You are the internal audit manager of Carsome Bhd (Carsome). You have received a request from the
Question:
You are the internal audit manager of Carsome Bhd (Carsome). You have received a request from the management about an inventory fraud which was brought to the attention of the company’s audit committee by a whistle-blower. Carsome manufactures and sells parts used in the automotive industry to both car manufacturers and to garages specialising in the repair and servicing of cars.
The audit committee would like the internal auditor to perform an investigation into the fraud and to quantify the loss suffered as a result of the inventory fraud, and to recommend improvements in the company’s internal controls to avoid similar issues in the future. The audit committee head provided you with the following summary of the allegations of the whistle-blower: ‘The warehouse manager has been working with one of the sales representatives to dispatch goods to a fictitious customer which the warehouse manager has created on the dispatch system.
The sales orders are input by the sales representative into the dispatch system which is not directly linked to the invoicing and accounting system. After the goods dispatch note is issued by the warehouse manager and the goods leave the warehouse for delivery to the fictitious customer, the sales representative cancels the original order. The warehouse manager reverses the dispatch immediately so that the daily report on inventory movement used to generate invoices in the sales system does not reflect movement of the goods.
The sales representative takes delivery of the goods at the address of the fictitious customer and then sells the parts on the internet, splitting the proceeds with the warehouse manager. The warehouse manager supervises and participates in all inventory counts to ensure that he is able to adjust the records of inventory to disguise the missing items.’ The operations director has informed you that no authorisation is required for either the cancellation of orders or the reversal of dispatch notes. Required:
(a) Recommend SEVEN (7) procedures which should be performed in order to quantify the inventory loss; (7 marks)
(b) Evaluate FIVE (5) deficiencies in Carsome’s internal control system. For each deficiency, explain how it has contributed to the fraud, and provide recommendation(s) to prevent such fraud from reoccurring. (10 marks)
(c) Explain EIGHT (8) roles of an internal auditor’s in investigating fraud. (8 marks)
Auditing a business risk appraoch
ISBN: 978-0324375589
6th Edition
Authors: larry e. rittenberg, bradley j. schwieger, karla m. johnston