The year under audit is Year 4. For each independent situation below, double-click on the associated shaded cell and select from the list provided the type of fraud, fraud factor, and appropriate audit procedure to detect misstatement due to fraud. A selection may be used once, more than once, or not at all. If there is no fraud committed, select Not Applicable for type of fraud, fraud factor, and appropriate audit procedure to detect misstatement due to fraud.

Fraud Incident	Type of fraud	Fraud Factor	Audit procedure to Detect misstatement due to Fraud
berryphones produces two products: cell phone and computer tablets. Berryphone utilizes expensive quality materials to create the Redberry. In addition, Redberry pays top wages for its workforce to assemble the cell phone. As a result, in year 1 and year 2, berryphones dominated the market in cell phones and had substantial profits related to its redberry phone, which offered exceptional quality and several unique features that were not offered by any other cell phones. The redberry phone accounted fo 70% of revenue in year 1 and year 2. On January 1, Year 3, a new product released by a competitor, Strawberryphone, made their most popular model of cell phones, Redberry phones, obsolete. Management is about to release their annual results for the year ended December 31, Year 3 and has decided to ignore any of the competition's effect on their inventory. Management has not recorded any fictitious sales.
The inventory purchasing agent at HomeStore is solely responsible for allinventory purchases. When the purchasing agent sees that the inventory oftowels is low, he buys more inventory from a set of approved vendors. In both Year 2 and Year 3, the purchasing agent consistently paid significantly higher than market value for inventory from vendor SoftProducts. SoftProducts had an oral agreement with the purchasing to pay commission to the purchasing manager of 8% of the sales prices. HomeStore is unaware of this agreement and the purchasing manager utilizes the commission from Softproducts for personal use. The commissions amounted $40000 and the company has $125,000 in revenue.
3. The payroll manager of RMF enterprises is upset at his performance review and lack of salary increase. The payroll manager feels his salary is below market. As a result, the payroll manager colluded with a payroll staff to ask a fictitious employee to the payroll in Year 2. The payroll manager created a fictitious paper file for the employee and had the payroll staff enter the fictitious employee information into the system. The weekly time cards are approved by the payroll manager. The paycheck of the fictitious employee was split 70/30 between the payroll manager and the payroll staff. The amount paid is immaterial to the company at $20,000, but it does put the payroll managers salary at market value. When management performs a reasonableness check, the amount goes undetected as the financial statements are rounded to the nearest million.

Audit procedure to Detect misstatement due to Fraud

Select an item:

1-Observe inventory counts at all warehouse locatins on the same day

2-Conduct inventory counts at the end of the reporting perios

3-Request to examine inventory boxes on the day of the inventory count

4-Analyze inventory turnover ratio

5-Review prices of similar products

6-Vouch a sample of items from the inventory report sheet to the corresponding prenumberes inventory tags

7-Examine vendor invoices to determine whether inventory is valued correctly

8-Review disbursements and agree to the related support (i.e Invoice, timecard)

9-Verify that the appropriate cost method is disclose (i.e FIFO, LIFO)

10-Trace the inventory amount on the general ledger to the trial balance

11-Observe distribution of paychecks

12-Verify that timecards are approved

13-Review personnel file and recalculate salary amount based on time.

14-Trace the disbursement check amount to the payroll expense file

15-Inspect sales contracts to determine wheter the customer has rights to return the merchandise

16-Trace a sample of shipping documents to corresponding sales invoices, and to the sales journal and accounts receivable ledger

17-Vouch the sales journal to a sample of shipping documents

18-Not Applicable

Type of fraud

1-Fraudulent Financial reporting

2-Misappropriation of assets

3-Not applicable

Fraud Factor

1-Incentive/pressure

2-Opportunities

3-Aatitudes/rationalization

4-Not applicable