Each year near 30 June, when the managing director of Bargon Construction Ltd takes a three-week holiday to the Barrier Reef, she signs several cheques to pay major bills during the period she is absent. Jack Morgan, head accountant for the company, uses this practice to his advantage. Morgan makes out a cheque to himself for the amount of a large vendor's invoice, and because there is no acquisitions journal he records the amount in the cash payments journal as an acquisition from the supplier listed on the invoice. He holds the cheque until several weeks into the subsequent period to make sure that the auditors are unable to apply reconciliation procedures for presented cheques. Shortly after the commencement of the new financial year when the managing director returns, Morgan resubmits the invoice for payment and again records the cheque in the cash payments journal. At that point, he marks the invoice 'paid' and files it with all other paid invoices. Morgan has been following this practice successfully for several years and feels confident that he has developed a foolproof method.

REQUIRED

a. What is the auditor's responsibility for discovering this type of embezzlement?

b. What deficiencies exist in the client's internal controls?

c. What evidence could the auditor use to uncover the fraud?