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Audit: Examples as fraud, indicator of fraud or unrelated

5.1 An experienced senior auditor was assigned to investigate a possible fraudulent situation characterized by extremely high, unexplained merchandise shortages at one location of the company's department store chain. During the course of the investigation, the auditor determined the following:

a. The supervisor of the receiving department was the owner And operator of a small boutique carrying many of the same labels a the chain store. The chain store's general manager was unaware of the ownership interest.
b. The receiving supervisor signed receiving reports showing that the total quantity shipped by a supplier had been received. A total of 5% to 10% of each shipment was diverted to the boutique.
c. The chain's buyers were unaware of the short shipments because the receiving supervisor would enter the correct quantity on the move ticket accompanying the merchandise to the sales areas.
d. The chain's accounts payable department paid vendors for the total quantity shown o the receiving report.
e. Based on the supervisor's instructions, quantities on the move tickets were not compared with those on the receiving report.

Required:

Classify each of the five situations as a fraudulent act, an indicator of fraud, or an event unrelated to the investigation. Justify your answers.

Solution Preview

a. The supervisor of the receiving department was the owner and operator of a small boutique carrying many of the same labels as the chain store. The chain store's general manager was unaware of the ownership interest.

This is an indicator of fraud because it provides motivation for the employee. Had the information been known, the employee should probably have had some other position in the company. This is a good example of why general employee work and personal histories, as well as credit checks, can be important.
Had the information been known in the interview stage, the person should not have been hired for a position that invited fraud.

b. The receiving supervisor ...

Solution Summary

The 448 word solution carefully explains the classification of each statement with reasons and examples.

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