Flex-Rod Case
07/17/2012
Attach the following grade sheet to THE TOP of your report.
Grade Sheet
(Place on top of the report.)
Names alphabetically:
___Chris Almeida_______________________
Group Number: 3
___Daureen Lingley_____________________
___Lancelot King_______________________
___Lynne Winter_______________________
_____________________________________
Appendix A. SWOT
1.5
_____
Part I. Introduction
1.5
_____
Appendix B. – Why Targets
1
_____
Part II. Strategic Analysis of Process
2
_____
Appendix C. Audit Process
4
_____
Part III. Analysis of Area Under Audit
3
_____
Format/Ponctuation etc.
2
_____
Total
15
_____
1
Flex-Rod Case
07/17/2012
To:
From:
RE:
Date:
I.
Board of Directors
Director of Internal Audit
Audit of D.I.R.T
July 17, 2012
Introduction: The internal audit of administrative and accounting control procedures relating to
the construction and billing activities of Flex-Rod and its contractor (D.I .R.T), revealed a variety
weaknesses in both D.I.R.T’s and Flex-Rod’s internal controls. Lack of internal controls around
several key areas within D.I.R.T. has led to inaccurate billings. Flex-Rod has been vastly
overcharged approximately $2.6 million. Other fraudulent activity included the use of substandard
materials to offset the cost overruns. The following report outlines the internal audit findings of
the weakness in controls and suggestions to enforce and improve upon controls to mitigate future
risks and take corrective action of the present contractual agreement with D.I.R.T.
A.
Scope Areas and Conditions Found: The following outlines scope areas included in the
audit and the related conditions that were found in each area at the Flex-Rod construction
site:
1.
2.
Plant Security: Plant security is insufficient and inconsistently enforced. There
are few policies that are enforced uniformly and multiple areas allow for
unauthorized access:
a.
Entry Gates: There are three entry gates A, B and C. All deliveries
and visitors are required to use gate A. There is no enforcement of this
written procedure. Gates B and C are not monitored. All gates are open
during the day.
b.
Security Guard Hours: Security guard hours begin one hour after
construction workers arrive and end one hour before construction
workers leave.
c.
Delivery of Materials: Policy states all materials are to be delivered
to gate A. Delivery of construction materials were made to gate C.
Gate C, a gate that is to be used solely for the contractor’s employees—
not deliveries.
d.
Log Monitoring: Gasoline/diesel fuel usage log with equipment
identification and gallons dispensed is not used.
e.
Maintenance: There is a substantial area of fencing that is in disrepair
allowing unauthorized entry into the gated area.
f.
Hazard/Liability: Oxygen and acetylene tanks containing highly
flammable substances, especially when combined, are stored together
and lying unsecured just off the road to the construction site.
Warehouse/Kardex: The warehouse has processes for receiving material and
issuing inventory not being implemented.
a.
Dock Area: Unloaded shipments checked to bill of lading , but
contents of boxes/ crates are not opened to verify contents. Signatures
on bill of lading performed by unauthorized employees (not assigned to
warehouse).
b.
Reporting: Warehouse had not approved receiving reports for items
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07/17/2012
on hand for an average of 31 days. A surge of receiving reports (184)
submitted two days before audit for material received up to six months
prior.
3.
4.
c.
Inventory Requests: Inventory procedures not followed. Auditors
witnessed warehouseman prepare, approve and sign requisition and
send employee to get materials from warehouse (warehouseman
retained all copies). A physical inventory has never been taken.
d.
Storage: High dollar pipe valves and miscellaneous items not stored in
warehouse. Scrap materials estimated at $4000 put aside without a
fence around it. Numerous people milling about the warehouse.
e.
Recording: The employees are not using the Kardex system that was
implemented at the beginning of the project to keep track of inventory.
The records are set up in Kardex, but not maintained; the last entry was
four months prior.
Payroll: There are several issues and areas of concern in the/payroll process
and procedures; they are as follows:
a.
Time Report: Time reporting is not consistent; there are inadequate
controls over employees entering and leaving the site. Not all workers
sign in and/or out at the timekeeper’s shack due to lack of oversight.
b.
Timesheet Approval: The foreman and supervisor sign the summary
time report without appropriate verification of time worked.
c.
Fraud: The amount and extent of the inaccuracies are excessive
combined with the lack of information for verification indicate
potential fraudulent activity. It is possible that employees are signing
in/out for each other—receiving payment for hours not worked.
Billing: There are several issues and areas of concern in the billing process and
procedures:
a.
Contract Billing: Not applying the correct overhead rates according to
contract terms. The auditor(s) do not have the terms of the contract
with D.I.R.T. Invoices checked for mathematical accuracy only; no
verification of costs performed.
b.
Fraud: The amount and extent of the inaccuracies are excessive
combined with the lack of information for verification indicate
potential fraudulent activity.
c.
Tax Assessments: The amounts charged for FICA are not the legal
rates; recalculation and adjustments are necessary.
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07/17/2012
II.
Strategic Analysis of Process: The following summarizes the corporate objectives and department objectives, risks and critical success factors for the
next year.
A.
Corporate Objectives: The following provides a list of corporate objectives:
1.
2.
3.
4.
5.
Improve Tracking: Implement a better system to track contractors’ hours worked and budget v. actual.
Security: Security needs to be more effective with monitoring people as well as maintaining the premises.
Warehouse: Warehouse needs to keep track of inventory more efficiently.
Expense Reduction: Implement processes and controls to complete projects on time and on budget.
Safeguarding Assets: Mitigate risk of loss and liability through implementing controls to safeguard company assets.
B.
Department Objectives: To reach these objectives D.I.R.T must implement new control processes or ensure existing ones are being
implemented.
Table I
Strategic Analysis of Process
Department Objectives
Safeguard Assets: To have all highvalue assets in secure storage.
Performance Measures
# of secured high value assets/# of
high value assets
Critical Success Factors











