Question

A production manager for a moderate-sized manufacturer began ordering excessive raw materials and had them delivered to a wholesale business that the manager was running on the side. The manager falsified receiving documents and approved the invoices for payment. Which of the following procedures is most likely to detect this fraud?

1) Take a sample of cash disbursements; compare purchase orders, receiving reports, invoices, and check copies.
2) Take a sample of cash disbursements; confirm the amount purchased, purchase price, and date of shipment with the vendors.
3) Observe the receiving dock and count materials received; compare the counts with receiving reports completed by receiving personnel.
4) Perform analytical tests, comparing production, materials purchased, and raw materials inventory levels; investigate differences.

Answer 1

Comparing samples of cash disbursements, purchase orders, receiving reports, invoices, and check copies is the most likely method to detect fraud involving excessive ordering of raw materials by a production manager.

Step-by-step explanation:

The procedure most likely to detect the fraud involving the ordering of excessive raw materials by a production manager would be:

Take a sample of cash disbursements; compare purchase orders, receiving reports, invoices, and check copies. This method involves a thorough cross-referencing of documents that should, under normal circumstances, align with each other. Discrepancies among these documents could indicate fraudulent activity, such as falsified receiving documents or unauthorized approval of invoices. An internal or external audit performing this procedure would likely uncover the excessive and unauthorized raw material orders directed to the manager's side business.

Answer 2

The following procedure is most likely to detect this fraud 4) Perform analytical tests, comparing production, materials purchased, and raw materials inventory levels; investigate differences.

Step-by-step explanation:

Analytical tests that compare production, materials purchased, and raw materials inventory levels are most likely to detect the fraud described in the scenario. By analyzing these elements, discrepancies and anomalies can be identified, prompting further investigation.

Observing the receiving dock and counting materials received (Option 3) may help in detecting discrepancies, but it might not directly reveal the fraudulent activities of the production manager, who is manipulating the ordering and delivery process.

The first two options involve reviewing cash disbursements and confirming purchase details with vendors. While these are good internal controls, they may not directly uncover the fraudulent scheme involving the manager's side business, as the manipulation is happening internally.

Performing analytical tests allows for a comprehensive examination of the entire production process, revealing any irregularities between actual production, materials purchased, and inventory levels. Investigating these differences can lead to the discovery of the fraud, making Option 4 the most suitable procedure in this context.

So, the correct option is 4) Perform analytical tests, comparing production, materials purchased, and raw materials inventory levels; investigate differences.