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Auditing: Purchase Department Frauds

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How can a purchasing manager use his/her position to defraud the company? What can be done to prevent it? Where could an auditor look to find evidence of losses on purchase commitments and unrecorded liabilities to vendors?

Many companies use the computer to generate purchase orders. Who is responsible for authorizing a purchase when the computer generates the purchase order? What controls need to be implemented in the automated matching process to ensure that only authorized payments are made for goods and services actually received, and that payments are made at the authorized prices?

Why does the auditor examine travel and entertainment expenses? What would poor controls regarding executive reimbursements say about the "tone at the top" for purposes of evaluating and reporting on internal control? How might the auditor effectively use analytical procedures in the audit of various expense accounts, such as miscellaneous expenses? Give an example of how analytical procedures might be used in the audit of such accounts.

Describe how the separation of authorization of production transactions, recording of these transactions, and physical custody of inventories can be specified among the production, inventory, and cost accounting departments.

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How can a purchasing manager use his/her position to defraud the company? What can be done to prevent it? Where could an auditor look to find evidence of losses on purchase commitments and unrecorded liabilities to vendors?

The purchasing manager can use his position to contract with a vendor to charge a higher price for the purchases and then pay a commission to the purchase manager.
There can be actions take to prevent this fraud by having a system where the purchase prices are approved by the CFO. Usually, the CFO ascertains independently the prices of the products being purchased and then gives his endorsement for purchases. In case of small purchases a finance officer is designated to endorse the purchase order.
The auditor can look at the price lists of vendors and interview similar vendors to find out the real prices of purchases.
Unrecorded liabilities can be unearthed if the invoice file is matched with the entries in the purchase book. Usually, where unrecorded liabilities exist the number of invoices received from vendors will be higher than the entries made in the purchase journal.

Many companies use the computer to generate purchase orders. Who is responsible for authorizing a purchase when the ...

Solution Summary

This solution talks about purchase department fraud from auditing perspective. . It then explores why travel and entertainment expenses are examined.

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See Also This Related BrainMass Solution

Fraudulent Activity

1) Companies depend on banks to help oversee their accounts and in some cases a breakdown in controls happens at the bank. With internet and remote capture banking becoming more popular, what controls should banks have in place to insure proper controls over remote deposits?

2) What procedures, if any, can we use during the invoicing process to eliminate the possibility of someone duplicating or changing information after it leaves the accounting department?

3) What type of fraudulent activity could this have been and what type of testing could have been included in the audit to discover it?

4) What can auditors do to verify inventory levels and that no fraudulent activity is occurring between annual inventory reconciliations?

5) What detection methods can be used to uncover this type of scheme?

6) What steps can employers take to minimize the misuse of non-cash assets by employees - or is this just a 'cost of doing business'?

7) What controls should a company have in place to prevent and detect larceny of inventory?

8) What ways can employees conceal inventory shrinkage?

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