Rae Philippe was a warehouse manager for Atkins Oilfield Supply, a business that operated across eight Western states. She was an old pro and had known most of the other warehouse managers for many years. Around December each year, auditors would come to do a physical count of the inventory at each warehouse. Recently, Rae’s brother started his own drilling company and persuaded Rae to “loan” him 80 joints of 5-inch drill pipe to use for his first well. He promised to have it back to Rae by December, but the well encountered problems and the pipe was still in the ground. Rae knew the auditors were on the way, so she called her friend Andy, who ran another Atkins warehouse. “Send me over 80 joints of 5-inch pipe tomorrow, and I’ll get them back to you ASAP,” said Rae. When the auditors came, all the pipe on the books was accounted for, and they filed a “no-exception” report.

Requirements

1. Is there anything the company or the auditors could do in the future to detect this kind of fraudulent practice?

2. How would this kind of action affect the financial performance of the company?

Step by step solution

01

Definition of Auditor

Auditor refers to an independent professional appointed by a company’s board of directorsto examine itsfinancial statements and express opinion. Auditors contain the license to review and inspect the financial records of a business concerned.

02

Detection of fraudulent practice

The auditors and the company’s administration can take the following steps to detect different kinds of fraudulent practices:

• The auditors should conduct the audit at the same time in every warehouse and take thephysical count of inventory for all the warehouses.
• In addition, the management is required to maintain arecord of inventory movementfrom one warehouse to another.

03

Impact on the company’s financial performance

If the company adopts such a practice, it may bear a great loss in the future as thestorekeepers may start using the inventories for their personal purposes without making a record of the same in the books. This would bringlosses to the company.

Once themanipulation takes place in the books, it becomes the practice of the employees to repeat such issues to gain personal benefits and that will result to company’s poor reputation.

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