Idea for Data Analytics to Uncover Account Payable Fraud

Introduction You are a Staff Auditor at Showker & Associates LLP. A long-time client, Home Improvement Inc. has asked your firm to come and investigate a possible fraud. Management has noticed a disproportionate increase in Cost of Goods Sold in the first quarter of the current year (2017) and has recently been notified through an anonymous tip that a purchasing fraud has taken place at the company. Home Improvement Inc. is a retailer in Harrisonburg, Virginia that sells approximately 24 home improvement products including cabinets, light fixtures, faucets and more. The company buys primarily from local vendors and sells its products locally. The company currently sells products offered by 200 vendors and has 80 full-time employees.
Management at Home Improvement Inc. is concerned that an employee has taken advantage of the lack of internal controls over the Accounts Payable function and has committed a fraud. Showker & Associates conducted the annual audit of the company several months prior for the year ended December 31, 2016 and found no trace of fraud. However, the firm did note that there was a lack of internal controls over vendor purchases and payments and relayed their concern to the company’s management.
Your firm will be conducting a fraud investigation based on transactions that occurred during the first quarter of the current year. Therefore, the primary focus of the investigation will be on purchases made from January 1, 2017 to March 31, 2017. Purchases and payment fraud are among the most common types of fraud in an organization. The audit team has decided to use IDEA to analyze the company’s data and investigate this possible fraud.
It is important to understand the possible ways in which this type of fraud could occur. It has already been mentioned that there is a lack of internal controls over the Accounts Payable function at Home Improvement Inc. With that in mind, it is important to think about what could go wrong at the company to help determine where to look for the fraud.
Potential Risks in Accounts Payable:
1. Payments made to unauthorized suppliers.
2. Payments made to individuals or employees.
3. Unauthorized premiums given to suppliers.
4. Invoices paid late.
5. Invoices paid on irregular dates.
6. Invoices processed twice.
7. Payments made in a way to go undetected by auditors.
8. Missing Purchase Order or other items / documents.
III. Steps to Completion As the staff auditor, your senior has assigned you with the task of analyzing the employees, vendors and purchases listings to check for fraud. These listings are updated through the end of the first quarter of the current year and contain all of the necessary information to conduct the investigation.
You are to go through the following steps to complete the investigation. It is important that you are thorough and complete in your work. Throughout the assignment you must take screen captures of each step and paste them to a Word document to be turned in at completion. This will allow your
Authors: Kenneth Blankenship and David Hayes
James Madison University
2
senior to easily follow your work and evaluate your performance.
The following Microsoft Excel data files are provided for this case:
• Employees.xls
• Vendors.xls
• Purchases.xls
1. Open the IDEA software and create a new project for Home Improvement Inc. Give the project the title Fraud Investigation. Change the Project properties to contain the proper Report name and Report period.
2. Import the three excel files provided for this case into your newly created project in IDEA. Check the field statistics of each data set individually to verify that all of the data was imported correctly. From the Field Statistics, the Total Amount column in the purchases listing should equal $188,552.00.
▪ The excel file titled Employees contains a detailed list of every employee at Home Improvement Inc.
▪ The excel file titled Vendors contains a detailed list of every vendor that is in the company’s accounts payable system. These vendors have been approved by the Purchasing department and are paid when ordered items have been received by Home Improvement Inc.
▪ The excel file titled Purchases contains a listing of all the purchases made from Home Improvement, Inc. during the first quarter of 2017. Products are purchased from Home Improvement’s vendors to be sold by the company.
Once uploaded into the project, these three data sets will be used to search for any unusual, missing or duplicate information.
3. From the Vendors listing, extract any rows that contain a P.O. Box as the listed billing address and analyze the results for any unusual items.
4. Test for any gaps or duplicates in the purchase order number sequence on the Purchases listing. Additionally, test for any duplicate invoices.
5. According to the company’s policy, it is only acceptable to avoid credit approval on small purchases below $200. Ensure that no amounts of $200 or greater were purchased without the proper approval. From the First Quarter Purchases listing, extract all purchases above the threshold that were made without credit approval.
6. Run a Stratification on the Total Amount field in the First Quarter Purchases database and analyze the results. Extract any items you consider to be high or unusual payments as a result of your Stratification analysis.
7. Run a Direct Extraction to check for any orders received or payments made on unusual dates (weekends) from the Purchases listing.
Authors: Kenneth Blankenship and David Hayes
James Madison University
3
8. Ensure that all purchases have been made from vendors contained on the Authorized Vendors listing.
9. No employees’ information should be present within the approved vendor listing. Join the two databases to search for any possible matches. Analyze any duplicate data more closely and then extract any additional information as necessary.
10. Run a Summarization of the First Quarter Purchases containing all of the purchases information and order the results alphabetically by vendor name. Run a Bedford’s Law analysis on the first digit and first two digits of the Total Amount column from the listing.
11. Provide an audit trail for your supervisor by taking a screen capture of your File Explorer showing all of the project databases and reports that were created during the investigation and screen captures of the expanded history of your work on the project.
12. In your own words, make recommendations to the client on ways to improve their internal controls over the Accounts Payable function in order to prevent this type of fraud from occurring again in the future. Your recommendations should be based on your fraud investigation findings and each issue discovered should be addressed with a resolution.
IV. Deliverables
▪ Screen captures:
o Create screen captures of the Audit trail you created in Step 11, and
o Create a zip file of all audit trail files.
▪ Word document:
o Prepare a formal client report in APA Style using the recommendations you prepared in Step 12, and
o The report must be written in your own words.
V. Hints and Tips