Task: A major Australian Public Company ran promotions advertising for a number of its products through a promotions company. The promotions company falsely inflated the number of responses it received from purchasers of the company’s product. The false number of respondents was invoiced by the promotions company to the public company resulting in the overpayment of thousands of dollars. The records kept by the promotions company were those on its computer database as well as manual batch numbers of responses to the promotions.
REQUIRED : Identify five (5) procedures and checks that would have reduced the risk to the victim company?
Scenario “B”: You were engaged to conduct an examination on an Australian subsidiary of an American company following a discovery by the financial controller that freight and travel expenses were too high during a certain period. You have found the following:
The entries posted to the general ledger were examined and it was found that whereas normal expenses would be $10,000 to $12,000 for a particular month, they were in fact $33,442.19. Entries posted to the freight account were checked and in some cases there were no corresponding invoices.
Staff were frustrated in their efforts because the trade payables clerk, who was responsible for the payment of accounts and cashing of wages cheques, was either off sick or evasive when questioned.
The system for the payment of accounts was that the trade payables clerk would prepare a cheque to pay an invoice and would then present the cheque with the invoice and relevant documents for signing by two authorised signatories.
All company accounts were paid by cheque; the only cheques used to obtain cash were wages cheques. This would be done by stamping the reverse of the cheque with the words, ‘Please pay cash’; the trade payables clerk would then present the cheque to the bank and obtain the cash. Specimen signatures were, of course, held at the bank but they were rarely checked as the trade payables clerk was so well known to bank staff.
Duplicate cheques had been issued for payment of accounts already paid by the company and cashed at the bank by the trade payables clerk. The signatures on the cheques were, in some cases, forgeries and, in other cases, genuine (obviously people were signing things without due care). A payment of $6,217.60 was used to pay a travel company for a trip for two to Tahiti — the clerk had cancelled this entry with the words, ‘OK paid by me’.
When questioned, the trade payables clerk said that she had used her own cheque to pay for the travel. You checked with the travel company and found that, in fact, a company cheque had been used for the trip. You and officials of the company called in local detectives and all parties adjourned to the local police station. By this time, it was outside office hours and police were unable to contact the travel agent themselves and had no documentation to rely on to negate the clerk’s story. The clerk was released for further investigation by them, but the clerk left the country and is now living happily in Greece, $164,000 richer.
Procedures and checks to reduce the risk of the victim company:
The major Australian Public Company discussed in this case study analysis assignment faced a risk while doing promotion of some of its products with a promotions company. The risk faced was a financial risk. That was happened due to lack of transparency and false data records. These risks cannot be eliminated properly but can be mitigated and controlled by following some procedures.
Security Governance Procedure
As per the Scenario A desibed in the case study analysis assignment, it has been observed that all the records were kept with the promotions company only. This resulted in an overpayment of thousands of dollars for the victim company. The records of the purchasers of the company's products should be kept with the major Australian Public Company. It will increase the transparency of the overall company policy. Therefore, when all the data are kept with both the major Australian Public Company and the promotions company, then the promotions company cannot imply any kind of false inflation of the data. Moreover, this results in an increase in the transparency of the company policy. Hence this will reduce the risk for the victim company (Vovchenko et al. 2017).
Backup and Automation Procedure
The major Australian Public Company can involve a data expert, to check the risk factors. A secured room and system is needed to allow for the data expert. All the confidential data of the victim company will be kept with that person only. The data expert will perform the data analysis of key problem areas to detect the risk factors for the company (Tupa, Simota & Steiner, 2017). This will help the higher officials of the major Australian Public Company to assess the risk factors properly and to take necessary prevention measures.
The major Australian Public Company needs to involve a proper hiring process to control the data exchanged by employees of this company to the promotions company. According to this, the victim company can recruit a financial expert. The financial expert will check and tally the data given by the promotions company and the data given by the major company (Grath, 2015). This person will keep files and backups in a safe place for the victim company. The case study shows in this case study analysis assignment that the victim company had to pay a large amount to the promotions company. Hence when the victim company involves a financial expert, the chance to manipulate the data by the promotions company will reduce.
Causal Analysis Procedure
The audit expert will perform a financial audit. Hence, on the basis of the audit performed, the auditor will recommend some improvement in business policy development procedures (Sadgrove, 2016). Hence, by following the recommendations of the audit expert, the higher officials of the major Australian Public company can develop risk management procedures to mitigate and control the risk factors. Therefore the victim company can check the abnormalities in the information given by the promotions company.
Data Profiling Process
The major Australian Public Company needs to keep complete and original data. This company needs to collect all the information from the promotions company and store all of that in a secure and proper way (Emmer, Kratz & Tasche, 2015). The case study shows that there was no original data information kept with the victim company. As a result, the promotions company was able to charge more payments from the victim company by manipulating the data. Therefore, in order to decrease the chance of data manipulation by the promotions company, the victim company needs to collect the data time to time from that company. Hence, this will check the chance for the promotion company to charge extra payment from the victim company.
