Free Case Study About Auditing Case Study

1.
The auditor would have identified the risk through carrying internal control procedures and analysis of financial statements. The city’s pension account seems to be operated by several people. Therefore, there seems to be no guideline on who should manage the city’s pension fund. The auditor should examine bank reconciliations for every month. He should consider if the bank account was active or dormant. This is because transfer of substantial amount of money to personal bank account is an indication that no one was monitoring the city’s pension fund. The auditor should also determine whether the treasurer carried most of financial duties meaning there was no segregation of duties. The reason for using internal control procedures is because most cases of money defalcations arise due to weak internal controls.
Defalcation can be detected through tracing the money from the journal entries to the general ledger. If the amount is material, it is easy for the auditor to detect because he can audit all the material amounts in the bank statements. The audit procedures that the auditor should carry to detect the fraud are to trace the source of the money and verify whether it was deposited in the bank account. The auditor should confirm authorization for any withdrawals of money from the bank and the supporting documents to show how the money was used. He should compare the movement of the city’s pension fund account over the years.
The city’s pension fund is managed by several treasurers. This should serve as prove that the internal controls are weak in relation to segregation of duties. The auditor should therefore carry out substantive procedures on money received and disbursed for all material amounts and get confirmations from the management that all payments were authorized. Since defalcations relate to transfer of money to personal account, explanations of each transfer should be provided.
2.
A fraud amounting to 125,000 dollars is very insignificant in relation to 12,000,000 dollars. Therefore, it is not easy for the auditor to detect. However, the auditor should obtain a list of all authorized vendors from the top management and get confirmations from the vendors themselves. The auditor should also verify how long the vendors have been supplying goods to the organization. The frequency of purchase should also be verified from the management. This can be identified through review of operational procedures.
The audit procedures that the auditor should perform are to verify the list of authorized vendors, who authorises the purchase and payment of goods from the fictitious vendor and trace the recording of the purchase in the general ledger.
The control procedures of detecting or preventing such defalcations is by providing a list of all authorized vendors, dividing the duties of ordering, receiving, recording and payment of purchases.
3.
The auditor would have detected the defalcation through identifying all the welfare recipients and who authorizes their payment. This can be done through review of the operational procedures authorized by the management and analysis of financial statements.
The defalcation can be detected through tracing all the payments from the bank to the recipient. The auditor can directly confirm the existence of the welfare recipients, the percentage variation of the amounts paid in the previous years and segregation of duties. He can also review the files and confirm the information in those files and whether all the files relate to the authorized welfare recipients.
The control procedures to detect defalcations can be segregation of duties. Since the social workers write and deposit checks, it is easy for them to perpetrate a fraud. Written checks should be signed by authorized persons, and a list of authorized welfare recipients kept. Recording of all transactions in the computer should be done by a different person other than those who write the checks. The files should be examined to ensure they relate to the existing authorized welfare recipients
4.
The auditor would have reviewed the internal controls to identify if the management has set the market prices for all purchases and whether there are authorized personnel who inspect the market prices in the purchase orders.
The audit procedures that the auditor should have carried to detect defalcations should be inspecting the prices in the purchase orders by comparing them with the prices provided by the management. Comparison of the price charged to the vendors and the price paid by the company.
The procedure to control and detect defalcations of prices is to set the prices and authorize them and confirm from the vendors the price charged when obtaining the goods. Segregation of duties is also an important control measure.
5.
The auditor would use internal control procedures to detect the collusion. The auditor would examine how departments coordinate from initiation stage of a transaction to the filling stage. He would also obtain a list of all the employees and physically confirm their existence.
The audit procedures would be to confirm from the previous year how many employees were hired and staff turnover over a period of one year. He would also wish to physically confirm the existence of each employee and compare the information with the human resource department. He would confirm the method used to pay employees and whether there are employees who collect money on behalf of others.
The procedures that can be used to control or detect such collusions should be segregation of duties. The cashier and the supervisor should not be the final people to approve the number and payment of employees. After the supervisor approves the payroll a final person should be responsible of confirming the existence of the said employees. Each employee should have a file where all their information is kept.
6.
The auditor should have used internal control procedures and analyse financial statements in order to confirm the number of bank accounts the company has. He would also obtain information concerning the dormant and the active accounts. He should confirm the signatories of the bank accounts and whether bank accounts are reconciled every month. The financial statements will show all the bank accounts a company has and control procedures will show if operations regarding bank accounts are in place.
The audit procedures that the auditor would use include obtaining a list of all signatories and agents of bank accounts and confirming the same with the bank. Obtain a list of active and dormant accounts. Confirm monthly bank reconciliations for both dormant and active accounts. Confirm the monthly statement balances with the customers.
The procedures of control or detection of defalcation of money in the bank include segregation of duties. The manager should not deal with customer statement balances as well as bank accounts. These two duties should be done by different people. The manager should also not be the one to correct customer balances. Dormant accounts should be closed and maintain the active bank accounts only.
7.
The auditor would use internal control procedures in order to examine how transaction flow from initiation to filling and examine whether the internal control procedures are efficient in preventing errors and fraud.
The audit procedures to be carried out are examination segregation of duties among the various personnel, whether discounts, bad debts and returns are properly authorised.
The audit control procedures would be segregation of duties. The accounts receivable bookkeeper should not handle all the duties of opening the mail, make cash deposit, record discount, returns and bad debts. These duties should be done by different people in order to reduce cases of misappropriation of cash.