As internal auditor for a retailer, you notice a large increase in the inventory shrinkage account. You decide to have a new staff member go “‘undercover”’ as a retail clerk to see if he can uncover the nature of the shrinkage problem. It is expected to be an internal pilferage problem, involving employees, but the means by which the assets are being extracted cannot be pinpointed.
The “undercover” work pays off. The new staff member posing as a retail clerk is approached by a fellow employee and told that he can ‘“‘order’’ any piece of merchandise at about 20 percent of cost. The merchandise would be made a part of a window display, after which it would be delivered to the employee’s address. The payment had to be in advance, since it covered handling costs and, of course, a profit to the window display employees who had discovered the “hole” in controls which facilitated the fraud. No monitoring device was present over inventory after it had been checked out for a window display.
Required:

a. What do you think of such an “undercover” approach to fraud detection?

b. What recommendations would you make as to future control procedures?

c. Assume that you discover that this fraud has been perpetrated for two years and that 30 percent of retail clerks were involved in ‘buying’? merchandise from display windows. Management asks for your input as to how the employees should be disciplined. What would you recommend?

d. Assume that top management chooses to merely establish new controls and ‘‘let bygones be bygones.’’ What implications would such a choice have for the internal auditor?