You are the internal auditor for a company that started over 40 years ago as a local retailer of major home appliances. The company has now grown to include 55 retail stores in 12 metropolitan areas. Because of rapid growth in the number of stores opened in the last three years (46), a professional management team was hired to replace the previous management team, which was composed of members of the owning family. To encourage continued growth, a sales incentive bonus plan was instituted. Under the plan, managers of individual stores receive a bonus based on inventory turnover.
A retail point-of-sale system is used to aid inventory management. Each store is a node with terminals, a local processor, and a storewide database. The nodes communicate with a central system wide database located at corporate offices. Retail prices for all merchandise are updated once a month to the storewide database, using a master price list provided by corporate offices.
Because the desired margin is achieved for each product sold at the established master price, inventory turnover is viewed as the critical determinant of profitability for each store. Accordingly, sales volume, by product class, is reported weekly to corporate offices. Revenue is also reported weekly, but only in the aggregate. Detailed sales and inventory data, including unit revenue, product class revenue, revenue generated at discount prices, inventory movement, and inventory levels, are produced daily by each store for use by the store manager.
Selling prices are frequently discounted in widely advertised sales. For sale items, sales clerks in each store must override the master price and input the advertised price. Sales at wholesale prices, such as contractor sales, are prohibited by company policy. Damaged goods can be sold at any time at heavily discounted prices at the discretion of the store manager, who assesses damage and sets the sale price.
Over a two-year period, a store manager inflated unit sales by the following acts:
1. Fictitious credit sales were recorded in the last month of the year, with subsequent return of the goods recorded in the first month of the New Year. No goods actually changed hands.
2. Undamaged goods were declared to be damaged and sold at prices significantly less than master prices.
3. Sales were completed at wholesale prices.
4. "Sale-priced" merchandise was frequently sold at prices above its advertised sale price.
Acting alone, the store manager also sold selected merchandise for cash with no record made of the sale. Although a register receipt is required for customer pickup, the store manager verbally instructed the warehouse to load the merchandise without a receipt.

Required
a. Identify six control weaknesses or management deficiencies that permitted the fraud.
b. Identify four indicators that may have signaled the presence of the fraud.
c. Identify four controls needed to detect the fraud.
d. Describe the responsibilities of the internal auditing department in the situation just described.