Case Study: Examining Financial Misconduct and Internal Controls

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Assessment task - two
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Table of Contents
Introduction......................................................................................................................................3
Scenario A.......................................................................................................................................4
Scenario B........................................................................................................................................6
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
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Introduction
Financial misconduct and fraud are always degrading the growth of a company. There are many
such cases on this world where many companies shut their business due to financial misconduct
so it's always important for a company to continuously measure the accounts of a company so
that any kind of fraudulent activity cannot arise in the company otherwise a company can face
heavy loss in their operations. In the first scenario of the case study, an Australian public
company is suffering from heavy loss due to the overpayment of invoices, in this, it will be
explained how a victim company can reduce the effect of overpayment loss. The second scenario
of case study, a clerk had made do Freud in the accounts of the company and generate some false
invoices which are again create an extra cost burden on the company and company also suffer
from heavy loss. The strength of internal controls of a company how can internal controls of a
company will prevent these Freud in the future will be briefly discussed in this study. The
activities of the auditor will be discussed in this study and how can an auditor minimize these
risks in the company.
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Scenario A
In the first scenario, an Australian based public company outsources their promotional activities
to a company which is done promotion on the behalf of a public company. The promotional
company has falsely represented some invoices in front of the public company due to this the
expenditure of public company sharply increases and this result in public company faces a huge
loss of revenue. It's important for every company to take proper control of the outsourcing
company so that this kind of problem cannot arise. These are five important factors that if a
company follow in their operations than they might overcome with this kind of Freud.
 The Australian public company cannot monitor the activities of the promotional company
if the Australian public company keeps making an eye on all the activities of the
promotional company than they might be overcome with this issue (Jeacle and Carter,
2012). Negligence and laxity is the main reason is the main reason behind any
misconduct in any company if a company cannot behave strictly or show laxity to other
company than the chances of Freud in the company increases. If the Australian public
company tracks operations of a promotional company than they can easily find Freud.
 The Australian cannot check accounts of the promotional company on a timely basis if
they check accounts of the company on a regular basis then they cannot face this kind of
issue. The account of a company considers many things such as inflow and outflow of
cash, comprehensive income statement, balance, and trading account of the company.
The financial statements of a company represent a fair picture of business transaction and
in this case, the public company of Australia cannot monitor the financial transaction of a
promotional company. Thefinancial accounts are necessary for a firm to check on a
periodical basis to know exact information about the operation of the business.
 The Australian public company must check the background of a promotional company,
it's important for a company to check background before outsourcing of business. The
background report of a company is clearly demonstrating the past operations and past
activities of the business (Parsonset, et., al., 2018). The Australian company might be not
checking the background of another company before outsourcing the business. the
background report completely revel the past history of business and if the Australian
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company critically analysis the background report of another company that might be they
gain some hint regarding misconduct in the books of account.
 The Australian company can also use legal laws before entering into an agreement, if a
company makes a contract with other companies that first of all the need to make a legal
contract with the company regarding Freud activates (Karpoff et. al., 2014). The legal
agreement provides many benefits to both parties if a party cannot work according to
terms and conditions of agreement than another party can easily sue and take help from
the legislation. In this case, both the parties cannot make any kind of agreement related to
fraudulent activities so they definitely face the problem and if they make a legal
agreement that the problem can be easily solved.
 The Australian public can also take external audit advisor to check financial accounts of
another company but they cannot take any kind of help from external auditor and this
may increase chances of Freud. The auditor of the Australian public company is also not
aware of fraud this means the auditor is not an intellectual person because if an auditor
can carefully check the accounts of another company than the auditor can easily find
misconduct that happens in another company.
So these are some important points which if the Australian public company considered that they
cannot face the issue of overpayment. These factors are very important from a company
perspective because a company cannot proceed according to these points than they definitely
face issues in their payment system.
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Scenario B
In the second scenario, an American based company have worked in Australia with their
Australian subsidiary company but they come with some issues. The clerk of company show
expenses more than that actually occurs, the travel charges and freight charges are charges
shown excessive in the books of accounts but the actual expenses are far less than presented by
the clerk. The ledger book of the company is clear fully measured and management of the
company find out that the amount is written excessive like – the usual expenses that occurred on
the travel and freight would around $10000 to $12000 but the book of accounts show the
expanses around $33,442.19 which are far greater than actual expenses of company. when the
accounts of the ledger are critically analyzed than the management of the company finds out that
the invoices are also not properly shown in the books of accounts but expenses are shown so this
creates confusion whether these expenses really occur or not.
The clerk of the company is totally responsible for the payment system of the company and the
clerk is not responding and also not coming into the office so this also creates a big issue for the
company, the clerk is the only person who knows everything about the reports of accounts. The
clerk of the company is making the cheque in the favor of vendors after the completion of this
process the higher authority of the company makes a sign on a cheque for validation of cheque.
