Question

What types of fraud could be present in the payment and acquisition cycle and how could that fraud be perpetrated, detected, and prevented?

Answer 1

1. Ensure Controls Are in Place- The stronger internal controls the company has in place, the less likely it is that there are errors or fraud in the purchasing system. Use a list of approved vendors and review vendors on a regular basis which reduces the risk of fraud and kickbacks for purchases. Check that there is separation of duties, and approval is needed in the purchasing and cash disbursement process.

2. Evaluate Inventory and Cost of Goods Sold- Ensure it's not overstated. Observe a physical inventory count. Test inventory purchase transactions near a financial cutoff period to make sure transactions were recorded at the right time.

3. Look at Accounts Payable and Related Expenses- Search for unrecorded accounts payable. Pull transactions from a subsidiary accounts payable ledger and check that they are also recorded in the general ledger. Contact large vendors and suppliers and confirm they agree with what the company purports they owe them. Purchasing also affects inventory value, so test transactions to see if inventory values agree with the vendor's sales price