The auditors could have detected this embezzlement and fraud by performing additional audit procedures for cash and inventory. With respect to cash-skimming scheme, the auditor could investigate further on the “Office” line item of certain cash report sheets by inquiring the company’s personnel and the management. Similarly, the auditor could also use analytical procedures to gain an overall assessment of sales and profitability across individual stores. Because the cash receipt was taken into consideration in determining sales and profitability of stores affected by the embezzlement, stores that consistently exhibit relatively lower sales and profitability may raise auditor’s eyebrows. Additionally, since the cash-skimming operation was not particularly concealed at store, the auditor could also observe the accounting procedures for cash distribution at the retail store level after acquiring an understanding of what the “Office” line item consists of. In terms of Accuhealth’s inventory scheme, performing inventory counts at warehouse and drugstore simultaneously or on the same day would eliminate the double counting problem.
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This procedure would prevent the senior pharmacist from having enough time to transport inventory. An alternative procedure that is also effective in avoiding double counting of the inventory would be to sequentially number items that have been counted one day or keep track of other unique identification of different items to ensure they are not counted again on a later day. Focusing on a bigger picture, the auditor may also want to perform analytical procedures on sales and profitability for individual stores to spot unusual increase in certain store’s gross profit. Since profits were only inflated in a selection of stores where inventory counts were not observed by the auditor, a comparison of sales and profitability across all individual stores should provide the auditor an indication of possible fraud. The control environment is the most important component of an entity’s internal control process because it is the first line of defense against fraud and a basis to perform effective control procedures. AU-C Section 315 describes the control environment as the component that sets the tone of an organization and influences the control consciousness of its people. Some key elements of the control environment include management’s integrity and ethical values, operating philosophy, organizational structure and independent oversight. Several factors in the company’s control environment had negatively affected the other components of internal control structure and ultimately contributed to fraud. …show more content…
First, the Accuhealth’s executives clearly departed from a sound operating philosophy of ensuring appropriate accounting reports and protection from fraud loss as well as meeting external shareholders’ expectations. By embezzling cash and overstating inventory, they failed to set an ethical tone at the top for their employees and were sending a clear message to their employees that committing fraud was acceptable and needed not to be taken seriously, therefore creating an entire culture of workplace frauds.
Moreover, the company’s control environment was deeply undermined by the employment of several immediate relatives and family members as the company’s top management and board of directors. The close relationships among top executives greatly diminished the independence of the board of directors from management and their abilities to exercise oversight of the development and performance of internal control, which caused ineffective monitoring of internal controls and fostered collision among officers and employees to commit frauds. Lastly, the importance of the control environment is further exemplified by the nonchalant attitude of officers and employees towards the schemes. A
This procedure would prevent the senior pharmacist from having enough time to transport inventory. An alternative procedure that is also effective in avoiding double counting of the inventory would be to sequentially number items that have been counted one day or keep track of other unique identification of different items to ensure they are not counted again on a later day. Focusing on a bigger picture, the auditor may also want to perform analytical procedures on sales and profitability for individual stores to spot unusual increase in certain store’s gross profit. Since profits were only inflated in a selection of stores where inventory counts were not observed by the auditor, a comparison of sales and profitability across all individual stores should provide the auditor an indication of possible fraud. The control environment is the most important component of an entity’s internal control process because it is the first line of defense against fraud and a basis to perform effective control procedures. AU-C Section 315 describes the control environment as the component that sets the tone of an organization and influences the control consciousness of its people. Some key elements of the control environment include management’s integrity and ethical values, operating philosophy, organizational structure and independent oversight. Several factors in the company’s control environment had negatively affected the other components of internal control structure and ultimately contributed to fraud. …show more content…
First, the Accuhealth’s executives clearly departed from a sound operating philosophy of ensuring appropriate accounting reports and protection from fraud loss as well as meeting external shareholders’ expectations. By embezzling cash and overstating inventory, they failed to set an ethical tone at the top for their employees and were sending a clear message to their employees that committing fraud was acceptable and needed not to be taken seriously, therefore creating an entire culture of workplace frauds.
Moreover, the company’s control environment was deeply undermined by the employment of several immediate relatives and family members as the company’s top management and board of directors. The close relationships among top executives greatly diminished the independence of the board of directors from management and their abilities to exercise oversight of the development and performance of internal control, which caused ineffective monitoring of internal controls and fostered collision among officers and employees to commit frauds. Lastly, the importance of the control environment is further exemplified by the nonchalant attitude of officers and employees towards the schemes. A