Senario:

When the managing director from ABC Contructions goes on four weeks holiday each year in June (just before balance day) he signs several blank cheques for payment of major bills during his absence. John Jackson, head bookkeeper, uses this to his advantage. Jackson makes out one of these cheques to himself for the amount of a large suppliers invoice, and since there is no purchases journal, he records the amount in the cash payments journal as a purchase to the supplier listed on the invoice. He doesn't cash the cheque until several weeks into the next financial year to make sure the auditors do not get the opportunity to examine the presented cheque. When the MD returns, Jackson resumbits the invoice for payment and again records this in the cash payments journal; he marks the invoice paid and files it with all the other paid invoices. Jackson has been doing this for several years and considers it foolproof.

Questions:

1 - Should the auditors have uncovered this embezzlement?

2 - Does the external auditor have a responsibility to uncover this type of embezzlement?

3 - What are the weaknesses in the internal control system?

4 - What internal controls would an internal auditor recommend?