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CS Professional · Internal and Forensic Audit · Audit and Investigations

In a forensic review of invoices at Sagar Engineering Ltd., the auditor finds that an unusually large number of invoices are for amounts just below Rs 50,000, the limit above which a second approver is required. What is the most appropriate inference and next step?

Clustering just below an approval limit is a red flag of possible limit avoidance, not proof of fraud. The auditor should perform targeted testing on those invoices, vendors and approvers to establish whether splitting or collusion occurred, before drawing any conclusion.

  1. AConclude that fraud is proved and report to the police immediately
  2. BTreat it as a red flag of possible approval-limit avoidance and perform targeted testing on those invoices and approversCorrect
  3. CIgnore it because each invoice individually complies with the limit
  4. DExtend the sample for the whole year only for invoices above the limit

Explanation

Clustering just below an approval threshold is a classic red flag of splitting or avoiding authorisation, but it is not proof. The proper response is targeted testing of those transactions, approvers and vendors. Concluding fraud is premature, ignoring it misses the pattern, and testing only above-limit invoices misses the risk area.

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