Describe the management system within your case study business. Assess the risk of fraud in this business, and suggest methods for detection
Management system in this case study.
It is a private ltd company to which owns a large restaurant also a cafe and gateway management at executive level includes. To director David, responsible for financial side of the business and Linda is also a Director involved in day to day running of business. Sue and Lisa are two managers, besides this they hire casual employees during summer reason being they are running seasonal business and during people bossiness months they have to fire employee on temporary basis but still 15 employee are on their Payroll and most of them are two years old.
Risks of fraud
Management system described earlier status position of the two directors and there responsibilities if we look into system deeply it is evident that management system is week. Controls are not properly designed, implemented and if somewhere there are implemented leaving a loophole for concealment that is found.
1. Risk in sales, business is having seasonal sale and the rest of the period business is not doing well so it could be the intention to show a regular sale or cash based sales is also a risky area. Leading to fraud automatic link for credit card payments to directly transfer the amount in company bank account so indirect check is lacking there due to absence of control implemented by management creating an opportunity for fraud.
2. Software used for recording the transaction is open to use by any body, again absence of controls by management creating opportunity for fraud.
3. Different suppliers could also be exposed to fraud.
4. If there is no reconciliation for sale receipts is available. Then if should be an intentional concealment.
5. Proper sales supporting documents are not available.
6. Evaluation of fraud risk factors
The auditor shall evaluate weather information obtained from other risk assessment procedures and related activities performed indicates that one or more fraud risk factors are present while fraud risk factors may not reasonable indicate existence of fraud they have often been present in circumstances where fraud have occurred therefore may indicate risk of material misstatement due to fraud.
Risk assessment procedures performed for detection of fraud are.
1. Inquires of management
2. Discussion with those charged with Government
3. Universal and unexpected relationships identified through analytical procedures.
In this case study absence of supporting sale documents, receipts and follows ups suspects frauds. Charging fixed assets in profit and loss account as expense is an error but if it is not properly valued and directs management assertions like valuation correctness, existence etc. then it would an intentional concealment.
Ineffective Controls includes
- Ineffective control for recording and maintenance record of sale and purchase transaction and ineffective monitoring suspects fraud.
- Incompetent personal hired, it could be ineffective HR policies.
Method for detection
Fraud is suspected at management assertions level and class of transaction so audit risk assessment proceedings includes:
1- inquiries to management
2- Discussion with internal auditors and understanding internal controls
3- Analytical procedures
4- Inspection and observations
These are procedures used by the auditors to detect fraud.