Question

During an audit it was determined that the management in Heavy Earth-Moving Vehicles Resales in Queensland do not consistently comply with the Head Office policy that sealed bids be used to sell obsolete vehicles. An audit of the sales records shown that several vehicles with recent major repairs were sold at negotiated prices. The management vigorously assured the auditor that performing limited repairs and negotiating with knowledgeable buyers resulted in better sales prices than the sealed-bid procedures. Upon further investigation it was revealed that the vehicles were sold to employees at prices well below market value. Four managers and eight other employees pleaded guilty to criminal charges and made restitution. Required a. List fraud symptoms that should have aroused the auditor’s suspicion. b. What audit procedures would show that fraud had in fact occurred?

Answer 1

a)List the fraud symptoms that should have aroused the auditor’s suspicion.

1)Failure to follow the established policy of requiring sealed bids to dispose of vehicles being salvaged.

2)Management's vigorous justification for departing from established policy.

3)Repairing vehicles before they were sold for salvage.

b)What audit procedures would show that fraud had in fact occurred.

1)Review thoroughly the sales documentation that identifies the people who bought the vehicles at negotiated prices, including comparing the buyers to a list of company employees.

2)Determine whether the company received fair value when the vehicles were sold. This could be accomplished by one or more of the following:

•Compare the sales price to "blue book" prices or to proceeds of sales of comparable vehicles made based on sealed bids

•Locate the actual vehicles and have their values appraised.

3)Review maintenance records for salvaged vehicles looking for recent charges that indicate the vehicle might have been fixed before it was sold.