Question

For the situations presented, describe the recommendations the internal auditors should make to prevent the following problems.      

Situation 1: Many employees of a firm that manufactures small tools pocket some of the tools for their personal use. Since the quantities taken by any one employee are immaterial, the individual employees do not consider the act as fraudulent or detrimental to the company. The company is now large enough to hire an internal auditor. One of the first things she did was to compare the gross profit rates for industrial tools to the gross profit for personal tools. Noting a significant difference, she investigated and uncovered the employee theft.

Situation 2: A manufacturing firm’s controller created a fake subsidiary. He then ordered goods from the firm’s suppliers, told them to ship the goods to a warehouse he rented, and approved the vendor invoices for payment when they arrived. The controller later sold the diverted inventory items, and the proceeds were deposited to the controller’s personal bank account. Auditors suspected something was wrong when they could not find any entries regarding this fake subsidiary office in the property, plant, and equipment ledgers or a title or lease for the office in the real-estate records of the firm

Answer 1

Situation 1:

• Implement and communicate through proper training a policy regarding the theft of company goods and services and the repercussions associated with theft.
• Allow employees to purchase tools at cost from the company.
• Continue to compare the gross profit rates for industrial tools to the gross profit for personal tools until the problem is resolved.
• Discipline or terminate any employees not following the new policy
• Institute better physical access controls over the tools to prevent theft

Situation 2:

• Implement a better segregation of duties. The company controller should not be able to order goods, specify shipment locations, and authorize payment for inventory.
• Require all inventory purchases to be initiated by the purchasing department.
• Require all inventory payments to be supported by proper supporting documents such as receiving reports signed by authorized personnel.
• Require special authorization for shipments to locations not typically used.