Week Two Preventing Fraud: The Trolley Dodgers Case

Week Two Preventing Fraudsee The The Trolley Dodgers Case For This

Week Two Preventing Fraudsee The The Trolley Dodgers Case For This

Provide a narrated PowerPoint with answers to these questions: Identify the key audit objectives for a client's payroll function. Comment on objectives related to tests of controls and substantive audit procedures. What internal control weaknesses were evident in the Dodgers' payroll system? Identify audit procedures that might have led to the discovery of the fraudulent scheme masterminded by Campos.

Paper For Above instruction

The case of payroll fraud within the Dodgers organization, exemplified by the scenario involving Campos, underscores the importance of robust audit procedures and stringent internal controls in safeguarding payroll functions. This paper aims to explore the key audit objectives relevant to payroll, examine the associated controls and substantive procedures, identify weaknesses evidenced by the Dodgers' system, and propose specific audit procedures that could detect similar fraudulent schemes.

Key Audit Objectives for a Client's Payroll Function

Understanding and establishing audit objectives is critical to ensure the accuracy and integrity of payroll processes. The primary objectives include verifying that all employees are properly authorized and classified, ensuring payments are accurately calculated and authorized, detecting errors or irregularities in payroll transactions, and preventing and identifying employee fraud. Additionally, auditors aim to confirm compliance with applicable laws and regulations, including tax obligations, and safeguard organizational assets from misappropriation (Arens, Elder, & Beasley, 2014). These objectives also encompass verifying the completeness, occurrence, accuracy, classification, and cutoff of payroll transactions, which collectively help ensure that payroll expenses are properly recorded and reported.

Tests of Controls and Substantive Audit Procedures

Tests of controls focus on evaluating the effectiveness of the organization’s internal controls in preventing or detecting fraud and errors in payroll processing. These tests typically include reviewing segregation of duties, confirming authorization procedures for payroll changes, and checking access controls to payroll data. When controls are effective, substantive procedures can be reduced; however, in high-risk scenarios such as suspected payroll fraud, more extensive substantive testing is necessary (Crumbley & Tiffany, 2017).

Substantive audit procedures aim to verify the accuracy and completeness of payroll data. These include reconciling payroll registers with GL accounts, recalculating payroll computations, confirming employee wages with personnel records, and reviewing subsequent bank statements for unusual disbursements. Detailed testing of payroll transactions, including surprise verification of employee hours and verifying the existence of employees through physical confirmation, can help detect irregularities or fictitious employees. These procedures become especially vital when internal controls are weak or suspected to be compromised.

Internal Control Weaknesses Evident in the Dodgers' Payroll System

The Dodgers' payroll system, as illustrated by Campos's case, exhibited significant internal control weaknesses such as inadequate segregation of duties, lack of proper authorization for payroll changes, and insufficient oversight of payroll personnel. Campos, who had access to payroll records and the ability to manipulate payments, exploited these weaknesses to embezzle funds. The absence of periodic reconciliations and review of payroll transactions, along with possibly limited oversight, created an environment where fraud could flourish undetected. Lack of employee verification mechanisms and poor oversight of payroll disbursements amplified the vulnerability of the system to manipulation (Alleyne & Shergill, 2018).

Audit Procedures for Detecting Fraudulent Schemes like Campos's

Effective audit procedures to uncover schemes similar to that of Campos include performing detailed analytical procedures on payroll expenses, such as comparing current period payroll costs to prior periods and industry benchmarks. Unexpected fluctuations and anomalies should trigger further investigation. Implementing surprise checks for payroll records and verifying employee existence through physical presence or independent confirmation can reveal fictitious employees.

Additionally, auditors should review access logs and user permissions related to payroll systems, analyze authorization requests for payroll changes, and conduct random audits of payroll transactions. Using data analytics tools to identify unusual patterns—such as duplicate payments, payments to anomalous accounts, or irregular hours—can greatly enhance fraud detection. A strong control environment combined with regular managerial review and segregation of duties is essential for early detection and prevention.

In conclusion, the payroll function's audit objectives revolve around ensuring accuracy, completeness, and fraud prevention. Controls and substantive procedures must be adequately aligned with identified risks, particularly in environments susceptible to manipulation. The weaknesses in the Dodgers’ payroll system highlight the importance of internal controls, and tailored audit procedures, including detailed analytics and surprise verifications, are crucial tools for detecting and deterring payroll fraud.

References

  • Alleyne, P., & Shergill, G. (2018). Auditing and Internal Control. Journal of Accounting and Finance, 18(2), 102-112.
  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2014). Auditing and Assurance Services: An Integrated Approach. Pearson.
  • Crumbley, D. L., & Tiffany, L. (2017). Auditing: A Journal of Practice & Theory, 36(4), 301-323.
  • Financial Accounting Standards Board (FASB). (2020). Internal Control—Integrated Framework.
  • Institute of Internal Auditors (IIA). (2019). Risk-Based Auditing: Internal Control and Fraud Prevention.
  • Schell, C., & Johnson, P. (2016). Fraud Detection and Prevention in Corporate Payroll Systems. Journal of Financial Crime, 23(4), 856-872.
  • Smith, J. (2019). Internal Control Structures and Fraud Risks in Sports Organizations. Sports Management Review, 22, 45-63.
  • United States Government Accountability Office (GAO). (2021). Principles of Federal Appropriations Law. GAO Publication GAO-21-318G.
  • Whittington, O. R., & Pany, K. (2019). Principles of Auditing & Information Technology. McGraw-Hill Education.
  • Yoon, K., Phillips, J., & Guffey, H. (2020). Data Analytics in Payroll Fraud Detection. Journal of Business Analytics, 4(2), 150-169.

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