Essay on Chapter 10 HW

Sipei Wang & Wanlu Chen
Professor DennisA. Conrad
ACCT 406
October 31, 2014
Two Types Fraud Related to Procurement Cycle
Purchasing process of a company handles the procurement of both tangible resources
(such as goods) and intangible resources (such as services). Goods that are acquired by a company may consist of materials, components, supplies, fixed assets or intangibles such as patents and computer programs. The processes of purchase can be illustrated as the following chart.

According to the article named Examples of Procurement Fraud, one classic type of fraud during procurement cycle is that employees conspire with an outsider supplier to defraud organizations. There are several ways for employees conspired with outsiders to defraud employers. For example, employee negotiates with vendors to accept or apply for kick back, remuneration, gifts or other kinds of benefits. Employee conspires with vendors to increase the amount on invoices.
Employee attains false invoices from vendors so that he/she can obtain extra cash from employers. Employee fakes shipping documents and shares the benefits with carriers to deceive

organization. Employee fakes accounts payable that doesn’t exist to withdraw money of organizations with withholding invoices.
There are lots of risks when considering employees conspire with outsider suppliers so that proper internal controls should be taken place to prevent or hinder the frauds in purchasing process. One of the effective internal controls is to use appropriate accounting information systems when doing purchasing activities.
A good information system should improve the efficiency and effectiveness of internal controls, specifically, should contribute to the establishment and revision control standards, control effectiveness assessment activities, generating internal control reporting to managements, and timely communication to develop recommendations for improvement. In the result, a unified and complete accounting information system should be made. There are several ways for systems to perform well when considering decrease risks related to conspiring. To prevent extra benefits obtained by employees, accounting information system can store bunch of venders’ information including their prices through electronic data interchange (EDI) systems. When a voice has been generated, AIS can automatically verify whether the price on the invoice is reasonable. If it is far high from the average quoted price, then systems can terminate disbursement process and reports to department managers through exception reporting. To prevent false invoiced made by employee, the system should match material information on the voices with purchase order. All the items should be matched before employee gets access to payment. AIS can prevent false shipping documents and accounts payable through segregation duties between solicitation stuff and receiving clerk. Segregation duties can be performed by

different access to the system with password and terminal access when the system inspects unmatched information.
Another special procurement fraud, according to Examples of Procurement Fraud, is when employees establish a dummy supplier account or company in the company’s systems and then steal from the employer through contracts, invoices or payments. Procurement contracts are expenditure of economic contracts based on materials, equipment and other expenses. No matter of the quantity or the amount of money, procurement contracts contribute to a large percentage of the economic contracts. Because of the importance of procurement contracts, the cost and capital of a company can be influenced by whether the procedure of signing a contract is legal and whether the contracts, invoices or payments exist fraud.
The fraud in the contracts, invoices and payments can be made in several ways, such as signing fraudulent procurement contracts, having higher price in contracts

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