Question

You are the auditor for Konerko's Office Supply Store, which is opening for business next week. The store owner has established all the controls you have recommended for ensuring that sales and cash are recorded properly and tracked physically. The owner has heard from other small business owners that employees often used returned goods as a means of skimming money from the register. Post your responses to the following questions: How might an employee use returned goods to skim money from the register? What controls would you recommend to prevent or detect fraudulent returns? What audit procedures might you perform to detect fraudulent returns?

Answer 1

1. Even though there's no return actually, the employee may record such transaction as if customer is returning the goods. And thus, takes out cash from the register for those fictitious returns.

However such false transactions tend to overstate the Company's inventory. As inventory checking is not very regular it generally takes few months to detect the frauds.

PREVENTING THE FRAUD RETURNS :-

A) Appointment of specific employee whose responsibility is to verify and authorize the returns and make sure transactions are recorded properly for such.

B) Unannounced checks on Cash register and proper inventory control.

TO DETECT SUCH FRAUDS:

A) Requesting feedback from the customers and getting to know the real reason for the return.

B) Analysing and comparing the returns per employee and getting to know the reason if the return rate is high.

C...........

Creating and performing the analytical procedures which expose the increase in return and finding the reason for such.

A sound inventory control is very necessary to identify the inventory shortage.

Thank you for your question.

Please rate my answer if you are satisfied with it. It helps me.

Have a great semester.