Reference no: EM133266967

Argus Productions Inc. (API) isa motion picture and commercial production company. Improper expenditures for copy services were charged to production costs by an employee, Wellby, who had the power to perform incompatible functions in the purchases, payables, and payments process. Because of his authority at API, over a period of five years, Wellby was able to conduct a fraud that brought him $475,000 in false and inflated billings. During this period, API's net income was understated a modest amount because the copying costs were capitalized as part of production costs, then amortized over two-to-three year period.

 API's management had assigned Wellby the authority and responsibility for obtaining copies of scripts used in production. Established procedures permitted Wellby to arrange for outside script-copying services, receive the copies, and approve the bills for payment. In effect, Wellby was both the purchasing department and the receiving department for this particular service. To a certain extent, Wellby was also the accounting department because he approved the bills for payment and coded them for assignment to projects. Wellby did not make actual accounting entries or sign the cheques. 

Wellby set up a fictitious company under the registered name of Quickprint Company with himself as the incorporator and shareholder. The company had a post office box number, letterhead stationary, and nicely printed invoices, but no printing equipment. Copy services were subcontracted by Quickprint to real printing businesses, which billed Quickprint. Wellby then wrote Quickprint invoices to API, billing the production company at the legitimate shop's rate, but for a few extra copies each time. Wellby also submitted Quickprint bills to API for fictitious copying jobs on scripts for movies and commercials that never went into production. Aa the owner of Quickprint, Wellby endorsed API's cheques and deposited the money in the copy company's bank account, paid the legitimate printing bills of the subcontractors, and took the rest for personal use. 

Audit Trail 

API's production cost files contained all the Quickprint bills, sorted under the names of the movie and commercial production projects. 

Wellby even created files for proposed films that never went into production and, thus, should not have had script copying costs. There were no copying service bills from any shop other than Quickprint.

REQUIREMENT: 

For  the above case, is required to provide: 

1. Audit objective 

2. Relevant controls that should be there. 

3. Tests of controls 

4. Tests of details of balances