Question

Auditors must always be alert for the possibility of fraud. Assume the controls over each risk listed below are marginal. Which of the following possible frauds or misuses of organization assets should be considered the area of greatest risk?

A. Purchases of supplies are made from fictitious vendors.
B. Grants are made to organizations that might be associated with the president or are not for purposes dictated in the organization's charter.
C. The payroll clerk has added ghost employees.
D. The president is using company travel and entertainment funds for activities that might be considered questionable.

Answer 1

The area of greatest risk among the options is grants made to organizations potentially associated with the president or not aligned with the organization's charter, as this can involve significant misuse of funds that are difficult to trace.

Step-by-step explanation:

When considering areas of greatest risk of fraud or misuse of organization assets, each scenario provided has potential for significant harm to an organization. However, the scenario where grants are made to organizations that may be associated with the president or are not for purposes dictated in the organization's charter could represent the highest risk of misuse of assets.

This is because such grants can involve large sums of money, may be less likely to be subjected to the same level scrutiny as other transactions, and can result in the misdirection of funds for unauthorized purposes over a long period without detection.

Purchases from fictitious vendors, addition of ghost employees to the payroll, and questionable use of travel and entertainment funds by the president are all significant risks as well. However, unauthorized grants have the potential to divert large amounts of funds towards entities that could be difficult to trace, especially if they're intertwined with the personal interests of top executives.