Question

An ex-employee of a company’s payable department was able to steal around $200K by filling fake invoices from his own dummy company. A forensic accounting team discovered that there were 12 fake invoices were submitted and paid by the ex-employee over the time frame of previous 1 year. Payments made of the fake invoices were paid first into account of his wife, after which they were transferred into his own account.

Required: 1. Suppose you are the external auditor, what audit procedures you will use to catch this fraudulent activities and person responsible?

Answer 1

Q: Required: 1. Suppose you are the external auditor, what audit procedures you will use to catch this fraudulent activities and person responsible? (15 marks)

A: As an external auditor, one may realise that the most important, and major task of an auditor making up about 60% of their audit work as part of an audit procedure is the inspection of documents. The fact that an ex-employee's criminality of stealing around $200K by filing fake invoices over a period of one year has come to light, it means that the initial audit procedural tasks of analytical review, observation, and inquiry are already completed. Now it all boils down to inspection of the fake invoices as submitted by the ex-employee to confirm the criminality (of the ex-employee) followed by the recalulation to assess and tally the amount of the theft with the client's assessment. Inspection refers to the actual verification of the suspicious or dubious documents like invoices, payment vouchers, and all supporting documents including approvals for purchases, payments, inventory management and movement (physical tallying with documentary evidence on incoming and outgoing materials with actual stock in the warehouse), etc. The inspection of payment and stock movement documents are crucial as supporting evidence to compare and tally the amount of fraudulent activities committed and to verify if there are any procedural lapses and to verify if any other concerned / related departmental staff are involved as accomplices like warehouse staff, security staff, accounts/finance staff, purchases staff, etc., in the fraudulent activity, or whether this ex-employee was all alone in the execution of the crimes. After inspection and recalculation, a final audit report is to be submitted with all supporting evidence and recommendations to the top management for actioning.