Question

An over-incentivized sales manager falsifies sales by creating and approving fictitious customer sales orders, which are then processed and shipped prior to year-end according to the client’s normal control procedures, which your firm tested and found to be effective. Which of the following audit procedures would most likely detect this fraud?

Vouching accounts receivable to sales invoices, shipping documents, and approved customer purchase orders.

Confirmation of balances with customers.

Examining evidence of credit approval for a sample of recorded sales invoices.

Re-performance of client estimates of bad debt expense using independent estimates.

Answer 1

- Voucing accounts receivable to sales invoices, shipping documents may not help to much extent since the question mentions the sales are inflated by creating and approving fictitious customer sales orders which are processed and shipped as well .Hence all the documents are in place, Voucing of documents will not bring out the fictiousness of customer.

- Confirmation of Balances with customers is the best solution since customers created are fictitious. Hence confirmation will not be received from any one and all the fictitious accounts can be caught through this.

- Evidence of credit approval will substantiate if the fraud is detected in step 2. But alone the credit approval may not be helpful since the sales are alreay made using whole process.

- Option 4 will not indicate the fraud but it can be used after the fraud is detected.