ID Badges
Repaired Fence
Employ adequate # of guards
Proper training for guards
Proper training for personnel
Signage indicating proper
procedures for contractors and
visitors
Assets organized by value
Safeguarding of high value
assets.
Locked gates
Security guards present during
all shifts
Sufficient warehouse space for
segregation of goods
Risks



Fraud due to theft of assets
by employees (S,O)
Possible theft from outside
intruders (O)
Lack of resources to fix
damages and provide
additional security (S)
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Table I
Strategic Analysis of Process
Department Objectives
Materials Billing: To have 100% of
materials billed correctly.
Performance Measures
% of inventory checked out by
requisition form = 100
Critical Success Factors




Kardex/Inventory: To have 100% of
materials inventoried correctly.
# (quantity) and $ (amount)
requisitioned and ordered = (equal)
to # (quantity) and $ (amount)
received (Bill of Lading) and
recorded in Kardex













Employees are educated on how
to fill out forms
Processes are enforced.
Kardex needs to be used 100%
of the time
Inventory dept. asks for
requisition forms each time.
Shipments are opened upon
arrival
Authorized personnel to receive
shipments
Bill of Lading is matched to PO
Purchase Order information is
easily accessible
Recorded promptly in Kardex
system
Cost in Kardex matches cost on
invoice
Personnel trained in proper
procedures
Supplies are properly secured
Physical Inventory is taken
quarterly
Physical Inventory compared to
Kardex
Inventory logically organized in
warehouse
Requisition process followed
Recording of inventory upon
receipt and acceptance of
shipment
Risks












Employees do not follow
procedures (S)
Company overbills client and
loses customers(O)
Company eats excess costs
and loses revenue (O)
Personnel not available to
receive shipments (S)
Purchase Orders are not
accurate (S)
Payment for supplies not
ordered (O)
Wrong supplies shipped (O)
Supplies are stolen (S,O)
Management override of
control procedures (S)
Inadequate level of personnel
to supervise inventory (S)
Employee misappropriation
of supplies (O)
Improper invoicing of client
(O)
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Table I
Strategic Analysis of Process
Department Objectives
Labor Billing: To have 100% of labor
billed correctly.
Performance Measures
Labor hours charged=labor hours
worked
Critical Success Factors






Materials Billing: To have 100% of
supplies used meet architectural specs
or approval.
# Items purchased meeting
architectural specifications/total #
items purchased





Risks
Security guard is stationed at
only open gate
Security guard monitors
electronic sign in and out
Security guard works for
independent company
Supervisor reviews and approves
time sheets weekly
Electronic time system is
installed
Necessary security procedures
are implemented

Architectural specifications
available to purchasing
No vendor substitutions allowed
unless approved
Inspection of warehouse to
insure supplies are authorized
Match bill of lading with
purchase order
Building inspected for
unauthorized materials











