Q1 Class,

Jessica began working for XYZ, Inc. nearly 20 years ago, where she has been working as the Director of Marketing. During the past 20 years, XYZ, Inc. has experienced significant growth, and Jessica has played a major part in helping move along the expansion plans. Because of her great service and abilities, Jessica is greatly respected in the company. Although she has been very helpful to the company, she was forced to leave due to severe health problems.

Mack was called in to replace Jessica after she was released. Jessica's sudden departure prevented Mack from working with Jessica and learning the proper policies and procedures Jessica had put into place before he left. The lack of training created a problem for Mack, who was faced with finishing the projects Jessica had started. The major project Jessica left was an advertising project where the price had already been determined but no work had begun. Unfortunately, Mack could not find any advertising agency information, nor could he find any of Jessica's contacts. 

As Mack continued to search, he realized that he was in more trouble than he thought because there were no records available for any of the work that Jessica had performed. The lack of information forced Mack to bid the contract out to a new advertising agency. When Mack received the new bid and presented it to management, they were surprised to find that the new price was 30 percent less than the original bid.

Management believed the new bid price was wrong and questioned Mack to ensure that he had included all of the requirements for the project. Once management determined he had, it began to ask more questions. In looking around and reviewing some of Jessica's previous activities, management realized that she was no longer bidding out projects but rather giving them to specific agencies. When reviewing these agencies, management found that there was no information for the agencies on file-no addresses, phone numbers, or even tax ID numbers. All management had was a name, and from that information, accounts payable cut a check and Jessica delivered the checks personally.

Based on the new information, management began to question other employees about Jessica's activities. It found that others considered her very secretive and that she refused to allow anyone to work with her on her projects. Others told management that Jessica had also recently become very violent and erratic with many of the employees. Because of the number of red flags, management has called you in to investigate Jessica's previous activities.

Which people would you interview first and why? What type of information would you seek in the interviews and why?

Q2 Class,

You are an internal auditor for a medium-sized manufacturer. You received a tip that three of the firm's purchasing agents might be involved in some sort of fraud. You decide that a good step to validate the tip would be to examine a random sample of vendor invoices for evidence of fraud. You selected your sample from the firm's purchases journal, which lists the invoices, associate purchase order (PO) numbers, and a code that identifies the purchasing agent that issued the PO. The firm's procedures call for all vendor invoices to be routed to the purchasing agent that issued the PO for the merchandise for review before they are sent to accounting to be paid.

When you selected the sample and approached the three purchasing agents for the originals of the vendor invoices in your sample, all three became defensive and stated that they could not produce the originals. They all stated that it was their practice to photocopy the POs and destroy the originals because photocopies were easier to store. However, they were able to produce the photocopies of the invoices, but it took them several hours to do so.

Explain how you went about drawing your sample to provide the best opportunity to isolate evidence of possible fraud. Be sure to explain why you structured the sample the way you did.

Identify as many "red flags" of potential fraud and internal control weaknesses as you can and explain why they are red flags.

Assuming you are concerned about fraud, describe what you would do to verify the invoices.

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