The following situations may raise a suspicion of fraud on an audit engagement.

Required:

Explain how each situation could indicate a fraud risk and how the auditor could confirm or dispel it.

a. An employee can authorize medical insurance claims and enter them into the system for payment without supervisory review. What might happen?

b. The inventory warehouse manager was also responsible for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records. What might happen?

c. The petty cash custodian was replaced and the frequency of fund reimbursement decreased from every two days to every four days. What might you suspect?

d. There are no formal control procedures for bank reconciliations. They are rarely performed, and when they are, they are never reviewed.

e. A company may have recorded fictitious sales. What account could you audit to determine whether this has happened?