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CS Professional · Internal and Forensic Audit · Audit and Investigations

At Kaveri Textiles Ltd, the accounts clerk Ramesh prepares vendor payments, also approves new vendor creation and reconciles the bank statement. Over two years he pays invoices of a fictitious vendor he created. Which weakness in internal control most directly enabled this fraud?

The fraud was enabled by lack of segregation of duties. One clerk created vendors, prepared payments and reconciled the bank statement, so no independent person could detect the fictitious vendor. Separating these incompatible functions is the basic preventive control against such misappropriation.

  1. ALack of segregation of dutiesCorrect
  2. BExcessive use of statutory auditors
  3. CDelay in holding the annual general meeting
  4. DUnder-insurance of fixed assets

Explanation

One person controlled vendor creation, payment preparation and reconciliation, so no independent check existed. Segregating these functions would have exposed the fictitious vendor. The other options have no link to the opportunity that enabled the fraud.

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