Tuesday, January 8, 2013

Forensik Audit Assignment: Tenkey Book Co


Below is my recent forensic audit assingment, I just want to share it with you, maybe someday your lecturer give you this assignment to you,,lol

Tenkey Book Company

Tenkey Book Company operates a chain of retail bookstore throughout the United States. Sandra Hawthorn, Tenkey’s controller, runs a fairly tight internal control system with rigorous requirement for the segregation of duties throughout the company. Even the best systems can have a problem, and recently someone called in a tip to the company’s anonymous hotline saying that Tenkey was losing a lot of inventory to employee theft and the problem was pervasive through many of the company stores. The caller left no details as to who was committing the theft or how they were being committed.
Sandra was alarmed because inventories constituted a large percentage of Tenkey’s assets, and if losses could occur in even one store, they could probably occur in others too. She called a staff meeting that include the IT director and the general accounting manager, “We need a plan to investigate this,” she told them. “Any suggestions?”.

Tom Clockspeed, the IT director jumped right in. “Let’s do a complete inventory of all of our stores,” he said.

Anna Aburida, the general accounting manager began shaking her head, “We’re not due to take inventory for another six months. It would cost us a whole lot of overtime if we do it now.”
Sandra glared at Anna and said, “You’re just going to have to do better than that.”
“Okay”, said Anna. “We need a plan. Let’s start by considering everyone who might be in position to steal. There has to be a weak point somewhere.”

“This is little crazy,” said Tom. “You’re making all of these plans when we’re not even sure if the phone caller was telling the truth. Let’s at least do an inventory of one store before we do anything else.”

Anna frowned, “That’s great Tom. So what happens if we inventory one store and don’t find any inventory shortage? Then what do we do?”

Tom slid back in his seat and laughed, “Right,” he said. “But what happens next if you don’t find any control problems? Then we’ve just wasted time. And even if you do find control problems, there’s no guarantee that fixing them all will fix the problem. And remember, we don’t even know for sure if we do have a problem.

Sandra pounded her fist on the table. “This is going nowhere. I’m going to bring in a forensic accountant to find out what to do.”
a. If you’re brought in as Sandra outside forensic accountant, what advice would you give her?
b. Which employee could be stealing inventory? Describe one or two possible schemes applicable to this case.


a. If I brought in as Sandra forensic accountant, what advice would I give to her is
do the audit procedure in the Tenkey Book Company for one store for the whole store, but for the first time we will inspecting for one store then continued to another branch or store but not in the same time, this way will make the activities in another store will still running without disturbing the whole activities of company. The audit programs that I will offer to Sandra is

            i.            Inspection of documents and record which is consists of examining records and documents, whether internal or external, in paper form, electronic form, or other media. To do this procedure we can do vouching and tracing. Vouching is selecting process the entries in the accounting records then obtain and inspecting the documentation that served as the basis for the entries in order to determine the validity and accuracy of the recorded transaction. This step is performed by the auditor to test the overstatement of the financial accounting. The other way is by conducting tracing. Tracing is the process of selecting documents which are created when transactions are executed and determines that information from the documents is properly recorded in the accounting records (journal and ledgers). This step is performed by the auditor to test the understatement of the financial statements.

Overstating or understating the ending inventory balance can inflate and reduce profit, respectively. Overstated profit make management look good, while understated profit reduce taxable income. The signs of possible financial statement fraud include stagnant inventory balance for several consecutive accounting periods and inventory balance rising faster than sales.

          ii.            Observe the physical inventory through;

·         Determine whether the counts are carried out under proper supervision. Determine whether this official is independent of the custody and recording of inventory.
·         Observe whether persons in charge in supervising the inventory make test counts in all areas and review all areas where inventory are kept to ensure that they have all been counted and the count are recorded
·         Make sure that the quantities and description are properly entered on the inventory tags or sheets to determine the quantities are reasonably accurate.
·         Test the counting of inventory items by selecting items from the inventory tags or sheets and perform and independent count. Perform other counts of inventories and compare the results with those recorded on the inventory tags or sheets by company personnel. Follow up any differences, noted in the counts. Records selected items counted or subsequent comparison with priced inventory listings.
·         Determine that procedures for accounting for all inventory tags and count sheets are followed and that all such as tags and sheets have been accounted for, including used and unused tags and sheets, and that they are secured against alteration. Obtain details of records in order to test later for suppression, manipulation, addition or substitution of records after the physical inventory count (example: take copies of some or the entire count sheets).
·         Consider the procedures established for determining cutoff, visit the receiving and shipping department and note the last receiving and shipping documents.

iii. Do observation by

·         Examine issues transactions and supporting documentation for a period before the balance sheet date and determine that goods issued before the balance sheet date have been excluded from raw materials inventory, and that goods included in raw materials inventory are not included in work in progress, finished goods, sales and cost of sales.
·         Select receiving reports for goods received before the balance sheet date and determine that all goods received before the inventory have been included in inventory and liabilities.
·         Review supporting documentation for goods not included in the physical count but included in the general ledger inventory control account (example: inventory in transit, duty and freight, returns) and determines that the goods are properly included in inventory and the related liability has been recorded.
·         Examine the purchase and issues transaction and detailed supporting documents for the period after the balance sheet date to determine that they have been reflected in the proper period. Where pre-numbered documents are used, ensure that documents have been used in sequence and earlier numbers are included in and later number excluded from transactions in the period.
·         Review records of returned goods and claims against supplier and related debit/credit memoranda for periods before and after the cutoff date have been entered in the appropriate period.
·         Determine whether the method of inventory pricing is consistent with the prior year.

b. The employee that could be stealing inventory is the employee of Warehouse and Sales Department. Then the possible schemes applicable to this case is:

i). The fraudster make the inventory asset value does not change for several periods, or the change is minimal. It could be conducted by the employee who works in Sales Department together with the publisher. He/she agree to cooperate with certain publisher in selling their book, the real price has been cut by the publisher then given to that employee, but the quality of the book (papers, colour, etc) are bad.

ii). The fraudster make the gross profit percentage never changes from period to period, through taken the profit and just make gross profit similar with the previous period. This also could be conducted by the Sales Department.

iii). The fraudster make inventory values are increasing as a faster rather than sales. It could be happen to make the management performance looked goods. In the financial report the inventory values are increasing but actually there are no sales, or the sales invoices that made are just for fake customer. This could be conducted by the employee of Warehouse Department to increase the inventory value to make the performance of warehouse department good, then they could get more bonus.

iv). The fraudster make shipping invoice that cannot be traced to purchase or sales. This is to make the fake shipping invoice to schemes that there’s transaction (shipping) in some periods. This could be happened in order to take money that should be the cost of shipping to personal needs. This can be conducted by the employee of warehouse or sales department. For the employee of warehouse, he/she make fake shipping invoice to schemes that there’s transaction from the publisher but the company that should pay the cost. Then for the employee of sales department, he/she could say that their the shipping invoice is made to shipping the order of our customer.

v). The fraudster makes shipping invoices/ invoice of transaction with the strange or unauthorized delivery addresses. So here the employee make fake invoice of transaction and shipping to strange or unauthorized delivery addresses, but in fact those addresses are not exist. It could be happen to make the sales department performance looked good, since they will get more bonus if their performance good.

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