ACTG 440 Case 3

1135 words 5 pages
Tae Woong Kwak
Instructor: Bruce Darling
ACTG 440
Case #3
Due: June 1st 2015
1. The treasurer of a small city.
a. The risk is associated with the lack of segregation of duties and the potential of the treasurer to authorize the use of funds without any outside review.
b. Yes, the auditor should have discovered this defalcation. The defalcation would most likely have been uncovered by performing a simple analytical test of multiplying the asset amount (certificate of deposit) by the applicable interest rate and comparing it with interest income.
c. The organization had inadequate segregation of duties. The treasurer did both the investing and the recording. These activities should have been segregated.
2. The purchasing agent of a company
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5. The supervisor of a small manufacturing company
a. This would be difficult to detect. The auditor would have to
1. Note an unusual fluctuation in payroll expense for a particular department and then investigate its cause.
2. Perform a detailed payroll test and select the particular fictitious transaction.
b. This would be a difficult fraud to detect unless the auditor had prior evidence that the possibility of such a fraud might exist. In such a situation, the auditor would have to dramatically expand auditing procedures to search for fraud. The expansion of the audit procedures would include a payroll "pay-off" test in which the auditor would actually dispense the checks to the employees. Such tests in today's environment would be rare because most companies do not directly distribute payroll checks to employees: they are either directly deposited in bank accounts or are sent through the mail.
c. This case represents collusion that is difficult to control. The most appropriate control would be for the personnel department to maintain an independent listing of all employees (assuming that an independent department exists, which might