Roundtable

Internal Auditor, June, 1997 by E. Theodore Keys, Jr.

* Don't Ignore Receipt Books

When inspection officers conducted short routines and periodic checks in branch offices, they often focused on physical verification of unissued cash receipts and cash on hand. Because of time constraints, other important records, like stubs of issued receipts, were not reconciled past cash and sales summaries.

One sub-branch manager who knew of the inspection officers' checking procedure, would enthusiastically cooperate by producing the stubs of issued receipts and records of cash on hand. All looked proper and in good order.

However, when the internal auditors performed an annual audit, they found that M90,000 (U.S. $35,000) was missing in the company's books. Further review determined that the manager of the sub-branch had been handling the cash collections and receipts in a manner that allowed lapping and pocketing of cash receipts. His activities went undetected because there were no controls over issued and unissued receipts and no reconciliation to daily cash receipts.

When confronted with the findings, the manager admitted the malfeasance, and disciplinary action was taken. The M90,000 was eventually recovered.

IIA-Malaysia Chapter

* Stifling Structure

During a routine audit of the Treasury Department, the auditor noted that a disbursement bank account held an unusually high balance and was not earning interest at competitive rates. Upon inquiry, the auditor learned that the funds could not be invested in any other vehicle due to the unique regulatory restrictions imposed on this particular account. The auditor pursued the issue with in-house legal experts and the regulators, and together they were able to change the structure of the arrangement so that the account will earn $1.8 million more per year based on six percent money market rates.

Twin Cities Chapter

* Drive-offs Are Where?

During the implementation of a new convenience store reporting system, the internal auditors noted that a few stores consistently reported fuel promotion expenses. The discovery seemed odd, because the majority of the stores did not report any such expenses. In addition, the reported fuel promotion expenses agreed exactly with total drive-offs reported on store daily reports. Drive-offs occur when customers fill their vehicle with fuel and leave without paying for the fuel. Company policy required drive-offs to be reported as a cash shortage.

The new convenience store reporting system had been improperly set in some stores to record drive-off transactions as fuel promotion expense rather than as a cash shortage. Net profit was not changed, but fuel promotion expense was overstated and cash shortage was understated, distorting store cash operations. Store software settings were immediately checked in all stations and corrected.

San Antonio Chapter

* Delays Mean Money

The accounting manager complained to the internal auditors that four days were required to agree time sheets to invoices because of all of the errors found on invoices. The auditors found that everything was done manually despite the fact that the accounting department had microcomputers equipped with spreadsheet software.

The auditors recommended that the spreadsheet software be used to summarize time sheets and validate invoices as they were received. The auditors even helped design the necessary logic. Now that the automated process has been implemented, closing the payroll at the end of the month requires only one day.

Florida West Coast Chapter

* Accounts Payable Mystery

The person responsible for writing checks for vendor payments noticed a ten percent discount was available if the invoice was paid early. Accounts payable planned to send a check for $4,000 the same day to get the discount. The notice appeared unusual, however, and a copy was forwarded to the internal auditor for further investigation.

The auditor tried to get the vendor's telephone number and address from the telephone book. There was no listing for the vendor. The auditor then reviewed the vendor's cashed checks and discovered a person's name that did appear in the phone book. The auditor then pulled the vendor's file and noticed that all of the checks, which ranged from $1,000 to $12,000, had been sent to the vendor during the prior two months.

The company's requisitions provided the name of the employee who had signed for the orders, as well as the name of the individual to whom the checks were sent. Interestingly enough, only the payee's first name and middle initial appeared on the requisitions.

The address of the employee who originated the requisitions was obtained from personnel files, and the auditor noticed that it matched the address to which the checks had been mailed. Further investigation revealed that the employee had also submitted fraudulent petty cash vouchers using calculator tapes as receipts. Proper controls and segregation of duties were then implemented in the company, and the employee was terminated.

Houston Chapter

* Tax Collector Errors

The internal auditors were performing a sales tax audit because the state department of revenues (DOR) had assessed the company $4,000,000 in unpaid taxes plus an additional $6,000,000 in interest and penalties. The audit objective was to provide documentation support-mg purchases for which the state DOR had incorrectly assessed sales tax.