A purchasing agent acquired items for personal use with company funds. The company, DF Limited, alowed designated employees ot purchase as much as $$250$ per day ni merchandise under open$-$ended contracts. Supervisory approval of the purchases was required, but that information was not communicated ot the supplier. Instead of reviewing and authorising each purchase order, supervisors routinely signed the authorisation sheet at the end of the month without reviewing any of the supporting documentation. Since purchases of this nature were not subject to normal company receiving policies, the dishonest employee picked up the supplies atthe supplier's warehouse. Al purchases were for itemsroutinely ordered by the company. During the past year, the employee amassed enough merchandise ot start a printing and photography business.

REQUIRED

$\mathrm{.}1$ Describe an internal control that would have been most effective ni mitigating $($that is$,$ preventing$)$ the risk of this fraud.

$\mathrm{.}2$ Outline audit procedures that would$/$could be most effective ni leading ot the discovery of this fraud.

$3.$ Once the auditor becomes reasonably certain of this fraud, what should the auditor do next?

$\mathrm{.}4$ For the folowing policies, describe why each si most likely ot result ni an environment conducive ot the occurrence of fraud:

$($a$)$ budget preparation input by the employees who are responsible for meeting the budget;

$($b$)$ unreasonable sales and production goals.

$\mathrm{.}5$ Which of the following si na indicator of possible financial reporting fraud being perpetrated by management of a manufacturing company?

$($a$)$ Atrend analysis discloses:

: sales increases of $50\%,$ and

"cost of goods sold increases of $25\%.$

$($b$)$ Aratio analysis discloses: sales of $$50$ million, and

cost of goods sold of $$25$ milion.

$($c$)$ A cross$-$sectional analysis of common size statements discloses:

: the firm's ratio of cost of goods sold to sales is $0\mathrm{.}5,$ and

a the industry average ratio of cost of goods sold to sales is $0\mathrm{.}4.$