Fraud committed by workers
billing more hours than they
work (S/O)
Budget overruns (S)
Security hours of operation,
provides opportunity for
fraud (/O)
Collusion between guard and
employee (o)
Hours paid are not actually
worked (s)
Electronic records are
falsified (S)
Fraud due to substitution of
supplies by vendor (S,O)
Fraud due to theft of supplies
by employees (S,O)
Inferior building due to
inferior products (S,O)
Incorrect Supplies ordered
(S)
Correct Supplies unavailable
(S)
Improper invoicing (O)
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07/17/2012
III.
Analysis of Area Under Audit:
Analysis of Area Under Audit
Department: Plant Security
Inadequate plant security
Specific Conditions
Effect/Risk
 Fraud by employees
 Theft of assets
 Opportunity for fraud by employees
 Risk of losing $4000 of scrap due to inadequate security
Procedures
Practices
N/A
 Security works four days employees work five days.
 Security works from 8AM to 5PM, and construction hours are from
7AM to 6PM.
 Warehouse doors are left open all day.
Root Cause
 Gap in hours worked by security and hours worked by construction
employees.
 Employees have easy access to company’s assets.
Conclusion
Gaps in hours worked by security and employees, and the ease of access
by employees to company’s assets provide opportunities for fraud.
Recommendation







Gate B, the emergency gate, should be locked during working
hours.
All deliveries, including construction materials, should use Gate A.
No gap in security coverage. Security is required 5 days per week
and coverage is required from the time the 1st employee starts to
when the last employee leaves.
Security should monitor Gates A and C, and make periodic rounds
to Gate B.
Employee parking should be relocated to prevent easy access to
company’s assets.
Fence should be repaired.
Warehouse doors should be closed when vehicles leave and when it
is unattended.
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07/17/2012
Analysis of Area Under Audit
Department: Warehouse
The warehouse inventory and supplies are not being monitored correctly
Specific Conditions
and could lead to theft/overcharging.
Effect/Risk
 Lack of knowledge of parts on hand.
 Warehouse doors are open during the work days even when the
inventory manager is not present.
 Deliveries often come in through gate B/C as opposed to Gate A.
 People other than the warehouse manager are processing
goods/materials.
Procedures
 Currently there is a requisition process in place where the inventory
is supposed to be tracked via three slips, and then entered into the
Kardex system. This is not happening.
Practices
 If a worker needs supplies he will often come into the warehouse
and take them without telling the inventory manager. The inventory
manager insists he knows what is on file and can track it.
Root Cause
 Lack of concern by management and workers to keep an accurate
count of inventory.
Conclusion
 Over charging and theft will occur if the current process is not
enforced. The Kardex system must be updated with a physical
count of inventory.
Recommendation
 The process in place needs to be enforced and doors must be locked
when the warehouse manager is not present.
Analysis of Area Under Audit
Department: Warehouse
Inferior goods are being used in the building to date.
Specific Conditions
Effect/Risk
 Plant material is inferior.
 May shorten life of building.
 May cause frequent rework.
 If not caught, may weaken ethics of entire company.
 Encourages theft and fraud.
Procedures
 Requisition forms should be used to check out goods from
warehouse.
 Requisition forms should mark quantity and quality of goods
retrieved.
 Kardex system should be used to track inventory.

