Question

Problem)

Fraud Scheme - Purchasing Agent:

A purchasing agent for a large hardware retailer has sole discretion in selecting vendors for the parts and supplies sold by the company. The agent directs a disproportionate number of purchase orders to a supply company owned by the agent’s brother-in-law, which charges above-market prices for its products. The agent’s relationship with the supplier is unknown to his employer.

Required:

What type of fraud is this, and what controls can be implemented to prevent or detect the fraud?

Answer 1

The type of fraud is misuse of the authority of an official.

The type of controls to be implemented by the organisation is as follows :-

1. Primary control to be implemented in the organisation is segregation of duties. In the given case the decision taking is solely under one person due to this reason the supplies are purchase from brother in law of that person for above market prices.

2. for every transaction taking place in the organisation a flow of authorisation should be implemented

For example we take a purchase transaction :-

A. The purchase requisition list to be authorised by one person

B. The purchase bids to be collected by another person

C. The analysis and selection of available bids to be done by another person.

D. the approval of 1 bid for the supply of goods is to be authorised by purchase manager or head of the purchase department.

If the flow of authorisation are as per above given process for one transaction there are many people who are for authorisation in that flow if any person makes fraud can be detected by another person.

3. Internal controls not only financial relationships but also non financial relationships to be considered before and after authorising a bid for any transactions.

4. After confirmation of a bid the external confirmation also to should be taken from the supplier.

5. The owners of the organisation for those charged with governance should observe day to day transactions also. this observation will act as a moral check on head of the departments and also bottom level employees.

these are all the internal controls required to be implemented in the organisation to avoid such frauds like misuse of authorisations.

These are all the information required to solve the above given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.