(a) Control activities are the policies and procedures that help ensure that management directives are carried out; and which are designed to prevent and detect fraud and error occurring. Discuss the statement.

(b) Warehouse Ltd purchase furniture from local suppliers and sells them to customer both in cash and credit terms. The company do not have an internal audit department. Therefore, the only audit that is done by the external auditors while conducting their audit discovered a material fraud had occurred during the year. It involved cash, cheque and direct debits receipts from customers being diverted into employees personal accounts. In order to cover up the fraud, receipts from subsequent unrelated customers would then be recorded against the earlier outstanding receivable balances and this cycle of fraud would continue.

The fraud occurred because two members of staff in the account's unit and an employee of the bank colluded. One processed cash receipt and prepared the weekly bank reconciliation; the other employee recorded customer receipts in the sales ledger.

An unrelated sales ledger clerk was supposed to send out monthly customer statements but this was not performed. The bank reconciliations were not reviewed on a monthly statement this was due to inadequate staff in the account's unit.

The fraud was only uncovered when the two employees went on holiday at the same time and it was discovered that cash receipts from different customers were being applied to older receivable balances to hide the earlier sums stolen.

Required:

(b) The external auditors have discovered the fraud state the external auditor's responsibilities regarding the detection of fraud;

(c) Prepare a report to the Managing Director outlining the internal controls that needs to be implemented immediately to reduce the risk of fraud occurring again and, for each control, describe how it would mitigate the risk