The clerk of the company attached all the required documents with cheque such as invoice and
purpose of payment to make a validation from the higher authority of the company.
The company is using cheque as a tool to make a payment against all the expenses of company
and cheque is also used for the payment of wages to employees and labor. The clerk of company
is also using trust of bank in a negative way because when is signed by higher authority of
company than that cheque presented in front of bank to collect cash but staff of bank cannot
carefully measure the signature because bank staff have trust in clerk and clerk of the company is
using this trust in a negative manner. The clerk can also use a duplicate cheque for withdrawal
of money from a bank account so it's also a serious concern for the company. the payment was
issued in the favor of a trip to Tahiti and the clerk said the expanses of the trip were paid from
my own account but when the management of the company clarify this with a travel company
that they find out the cheque is given on the behalf of the company. the clerk of the company is
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presented in front of local police but the clerk is released for further investigation but after a
period of time, it is found that the clerk is leaving in Greece and leave a luxurious life and this is
completely shocking for the firm.
So these are five examples of internal control through which a company can prevent this kind of
Freud.
The separation of duties
The separation of duties is defined as the break of responsibilities of accounts in a manner so that
every employee works according to their own responsibilities in the company. the
responsibilities such as bookkeeping, auditing, reporting and deposits, all these important
activities must be done according to responsibilities if these responsibilities properly followed in
a company then chances of misconduct decreases in that company.
The proper control of the accounting systems of the company
The accounting systems of a company are must be properly controlled according to an increase
in the efficiency of the company (Ege, 2014). The security department of a company must
clearly set some important security restrictions on the important information of a company,
security such as log on and log off through technology, passwords on the important information
and lockout on the important information. All the above security instruments are more useful
from a company perspective and in the above scenario, none of these concerns followed. If the
higher authority cannot pass their signature to clerk than maybe this Freud cannot arise in the
company.
Create a regulation on financial documents
It's important for a company to keep making proper control on the documents of financial
transactions of a company, financial transaction documents such as reports of travel expenses,
receipts of inventory and invoices of expenditures (Chen et. al., 2013). All these transactions
play an important role in the growth of a company so a company must create a proper regulation
on the financial transactions of a company.
Measurement of trial balance
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A company must use a double entry accounting system for the preparation of company
accounting systems, the double entry accounting system record all the transactions in a proper
format.
Authority approval
It's important for every company to set roles and guidance for their employees in a manner when
a big decision taken by the employees they take permission from the higher authority of the
company.
So these are some important internal factors that a company must keep in their mind to avoid
fraud and misconduct in the company.
These are five procedures through auditor of a firm can aware of misconduct that happens in the
company.
Professional skepticism: An auditor cannot blindly believe in every information that is given by
the employee of the company, an auditor must cross-check each information.
Check accounts periodically: The auditor of a company must analyze the accounts of a company
on a clear basis (Buckwalter et. al., 2014).
Analytical procedure: an auditor must follow an analytical procedure to analyze the accounts of
the company so that any misconduct cannot happen in the company.
Coordination: the auditor of a company must make coordination with the finance department of a
company to avoid fraud.
Time limit: the activities of an auditor must be performed in a proper time limit so that the
auditor can timely find the activity of fraud.
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Conclusion
The above study had shown the financial misconduct and fraud faced by the two companies. In
the first scenario the overpayment misconduct had briefly explained and how can a company
overcome with these issues was also discussed in the first scenario of the case study. In the
second scenario, financial misconduct did by the clerk of the company and how can internal
controls of a company avoid this misconduct have briefly explained in this study. In the second
scenario of study, how can an auditor avoid financial misconduct in a company was briefly
discussed to take an idea about the role of an auditor in a firm. Financial misconduct can be
avoided if a company makes proper restrictions on the financial reports of a company.
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References
 Buckwalter, N.D., Sharp, N.Y., Wilde, J.H. and Wood, D.A., 2014. Are State Tax
Amnesty Programs Associated with Financial Reporting Irregularities?. Public Finance
Review, 42(6), pp.774-799.
 Chen, X., Cheng, Q. and Lo, A.K., 2013. Accounting restatements and external financing
choices. Contemporary Accounting Research, 30(2), pp.750-779.
 Ege, M.S., 2014. Does internal audit function quality deter management
misconduct?. The Accounting Review, 90(2), pp.495-527.
 Jeacle, I. and Carter, C., 2012. Fashioning the popular masses: accounting as a mediator
between creativity and control. Accounting, Auditing & Accountability Journal, 25(4),
pp.719-751.
 Karpoff, J.M., Koester, A., Lee, D.S. and Martin, G.S., 2014. Database challenges in
financial misconduct research. Unpublished Manuscript.
 Parsons, C.A., Sulaeman, J. and Titman, S., 2018. The geography of financial
misconduct. The Journal of Finance, 73(5), pp.2087-2137.
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