Stevens Manufacturing Company Case (Part I) You are Carter Quinn, a new auditor in the Internal Audit department of Stevens Manufacturing Company (SMC). SMC has been in business for more than 50 years and has its main office on Long Island. It is a publicly-traded company with 10 subsidiaries that manufactures parts for computers. The Stevens family still owns the majority stock of the company. The company has 12,000 employees located across the U.S., Canada, Mexico, and Scotland in eight offices. The business has been in good financial condition for most of its 50 years, and although it has experienced downturns during recessions, there have been very few times when the company has had to lay off its employees. The companys chairman of the board, Henry Stevens, is the son of founder Danielle Stevens. The vice-chairman of the board is Hailey Stevens Grace, daughter of Danielle Stevens. Other senior executives are not members of the Stevens family, but have been with the company, on average, 20 years. The company prefers to promote from within and offers stock options to all employees regardless of their position in the company. To become familiar with the audits that are conducted by the department, you have been reviewing working papers from previous audits. Two years ago, an audit was conducted of the purchasing function of a small division of the company in which the purchasing director, Eric Ryan, was extremely uncooperative. While this might be a fairly common occurrence in audits, this audit was never completed. There is a notation in the file that the CEO of the company asked the department to conduct an audit of another department that had been having serious problems, as soon as possible. This required all resources to be pulled to complete the CEOs request. The internal audit department had planned to finish the audit but never did. The auditors and internal audit manager who worked on the purchasing audit have since left the company. There were some notations that the auditors were having trouble locating some invoices and requisitions that had been selected for audit and that there were some purchases that looked like they had been split. A previous audit of the area was conducted without any major findings. In fact, there is a memo in the file from Dennis Yang, the former director of purchasing (now retired), who thanked the internal audit department for their assistance and said he would implement their recommendations immediately. You decide that it is time to look back into this situation. There are too many red flags that indicate something isnt right. You raise the subject with your manager, who gives you the go-ahead to check it out; but says that if its going to take more than 100 hours, you will need to let her know. Questions: 1. What are the red flags that indicate potential trouble? 2. What types of fraud could be occurring? 3. How would you proceed to check out this situation?