The staff auditor originally failed to give due consideration to the apparent warning signs of fraud. What are some of the more likely reasons why he either missed the red flags or failed to pursue them?
Q. A staff internal auditor was assigned to audit one of the company’s wholesale distribution locations. The staff auditor returned to the office after a week and said that everything was fine.
The senior auditor reviewed the staff auditor’s working papers and noted that there was a year-end adjustment in excess of US $100,000—a debit to sales and a credit to
The next day, the senior auditor was talking to the company controller. “I guess those price reductions earlier in the year really worked to attract new customers,” she said. “Price reductions?” said the controller. “What price reductions?” The company is a wholesale distributor—it does not have sales like one might find in a retail store. The senior auditor questioned the controller about the problems the company had encountered installing the accounts receivable system. The controller said that the staff auditor must have misunderstood because no problems had ever been reported.
Accordingly, the auditors expanded their fieldwork, tracing customer payments back and forth between the subsidiary ledger and the general ledger. Their expanded work uncovered the fact that the location manager was stealing payments customers made on account. That is why the subsidiary ledger was out of balance with the general ledger. To cover up his theft, the manager debited the sales account, which was why the gross margins of the two stores were not aligned.
The staff auditor originally failed to give due consideration to the apparent warning signs of fraud. What are some of the more likely reasons why he either missed the red flags or failed to pursue them?
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