Question

26. You were asked to investigate extremely high, unexplained merchandise shortages at a department store chain. Classify each of the five situations as a fraudulent act, an indicator of fraud, or an event unrelated to the investigation. Justify your answers. (Adapted from the CIA Examination)
    1. The receiving department supervisor owns and operates a boutique carrying many of the same labels as the chain store. The general manager is unaware of the ownership interest.
    2. The receiving supervisor signs receiving reports showing that the total quantity shipped by a supplier was received and then diverts 5% to 10% of each shipment to the boutique.
    3. The store is unaware of the short shipments because the receiving report accompanying the merchandise to the sales areas shows that everything was received.
    4.   Accounts Payable paid vendors for the total quantity shown on the receiving report.
    5. Based on the receiving department supervisor’s instructions, quantities on the receiving reports were not counted by sales personnel.

Answer 1

(a) INDICATOR OF FRAUD. The reason is that the supervisor has an outside business setup related to the department's setup which gives rise to a conflict of interest.

(b) FRAUDULENT ACT. The act of the supervisor is a fraudulent act as it results in utilisation of the entity's resources for other use by undertaking unfair means.

(c) INDICATOR OF FRAUD. Since the supplies are kept in stores, a quantity check of stock should be done periodically and results should be tallied with the quantity mentioned in the receiving report.

(d) EVENT UNRELATED TO THE INVESTIGATION. For payment to vendors, the receiving reports and invoices are base documents and accounts payable paid vendors according to them.

(e) INDICATOR OF FRAUD. It is an indication because the supervisor prevents the sales personnel from performing his duties.