ACC 3044 Advanced Audit & Assurance

Tutorial 8 – Ch 18 & 20

18-21 (a) The internal control deficiencies that allowed this scheme to continue for several years included the following:
 An understaffed internal audit function
 The agency had a reactive approach to fraud detection and prevention rather than a proactive approach
 The internal control requirement that all purchases exceeding $2,500 required an approved purchase order was easy
to circumvent

(b) The incentives of the agency employees to commit fraud included the following:
 The agency would lose any budget money that was not spent by the end of the year, so this provided an incentive for
employees to spend until they reached the budget limit.
 The employees personally gained by receiving expensive items in exchange for “purchasing” goods from the vendor
participating in the fraud.
 If the budget for the year is not fully utilised, it is likely that the budget for the following year would be reduced

(c) Data analytics can be used to detect fraud by through descriptive analysis which enables the auditor to analyze large
datasets more easily and to drill down into the data. Predictive analysis is used to determine where fraud is likely to occur
based on the past trends. Prescriptive analysis allows the auditor to identify measures to prevent future occurrence.

(d) The auditor can easily disaggregate purchases by month, by vendor, or by amounts that are close to a spending limit which
enabled them to detect 99% of consecutive invoices.
The auditor can examine trends in each of these areas as well. For example, in this particular case, the fraud examiner
noted that payments to the vendor in question increased 342 percent in one year.
The auditor can also examine the trend of purchases which revealed that substantial purchases were made towards the
end of the year.
20-24
a. INTERNAL b.
CONTROL DEFICIENCY TYPE OF MISSTATEMENT
1. The foreman should not hire employees. The foreman may hire unqualified employees, friends, or
possibly a fictitious person to be paid through the payroll
system.
2. The foremen should not recommend wages for The foreman may provide inappropriate pay rates or pay
employees. rates that are split between an employee and the foreman.
3. Time cards should not be left in a box that employees Employees, including the foreman, can take extra time cards
have access to. and clock in for other employees or fictitious employees.

4. The foreman collects and approves the time cards as well
as the duties described in 1-3. (Note: It is appropriate for
the foreman to approve times cards if he has none of the
other duties described in 1-3.)
5. There is no internal verification of the payroll clerk’s input
of names or hours into the payroll system.
6. The controller compares two output records and fails to
compare the output to any input records.
7. The foreman receives the payroll checks for distribution.
8. The foreman mails checks to absent employees.
9. The controller hires and approves wages for salaried
employees and signs their checks.
10. The controller has sole access to pay rates.
The foreman can include fictitious time cards for check
preparation.
The payroll clerk can make mistakes entering the hours or
names.
The controller will not find any existing mistakes made by
the payroll clerk.
The foreman can keep checks for which he has submitted
time cards for nonexistent employees.
Nonexistent or former employees who had someone else
prepare their time cards will receive a check in the mail.
The controller can submit information for a nonexistent
employee, open a checking account in the person’s name
and receive the direct deposit. She can also submit the
improper salary rate to the payroll clerk and split the
payment with the employee.
The controller can include any pay rates
she desires, for herself or others, including fictitious
employees and friends who will split the amounts with her.
11. The payroll clerk can add names to the payroll records. The payroll clerk can add fictitious names for either salaried
or hourly employees. She can set up a checking account in
the same manner discussed in 9.
12. An accounting clerk does the bank reconciliation each The person is unlikely to be qualified to do quality bank
month. reconciliation and will thereby be unlikely to find the
frauds included previously.