The following are three fraud scenarios that could potentially be perpetrated by employees at a Casino.

1.  The Casino's Entertainment Director is a dedicated employee. The casino has experienced exceptional growth and the Director has not taken any vacation in the last two years. As part of his job, the Entertainment Director negotiates contracts with entertainers (musicians, comedians) who perform at the Casino. The Director creates fake contracts for amounts higher than the actual amount he negotiates with the entertainment. Copies of the fake contracts are maintained in the Casino records. Payments are to be made by the Casino to companies supposedly representing the entertainer. These companies are actually created by the Entertainment Director. The Casino issues cheques to these companies. The Entertainment Director pays the entertainer (per the actual negotiated price), and pockets the difference.

2.  The Casino's Chief Financial Officer has signing authority up to $500 million. She "borrows" $10 million for a 10 day period in July and invests it in a Guaranteed Investment Certificate at 5%. She directs the financial institution to pay the $14,000 earned from the investment into her personal account. The principal is then returned to the Casino's account.

The Casino's Investment Committee approves all investments over $5 million. An investment continuity schedule (which lists all of the Casino's current investments) is prepared by the Finance Department and is to be reviewed by the Investment Committee at their monthly meetings.  Due to time pressures in the past year the Investment Committee has not met every month.  Due to technical issues related to the software used for preparing the reports, the investment continuity schedule is sometimes prepared manually (with paper and pencil).

3.  An accountant doing bank reconciliations for the Casino receives returned prize cheques for Casino guests who requested their winnings be mailed to their home address. Based on previous experience, this occurs when Casino guests move. Due to the Casino's company policy (which is in line with relevant laws and regulation), winners have one year in which to claim their prizes, otherwise the prize is forfeited. The accountant waits one year to ensure a claim is not made for the prize cheque. He then writes a cheque for the same amount to himself from a previously discontinued manually prepared prize cheque, forging an authorization signature. When this cheque is returned from the bank with the rest of the cancelled cheques, he substitutes the returned cheque, stamps it as cancelled, and discards the original manually prepared cheque.

Required:

Assume you have been assigned to conduct an internal audit and you are initially unaware that the fraud has occurred. For each scenario, determine:

a) What risk factors and/or internal control weaknesses would lead you to suspect that a fraud is occurring? ( 2 marks each factor/weakness)

b) Based upon the risk factors and/or weaknesses you identified, what further follow-up work would you perform to confirm a fraud has occurred and to identify the perpetrator? ( 2 marks each example)