Part A - General and Application Controls

The management at Design Thinking recognises that a well-designed internal control system brings many benefits. Among them are reliable financial records and a greater probability of detecting errors and preventing fraud.

Design Thinking internal audit department has performed an audit to determine the effectiveness of internal controls. In the latest audit, the staff found the following conditions:

1. Bad debt write-offs are prepared and approved by the same employee.
2. There are occasional discrepancies between physical inventory counts and perpetual inventory records.
3. Many original documents are missing or lost. However, there are substitute copies of all missing originals.

Required:

Identify the 2 possible causes of the above conditions. Recommend 2 general (IT) and 2 application (accounting-related) controls that would prevent the above situations from happening again.

Part B - Internal Controls

Explain how the principle of separation of duties is violated in each of the following situations (a) and (b). Also, for each of the situation below, suggest 3 procedures to reduce the risk and exposure highlighted.

(a) Customers returned the clothing that they were not happy with. Instead of recording the return and the clerk put it in another bin hidden in the corner and at the end of shift, the clerk transferred to her bag and took it home.

(b) A receiving clerk received 13 boxes of ball point pens included in the shipment. The clerk took one box aside and took it home after the shift has ended.

Part C - Fraud and IT Controls - 14 Marks

An employee in an engineering firm was unhappy being overlooked for a promotion opportunity and decided to resign. He found a job at competitor's firm in the same city. The former firm soon realised that the innovative designs in engineering solutions were being made available at the new firm where the employee was now working.

After a thorough investigation, it was found that the disgruntled employee's account and password were still active. The investigation showed that the employee had regularly accessed his account and reviewed the confidential designs.

Required:

(a) What are some of the distinguishing characteristics of fraud perpetrators? What factors must have motivated the employee to commit the fraud?

(b) Discuss 2 contributing factors to the type of fraud that took place, and recommend 2 general (IT) and 2 application (accounting-related) controls that could have prevented and/or detected this.