Andrew Dang
ACTG440
Case 3 1. a. The auditor would have identified the defalcation through review of operational procedures. By reviewing the operational procedures, he/she would have noticed that there was no segregation of duties when it came to receiving and recording the income earned. b. The auditor would have most likely detected the defalcation when confirming accounts receivable with a large statistical sample. He/she probably would have performed a cash trace and noticed the receipts not matching up with accounts receivable postings. c. A control procedure that would have been effective in preventing this defalcation is having segregation of duties. By having another employee record the income earned from the city’s pension fund, the treasurer would not have been able to divert any of the funds for himself. 2. a) The auditor would have identified the risk that led to billing schemes through analysis of financial results. b) The defalcation most likely would have been detected by the auditor when going through the financial statements and identifying the fluctuation in sales. He/she would probably verify that the vendor was real and noticed the defalcation. c) A control procedure that would have been effective in preventing or detecting this defalcation is to implement authorization controls on approval of purchase orders. Authorization of purchase orders would include detective controls such as investigating orders to see if the clients actually exist. 3. a) An auditor would most likely identify risk that led to the defalcation through analysis of financial results and then through a review of industry trends. b) Assuming that the amount is material, the defalcation should be detected. c) A control that could be implemented in order to prevent or detect this defalcation would be to implement