Embezzlement is a deliberate misappropriation of property by a fraudulent individual who is entrusted with the property. The fact that a legitimate office holder orchestrates the fraud makes it difficult to prevent its occurrence effectively. The success to deter such actions calls for a thorough recognition of the contributing factors that empower the embezzling officers, improvement of the control procedures, and a strict implementation of internal financial controls. The fraud triangle explains why people are lured into embezzlement and highlights three contributors of the vice; rationalization, opportunity and motive. This paper will examine the case for Baileys Books Inc. fictitious vendors, theft and embezzlement, give an audit objective, desirable controls, tests of controls, audit of balance and discovery summary.
The primary objective of an audit is to examine and report on the truthfulness and fairness of the presented positions and results in the financial records, statements and accounts. The achievement of this objective is facilitated by multiple checks and verifications of the contents presented in the accounting records provided by the entity. Such checks include the tests on arithmetical accuracy, verification of the validity and authenticity of transactions, and examination of the internal controls.
Controls are inevitably necessary for the achievement of truth and fairness in every business. Several controls are desirable in the case of Baileys Books Inc;
Centralization of the purchasing function to a single team or department other than specific individuals.
Clear outlining of the purchasing procedure to compel the purchasing people to obtain the actual competitive bids from the vendors and select the most attractive.
Establishment of a clear chain of command such that the purchasing department is under supervision by senior management to monitor and evaluate the authenticity of the function.
For Baileys, there were several loopholes in the control structure for the purchasing function;
Collins, the manager, is not entitled to inspect the performances of McGuire and Garza. This gives them the opportunity to inflate the prices and misappropriate the purchases. This could eventually result in expensive fictional purchases for the business.
Also, the performance of Collins is never audited or reviewed by anyone. He is thus left at absolute freedom to launch any fraudulent activity he wishes in the purchases he makes.
The three individuals entrusted with purchasing are not compelled by any rule to receive the actual competitive bids, and so they operate on personal interests.
The absence of an oversight role for the purchasing function also contributes to the embezzlement.
The tests of controls are meant to instruct an individual on where to obtain evidence and the procedures to undertake to verify the existence and authenticity of the control function. Baileys Books have not established any checks, and so there will be no tests of the same.
Procedures to obtain evidence for the existence, completeness, valuation, rights and obligations assertions include:
Since the purchasing function is computerized, data mining will enable an auditor to retrieve the purchasing data and compare the amounts paid for all periods for comparison purposes and thus request for explanations on any suspicious variances.
Request and vouch all the purchase orders issued and payment receipts obtained from the vendors.
Independent circularization of the vendors to ascertain the prices quoted by the purchasing individuals.
Examine any engagement contracts between the business and the vendors.
