You pull the vendor agreements for the vendors selected (which are found on the following pages). Some of the vendors have long standing relationships with JMC while others have been fairly new. You also pull a sample of the requisitions and can find all of them except for the ones for Lantern Co. You then go to accounts payable and match the requisitions that you found in purchasing with the invoices that have been paid for each vendor. The invoices you have pulled contain the required paperwork and have the proper authorizations, even for Lantern.

While in accounts payable you start talking with one of the accounting clerks, Beth Ann, who tells you that Mr. Brackens is a very demanding manager and is very big on providing prompt payment to the vendors. In fact, for one vendor whom he says is very picky, he has to pick up their checks and personally deliver them. Beth Ann recalls that the account is Lantern Co. For a couple other accounts, he wants to know every month when their checks go out. He says hes having to monitor them since they are fairly new. He used to do that for some other accounts, but not any more. Although she couldnt remember the ones that he doesnt ask for any more, he does keep an eye on Top Q and Blues Pro. This is probably a good thing, since we pay them more than others. You pull the checks and they have all been deposited into the vendors checking accounts.

Discussed below are all the concerns that would make an auditor believe that there is fraudoccurring in the company.A big red flag is Mr. Brackens picking up checks for Lantern Co. and personally deliveringthem, this doesnt sound like a normal payment procedure for the company in paying itsvendors. Another concern is the fact that the manager is keeping an eye on Top Q and BluesPro. By checking the vendor agreements we can notice that Warehouse Equipment and Seros,as well as Top Q. and Blues Pro have the same Tax IDs. The owner/CEO and contact personfor Top Q. and Blues Pro have the same last name (Robert Brill and Steven Brill) and it seemsthe two companies referred each other to JMC; they went in business on the same date of08/15/00; they are located on the same street and the P.O. Box numbers are almost the same;the phone numbers for the contacts are only two digits different (432-1600 vs. 432-1645), thisindicates an extension within a company not two different companies. Moreover, the twocompanies went in business on the same day (08/15/00); they both have a welcome letter dateof 05/05/97 but were not checked and approved until October of 2000; Top Q. approval dateof 10/00/00 is inexistent. Blues Pro was checked by A. Harkins, the same employee whochecked Seros Inc. which is in question for having same Tax ID as Warehouse Equipment;Top Q., Ad Systems and Lantern Co. was both checked and approved by Mr. Brackens, thisshows a lack or an intentional override in segregation of duties. Ad Systems has a welcomeletter date of 04/20/92 but was not checked and approved by Mr. Brackens until 04/20/95.

Questions:

1. Will you expand your audit? How?

2. Do you have predication for a fraud examination? Why or why not?

3. What fraud schemes could be occurring?

4. Who do you suspect? Why?

5. Who dont you suspect? Why?

6. What are your next steps?