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Auditing: Purchase Department Frauds

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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