Practices
 The requisition forms are not used in practice.
 The Kardex system is not used in practice.
Root Cause
 The Kardex system is not used to debit and credit inventory as it
comes and goes.
 This results in an unknown number of inventory.
Conclusion
 There is no process for inventory, which can result in inferior
goods, theft, lost inventory, and the use of more inventory than the
specs require.
Recommendation
 The Kardex system should be fully implemented.
 No merchandise should leave the warehouse without a requisition
slip.
 When inventory comes from suppliers, it should go through a QA
process by qualified staff.
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07/17/2012
Analysis of Area Under Audit
Department: Payroll
Specific Conditions
 Hours are not being tracked and labor costs and hours may be
overstated, resulting in a budget overrun.
Effect/Risk
 Overcharging of hours.
 Loss of productivity.
 Employees do not use sign-in sheets.
 Supervisors fail to review sign-in sheets.
 Loss of reputation/client.
Procedures
 Sign-in sheets
 Security guard for access
Practices
 Sign in sheets are not used.
 Security guards do not work same shifts.
Root Cause
 Sign in sheets are not used consistently.
 Poor tone at the top means supervisors never check work hours.
Conclusion
 A lack of mandated process leads to willy-nilly reporting of hours.
This results in cost overruns and overbilling to clients.
Recommendation
 Require all employees to sign-in.
 Supervisors review timesheets.
 Supervisors approve timesheets.
 No paychecks are issued until timesheets are approved by
supervisor.
 Budget v. Actual must be recalculated weekly.
Analysis of Area Under Audit
Department: Billing
Specific Conditions
 Invoice auditor only checks invoices for mathematical accuracy.
Effect/Risk
 Errors due to incorrect contract costs.
 Overbilling due to possible fraud by contractor.
 Budget overruns.
Procedures
 Invoice auditor checks for mathematical errors only.
Practices
 Invoice auditor does not verify costs.
 Invoice auditor does not have a copy of the contract.
Root Cause
 Poor management oversight
 Inadequate controls
Conclusion
 The inadequate controls in place provide opportunity for abuse of
fraudulent time reporting by employees.
Recommendation
 A formal procedure need to be implemented that requires the
invoice auditor to have a copy of the most recent contract and to
verify costs and mathematical errors on all invoices.
 A supervisor to review and sign off on the invoice auditor’s work.
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Appendix A
SWOT Analysis
Strengths
Demand: Increasing demand in product/services.
Demonstrated growth requiring expansion of
facilities.
Procedures:
Receiving Materials: procedures require
physical check with PO upon receipt (date and
quantity received). Copy of completed orders
matched to related material invoice and posted to
Kardex file.
Issuing Inventory: procedures requires
approved 3-part requisition (maintained by
appropriate parties). Issued copy is marked,
matched to original & posted to Kardex.
Kardex Inventory: System established for every
item at beginning of project.
Payroll Procedures: Workers are to sign in and
out with timekeeper’s shack. Payroll summarizes
weekly hours which is reviewed and approved by
foreman and superintendent.
Security:
 All visitors and deliveries use the main gate (with
guard shack), obtain authorization to enter
facility.
 Emergency gate B is locked after hours.
 Gate C is used for construction personnel.
 There is a fence surrounding the perimeter.
 Gasoline and diesel fuel tanks locked when not in
use.
Emergency Exit: In case one exit may be blocked
due to an emergency there is another that the
contractors can leave through.
Bidding: Effective bidding process in place ensuring
low cost efficient contract award.
Weaknesses
Plant Security:
Hours: Company hours (including guard hours) are not
the same as construction hours (two additional hours
without guard).
Gate Monitoring: Gates B and C are not monitored.
Delivery of construction materials made to gate C.
Log Monitoring: Gasoline/diesel fuel usage log with
equipment identification and gallons used not used.
Warehouse/Storage:
High dollar pipe valves and
miscellaneous items not stored in warehouse. Scrap
($4000 est.) put aside without a fence around it.
Numerous people milling about the warehouse.
Warehouse:
Shipments: Unloaded shipment checked to bill of laden,
but contents (boxes & crates not opened to verify
contents). Signature (laborer) on bill of laden was not
authorized (not assigned to warehouse).
Receiving reports:
Warehouse had not approved
receiving reports for items on hand for an average of 31
days. Surge of receiving reports (184) submitted two
days before audit (material received up to six months
prior).
Inventory: Procedures not followed. Auditors witnessed
warehouseman prepare, approve and sign requisition and
send employee to get materials from warehouse
(warehouseman retained all copies). Records set up in
kardex, but not maintained (last entry 4 months prior).
Billing:
Fraud: Many math errors in the monthly invoice results
in over billing.
Contract Terms: Not applying the correct overhead
rates for contract terms.
Tax Assessments: Amounts charged for FICA, etc. are
not legal rates.
Budgeted V. Actual: The budgeted amount and the
actual amount billed do not appear to be tracked.
Payroll:
 Not all laborers sign in and out regularly.
 Possibility of employees signing time cards for each
other.
 Lack of oversight in timekeeper shift.
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Strengths
