jim are furious that you did not detect the criminal activity during your audit.


Prepare some points you could discuss with Jan and Jim regarding the requirements for auditors to detect illegal activities.

Solution Preview

After reviewing the scenario, I would suggest the following requirements for the auditor to detect illegal activities:

1. The main reason, as pointed out, for the audit was so that sales could be documented for a lease agreement and a small loan.

2. The auditors' job was solely for this purpose, and may have had no knowledge about the purchases of an employee.

3. The jewelry store should have had a fraud policy ...

Solution Summary

This solution discusses auditors and points to discuss in detecting illegal activities.