Identification and discussion on internal control needed to prevent this fraud:
According to Scenario B described in this case study analysis assignment, the Australian subsidiary of the American company faced a data fraud issue. That occurred due to the lack of transparency in the data information collection. The needed internal control to prevent such frauds in the considered company are identified and discussed below along with examples:
Implementation of the signature screening process
A signature screening process is needed to be introduced in the company. Hence, by introducing the process, the cheques signed by using forgeries can be detected. A third party can be involved in this case (Simha & Satyanarayan, 2016). For instance, the Australian subsidiary of the American company can tie up with Commonwealth Bank, and request them to implement the signature screening process to detect the forgeries in the cheques. Hence, if such a step was taken previously in the company under consideration, the employee was not able to take away $164,000 from the company.
Division of responsibilities among a group of staffs
Division of responsibilities among the employees can be an important internal control to prevent fraud. The company can divide the responsibilities among the employees, like record keeping, the deposit of cheques, reporting the information and auditing the overall financial matters (Hess, 2016). For example, the Australian subsidiary of the American company can differentiate the financial duties among its employees. Scenario B shows that all the responsibilities regarding the cheque transactions were levied on one single employee only. Therefore it was easy for that employee to do fraud. Moreover, if the responsibilities were divided into more than one employee, that single employee would not be able to escape from the country with $164,000.
Monitoring of financial activity of the company
A financial advisor is needed to observe or supervise the overall financial activity of the company. The advisor will keep all the records obtained from the supervision procedure. This is needed because, by screening the records thoroughly, the overall transaction details can be obtained (Kulikova, & Satdarova, 2016). As per example, the Australian subsidiary of the American company can hire a financial advisor for this purpose. The advisor will maintain all the cheques inflow and outflow and make a day by day report on this. Therefore, the chance of forgeries can be checked by following this measure. Hence, if the financial activity of the company was monitored previously, then the normal expenses would be mentioned as $10,000 to $12,000, not $33,442.19 for a definite month.
Control in cheque issuance
Cash payable cheque signing should be prohibited by the company. The company also needs to check on the signing of blank cheques. Moreover, if there are any signed blank cheques, the authority must store those in a safe locker. The company must secure limited access to the cheques for the employees (Munteanu et al. 2016). For example, the Australian subsidiary of the American company will have to choose some employees, who only will have permission to handle the blank cheques. This company will also have to prohibit writing cheques payable to cash. However, if the considered company was concerned in this matter, the forgery issue would have not arisen.
Collection of information regarding cheque transfer
The company will have to set a department which will collect all the data and information regarding the cheque transfer (Artikis et al. 2017). For instance, the Australian subsidiary of the American company needs to construct a department for cheque transfer. This department will keep all the records of payment and payable cheques for the company. However, if such a department was present in the concerned company, the particular information related to the forgery case would have got.
Procedures which could have alerted the auditor to the fraud:
Employee behaviour management indicator
The auditor should audit the financial behaviours of the company properly. Therefore, if there is any misstatement found in the audit, the auditor must identify the employee responsible for the misstatement. The auditor then keeps an eye on the behaviour of that identified employee. There must be something suspicious present in the behaviour of that employee. For example, if the auditor of the Australian subsidiary of the American company was able to find misstatement regarding the fraud case, the suspicion behaviour of the employee would have been observed. Therefore, this would have alerted the auditor about the fraud.
Partnership with a legal body
The company should have a partnership with a legal body. The auditor will detect the misstatement of provided by an employee to the company. The legal body then will help the management to take legal action against the involved employee (Petri et al. 2017). As in the case of the Australian subsidiary of the American company, if the auditor could be able to detect the misstatement, then the legal body could help the management to take some legal action against the employee.
Assessment of material misstatement
The auditor should check the material statements very carefully so that any case of misstatement can be detected. On the other hand, the management should take a step against that employee who is responsible to submit such misstatement. For example, the incident occurred in the Australian subsidiary of the American company can be considered. There was a payment of $6,217.60 to a travel company for a trip for two to Tahiti. The clerk had cancelled that entry and left the words "OK paid by me". Therefore, if the auditor could have checked the statements entered by that clerk wisely, that would alert the auditor about the forgery.
Communication between the audit committee and management regarding fraud
There should be proper communication between the management and the audit committee. Whenever the auditor gets any information about fraud case, that matter should be brought into consideration of the management. The considering company in Scenario B that is the Australian subsidiary of the American company was not doing any day to day audit reports. As a result, the fraud case happened there.
Use of audit software
It is recommended in this case study analysis assignment that the company should use audit software to keep the information in a track. When the audit information is kept in an organized way, then it will be easy for the audit committee as well as for the management committee, to point out any misleading pieces of information generated in any step by any employee. For instance, the company under consideration that is the Australian subsidiary of the American company was not using any accounting standard. This resulted in a fraud case.
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