Question

Describe typical fraudoccur in the production, acqusition and expenditure cycle

Answer 1

• Production cycle fraud involves theft of raw materials and finished goods.
• Waste, Scrap, and Spoiled Goods

Frauds owing to inferior product quality usually involves the use of substandard materials in production or in the assembly line for manufacturing of finished products. These can also include fudging of records to meet certain tests or regulatory requirements (like emission norms), purchasing poor quality materials from vendors who pose to be potential conflicts of interest. Some of these vendors might also be returning undue favors or a kickback for inferior quality material. Additionally, there are cases where a manufacturer’s internal quality control may not be able to detect poor quality material as control procedures can pick defects only after the complete manufacturing process is over. As margins get squeezed, manufacturers tend to sub-contract critical and non-critical production processes to third parties. If sub-contractors are used without proper due diligence, manufacturers tend to become vulnerable to issues related to product counterfeiting or substitution. Therefore, implementing proactive measures within an anti-counterfeiting program, which includes conducting third party due diligence and performing a fraud risk assessment at the procurement, manufacturing and supply-chain processes level, can help identify leakages, if any, and significantly help deter counterfeiting or substitution

Expenditure cycle fraud

   Improper Purchases and Payments

• Unauthorized Purchases
• Fraudulent Purchases to Related Parties
• Misappropriation of Petty Cash
• Abuse of Company Credit Cards or Expense Accounts
• Unauthorized Payments
• Theft of Company Checks
• Fraudulent Returns
• Theft of Inventory and Other Assets
• Payroll Fraud
  • Improper hiring
  • Improper changes to employee personnel files for pay raises?
  • Improper work-related reporting

The five primary activities involved in the acquisition and payment cycle are follows:

·Requisition for goods and services·Purchase of goods and services·Receipt of, and accounting for, goods and services·Approval of items for payment·Cash disbursement