Carico Ltd, a manufacturer of construction blocks, operates with a fiscal year-end of June 30th, 2021. With a trading history spanning over 25 years, Carico caters to a diverse range of customers, including both large and small hardware stores nationwide. The company's operations encompass a manufacturing plant, five warehouses, and a central head office. Following the manufacturing process, the blocks are stored in one of the warehouses until they are dispatched to customers. It is important to note that Carico currently does not possess an internal audit department. The following is a reflection of the sales system: • • Each customer is assigned a distinct customer account number, which is utilized to input sales orders upon receiving written requests from customers. The responsibility of entering orders lies with an order clerk, and the system performs an automated verification to ensure product availability and prevent the customer from exceeding their credit limit. maintains a New customers are required to complete a credit application, which is reviewed by a sales manager. The application is then verified by a credit agency, and the credit controller enters the approved credit limit into the system. The company price list that undergoes biannual updates. In the case of larger customers, the sales director determines and establishes the applicable discount, which is recorded in the customer master file. • Once an order is entered, an automated confirmation is sent to the customer via mail or email, providing details of the ordered goods and an estimated dispatch date. The orders are subsequently sorted based on customer address. The warehouse located closest to the customer receives the order electronically, generating a dispatch list and sequentially numbered goods dispatch notes (GDNs). • • The warehouse team proceeds to pack the goods as per the dispatch list. Before the goods are dispatched, a second team member performs a double check, ensuring that the dispatch list matches the accompanying GDN. Upon dispatch, a copy of the GDN is forwarded to the accounts team at the company's headquarters. Simultaneously, a sequentially numbered sales invoice is generated and cross-checked against the corresponding GDN. Periodically, a computer-based sequence check is conducted to identify any missing sales invoice numbers. During the year the auditors uncovered two (2) cases of material fraud as follows: 1. Instances of misconduct involved cash/cheque receipts received from customers being redirected into personal accounts belonging to certain employees. To mask this fraudulent activity, subsequent receipts from unrelated customers were falsely attributed to earlier outstanding receivable balances. This deceptive cycle of fraud persisted over time. The collusion between two staff members, who happened to be related, facilitated the occurrence of this fraud. One of them handled cash receipts and prepared the weekly bank reconciliation, while the other employee recorded customer receipts in the sales ledger. Additionally, a separate sales ledger clerk was responsible for issuing monthly customer statements, but this task was neglected. Although the bank reconciliations consistently displayed minor unbalanced amounts, no one reviewed them after their preparation. The discovery of the fraud only transpired when both employees coincidentally took leave simultaneously. It was then revealed that cash receipts from various customers had been allocated to older receivable balances, thereby concealing the initial embezzled sums. 2. Another fraudulent activity involved a payroll clerk who illicitly established fictitious employees and diverted their wages into the clerk's personal bank account. Although the clerk has since departed from the company, the audit manager holds concerns regarding the potential existence of further fraud within the wages department. Required: 1. Propose and elaborate on control measures that Carico should adopt to minimize the likelihood of recurring fraud, while also outlining how each control would mitigate the associated risk. 2. Explain how a newly established internal audit department at Carico could support the directors in preventing and detecting instances of fraud and error. 3. Outline the necessary procedures to be conducted during the audit of wages in response to the manager's assessment of an escalated risk of fraud.

Carico Ltd, a manufacturer of construction blocks, operates with a fiscal year-end of June 30th, 2021. With a trading history spanning over 25 years, Carico caters to a diverse range of customers, including both large and small hardware stores nationwide. The company's operations encompass a manufacturing plant, five warehouses, and a central head office. Following the manufacturing process, the blocks are stored in one of the warehouses until they are dispatched to customers. It is important to note that Carico currently does not possess an internal audit department. The following is a reflection of the sales system: • • Each customer is assigned a distinct customer account number, which is utilized to input sales orders upon receiving written requests from customers. The responsibility of entering orders lies with an order clerk, and the system performs an automated verification to ensure product availability and prevent the customer from exceeding their credit limit. maintains a New customers are required to complete a credit application, which is reviewed by a sales manager. The application is then verified by a credit agency, and the credit controller enters the approved credit limit into the system. The company price list that undergoes biannual updates. In the case of larger customers, the sales director determines and establishes the applicable discount, which is recorded in the customer master file. • Once an order is entered, an automated confirmation is sent to the customer via mail or email, providing details of the ordered goods and an estimated dispatch date. The orders are subsequently sorted based on customer address. The warehouse located closest to the customer receives the order electronically, generating a dispatch list and sequentially numbered goods dispatch notes (GDNs). • • The warehouse team proceeds to pack the goods as per the dispatch list. Before the goods are dispatched, a second team member performs a double check, ensuring that the dispatch list matches the accompanying GDN. Upon dispatch, a copy of the GDN is forwarded to the accounts team at the company's headquarters. Simultaneously, a sequentially numbered sales invoice is generated and cross-checked against the corresponding GDN. Periodically, a computer-based sequence check is conducted to identify any missing sales invoice numbers. During the year the auditors uncovered two (2) cases of material fraud as follows: 1. Instances of misconduct involved cash/cheque receipts received from customers being redirected into personal accounts belonging to certain employees. To mask this fraudulent activity, subsequent receipts from unrelated customers were falsely attributed to earlier outstanding receivable balances. This deceptive cycle of fraud persisted over time. The collusion between two staff members, who happened to be related, facilitated the occurrence of this fraud. One of them handled cash receipts and prepared the weekly bank reconciliation, while the other employee recorded customer receipts in the sales ledger. Additionally, a separate sales ledger clerk was responsible for issuing monthly customer statements, but this task was neglected. Although the bank reconciliations consistently displayed minor unbalanced amounts, no one reviewed them after their preparation. The discovery of the fraud only transpired when both employees coincidentally took leave simultaneously. It was then revealed that cash receipts from various customers had been allocated to older receivable balances, thereby concealing the initial embezzled sums. 2. Another fraudulent activity involved a payroll clerk who illicitly established fictitious employees and diverted their wages into the clerk's personal bank account. Although the clerk has since departed from the company, the audit manager holds concerns regarding the potential existence of further fraud within the wages department. Required: 1. Propose and elaborate on control measures that Carico should adopt to minimize the likelihood of recurring fraud, while also outlining how each control would mitigate the associated risk. 2. Explain how a newly established internal audit department at Carico could support the directors in preventing and detecting instances of fraud and error. 3. Outline the necessary procedures to be conducted during the audit of wages in response to the manager's assessment of an escalated risk of fraud.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

Problem 6E: Elliott, Inc., has four salaried clerks to process purchase orders. Each clerk is paid a salary of...

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