Question

An internal auditor is concerned that fraud, in the form of payments to fictitious vendors, may exist. Company purchasers, responsible for purchases of specific product lines, have been granted the authority to approve expenditures up to $10,000. Which of the following applications of generalized audit software would be most effective in addressing the auditor's concern?

a. list all purchases over $10,000 to determine whether they were properly approved.
b. take a random sample of all expenditures under $10,000 to determine whether they were properly approved.
c. List all major vendors by product line. Select a sample of major vendors and examine supporting documentation for goods or services received.
d. List all major vendors by product line. Select a sample of major vendors and send negative confirmations to validate that they actually provided goods or services.

Answer 1

The most effective method to address the concern of fictitious vendor payments in an internal audit is by listing all major vendors by product line and examining a sample of their supporting documentation. This approach verifies vendor existence and the legitimacy of transactions. Sending negative confirmations to vendors is another, albeit less immediate, audit strategy.

Step-by-step explanation:

The concern regarding fraud in the form of payments to fictitious vendors can be addressed by applying generalized audit software. Specifically, listing all major vendors by product line and selecting a sample of these vendors to examine supporting documentation for goods or services received would be most effective. This method allows the auditor to verify that each vendor actually exists and that they provided the goods or services claimed. If any discrepancies are found, such as missing or inadequate documentation, this would raise a red flag for potential fraud.

An alternative approach might be to use negative confirmations. The auditor could send these to a sample of the listed major vendors to further validate the transactions. If the vendors do not refute the validity of the purported transactions, it adds an extra layer of assurance to the audit process. However, this may not be as immediate or thorough as directly examining the documentation supporting the transactions.

In comparison to options A and B, which are less targeted and may overlook transactions just under the $10,000 threshold, and option D, which relies on third-party confirmation, option C offers a good balance of direct control and comprehensive review of vendor-related transactions.