Question

Case 1: Each year Susan Riley, president of Bargon Construction, Inc., take a three-week vacation to Hawaii and signs several blank checks to pay major bills during the period in which she is absent. Riley’s vacation often occurs near the end of Bargon’s fiscal reporting period because it is a slack time for the construction business. Jack Morgan, head bookkeeper for the company, uses this practice to his advantage. He makes out a check to himself for the amount of a large vendor’s invoice and records it as a payment to the vendor for the purchase of supplier. He holds the check for several weeks to make sure the auditors will not examine the canceled check. Shortly after the first of the year, Morgan resubmits the invoice to Riley for payment approval and records the check in the cash disbursements journal. At that point, he marks the invoice as paid and files it with all other paid invoices. Morgan has been following this practice successfully for several years and feels confident that he has developed a foolproof fraud.

1. What is the auditor’s responsibility for discovering this type of fraud?
2. What deficiencies exist in the client’s internal controls?
3. What substantive audit procedures are likely to uncover the fraud?

Case 2: The auditor has always received cooperation from a particular client and has no reason to question management’s integrity. The controller has requested that the auditor inform her about which warehouse locations that the auditor will visit during the upcoming inventory count. In addition, the controller has requested copies of the auditor’s observations on the physical inventory because she wants to make sure that a good inventory was taken. Should the auditor comply with these requests? State your rationale, including a discussion of professional skepticism.

Answer 1