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CS Professional · Internal and Forensic Audit · Fraud Detecting Techniques

An internal auditor at Sundaram Pharma Ltd finds that a vendor's invoices are always just below Rs 50,000, the approval limit of the plant manager, and are sequentially numbered with no gaps over six months. What is the most appropriate interpretation?

Both patterns are red flags. Invoices kept just under the approval limit suggest deliberate splitting to avoid authorisation, and gap-free sequential numbers suggest the vendor may be fictitious or captive. The auditor should verify the vendor and goods received before concluding anything.

  1. ABoth are red flags, suggesting split invoicing to avoid approval limits and a possibly fictitious or captive vendor, needing further examinationCorrect
  2. BNormal pricing behaviour, so no action is needed
  3. CProof that the plant manager has misappropriated funds
  4. DA sign of strong internal control over vendor billing

Explanation

Amounts clustering just below an approval limit suggest threshold avoidance, and unbroken sequential invoice numbers suggest the vendor has no other customers, which is typical of a shell vendor. These are indicators calling for verification of the vendor and deliveries. They do not prove misappropriation.

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