Question

1. Mention some example of inventory fraud in term of management fraud and employee fraud!

2. Describe with your own word, what is “kickback”? What kinds of control needed to prevent or detect kickback?

3. Mention some auditor concern regarding presentation and disclosure assertion in client inventory and cost of goods sold!

4. Explain some audit procedure to test the existence or occurrence and completeness assertions of client account payable and cash disbursement!

Answer 1

1.Inventory fraud is the theft of physical inventory items and the misstatement of inventory records on a company’s financial statements.

Examples of management fraud

.personal purchases:-An employee can divert funds to buy goods or services on his own behalf.

.Ghost employees.

.skimming.

.Tax avoidance

.Asset theft

Examples of employee fraud

.Unrecorded vacation and sick leave

.pay roll

.stealing cash.

.Fabricated receipts

2.Kick back is an illegal payment intended as compensation for preferential treatment or any other type of improper services received.It may be money ,a gift,credit etc.

Detect kick back

Simple back ground checks can confirm the following.

i.vendor owner ship and valid employee identification number.

ii.physical address and valid phone numbers.

iii.website presence.

iv.perform a perodic data base search that matches vendor addresses to employee addresses.

3.Presentation and disclosure assertion in client inventory

If the client has a perodic inventory system ,the physical inventory count determines the balance in inventory accounts and will probably occur on the balancesheet date.

If the client has a perpetual inventory system,the physical inventory count may occur any time during the accounting period.

When the count occurs the auditor is required to observe

Presentation and disclosure assertion in cost of goods sold

Cost of goods sold is the cost of a product to a distributor manufacturer or retailers.sales revenue minus cost of goods sold is a business ‘sgross profit.cost of goods sold is considered as an expense in accounting and it can be found on a financial report called an income statement.

Cost of goods sold is substracted from net sales to arrive at the gross margin of business.

4.Explain some audit procedure to test the existence or occurerence and completeness assertion of client account payable and cash disbursement.

Audiy accounts payable ,you must match the ledger transaction to the figures in your general ledger.Cut off tests check to whether transactions for the fiscal year are indeed inyour business end of year financial statement.

Audit procedure to test occurrence and completeness of cash disbursement

When you test cash disbursements during an audit ,your first job is to figure out how your audit client pays its invoices.for cash disbursement transactions you need to five assertion s such as.

i.occurrrence

ii.completeness.

iii.authorization.

iv.accuracy.

v.cutoff

Audit procedure to test occurrence and completeness of client account payable

A lot of money flows through the account payable.Reviewing standard operating procedures,analysing source documents,confirming balances with vendors and compairing the account payable ledger to the financial statements.

1.Examinations of standard operating procedure.

2.Analysis of paper trails such as

i.purchase orders

ii vendor invoices

iii.bank records

3.confirmations

i. include the amout due based on the company’s accounting records.

ii.Leave the balance blank and ask the vendors to complete it.

4.Verification of financial statement.