Where to Hide Fraud Inventory: Expenses: Payroll

Overview

Imagine you have one hundred boxes that are all supposed to be full of manufactured inventory. How do you obtain reasonable assurance-- now defined as a high level of assurance-- that each box is full without opening every one?

You begin by assessing risk. If the client has strong internal controls over manufacturing, packing & transport to the warehouse, there is reasonable assurance the boxes are properly filled. Next, evaluate warehouse security & controls over access, as well as procedures for removing inventory. Once satisfied that controls are both adequate & operating effectively, you can observe & count the boxes & selectively test a sample– ensuring you do not only choose the most accessible ones, as fraud is often concealed within the middle of the inventory.

Based on this risk assessment & targeted testing, you can conclude with reasonable assurance that the inventory is properly stated without inspecting every box. This same approach applies to expenses & payroll: evaluate internal controls, observe processes & perform independent test procedures.

Weak internal controls in inventory, expenses & payroll create opportunities for fraud that may lead to material misstatements. In this session, we will explore how these vulnerabilities arise & how to recognize & address them through effective audit procedures.