Weaknesses
 Supervisor sign off without actually observing people
signing in and out.
 Hours’ work not coordinated with the hours paid.
Time cards completed by workers are not approved or
supervised for times to be correct.
Threats
Contract Terms: Cost plus nature of contract does
not provide D.I.R.T with any incentive to control
costs and monitor implementation of control
procedures.
Time-Shack Location: Allows workers to come in
and out of site without detection.
Opportunities
Security Controls: Improve physical security controls to
safeguard assets.
Manage Inventory: Enforce control procedures in place for
the deliveries and issuing of supplies in order to safeguard
assets and ensure accurate invoicing and financial statements.
Emergency Exit Location: Provides opportunity for
theft unless monitored.
Manage Labor Costs Effectively: Enforce payroll procedures
in order to manage labor costs and prevent fraud associated
with falsification of payroll records.
Security Hours: Security hours are not aligned with
construction hours providing opportunity for theft.
Employee Times: Improve the way employees enter the plant
allowing the company to keep track of them more.
Trust: Too much trust amongst peers, could lead to
theft or fraud.
Warehouse Inventory: Track warehouse inventory more
efficiently, make sure the system in place is being
implemented. Electronic tracking through RFID is a potential
solution.
Scrap: Scrap is separated from other materials with
no fence, leaving it open to theft and possible loss of
revenue from recycling.
Maintenance: The fence in disrepair could lead to
unauthorized entry during non-working hours and
possible theft by contractors or civilians.
Theft: Lay down area especially is susceptible to
theft.
Hazard Liability: Oxygen and acetylene tanks
stored together (highly flammable) and lying just off
the road to the construction site.
Bidding/Overruns: Not tracking budget v. actual can
lead to loss of contracts or losses on contracts.
Procedures: Not followed/potential theft/fraud.
 Inventory procedures not followed.
Warehouseman prepared, approved, signed
requisition, and sent employee to get
materials from warehouse (warehouseman
retained all copies).
 Records set up in Kardex, but not maintained
Security: Security needs to be more efficient, they should be
able to know how long employees have been there as well as,
what is being delivered.
Maintenance: Broken fences, tanks lying on the side of the
road should all be repaired and fixed to avoid hazardous
situations.
Tracking: Tracking budget v. actual can lead to less overruns
and improved tracking of costs.
Approvals: PO should be flagged by computer system if not
approved within 7 days.
Auditing: Audit should match DIRT to FlexRod invoices.
Automated Systems: The Kardex system provides for the
automation of processes. Fully utilizing this system can ensure
efficiency in operations.
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Appendix B
Analysis of Why Selected the SMART Objective and Targets for the Department
I.
II.
III.
Current Smart Objectives and Targets: At this time Warehouse Department of D.I.R.T. does not have
any SMART Objectives or Targets.
Suggested SMART Objectives and Targets: The following are suggested SMART Objectives and
targets that should be measured by the Warehouse Department:
A.
Kardex /Inventory System: To ensure efficiency in operations and make sure all supplies are
billed correctly. The quantity and value of supplies billed must be 100% accurate.
B.
Approved Materials: In order to ensure safety and quality, materials all materials used must be
equal to or surpass architectural specifications.
Suggested SMART Objectives and Targets: The following are suggested SMART Objectives and
targets that should be measured by the Construction Department:
A.
IV.
Labor: In order to ensure that labor is billed correctly 100% of labor dollars must be billed
without error and verified for accuracy.
Suggested SMART Objectives and Targets: The following are suggested SMART Objectives and
targets that should be measured by the Security and Safety Department:
A.
Safeguarding of Assets: To ensure that the company’s assets are properly safeguarded all assets
valued at greater than $25 must be stored in a locked facility/container.
B.
Safety: To ensure the safety of workers the company must be in compliance with all OSHA
regulations.
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Appendix C
Audit Process
I.
Invoicing – Materials: Following the close of each calendar month, D.I.R.T. submits an invoice covering 100 percent of all costs, amounts, and charges
for materials per their cost-plus-a-fee contract with Flex-Rod.
A.
B.
Requisitions: The materials charged to Flex-Rod are based on warehouse requisitions as recorded in the Kardex system.
1.
Creation: A site worker identifies a need for a material and fills out a 3-part requisition form.
2.
Approval: The worker submits the requisition form to their supervisor for approval.
3.
Presentation: The approved form is presented to multiple locations within the warehouse:
a.
Office: The form is first presented to the warehouse office, which keeps one of the 3 copies.
b.
Craft-Service Desk: The form is then presented to the appropriate craft-service desk for material issuance.
 Issuance: A designated craft employee issues the inventory item to the worker.
 Forms: The craft employee gives one copy of the requisition back to the requester along with the item, and keeps the
remaining copy of the requisition after marking it as “issued.”
4.
Matching: The craft employee brings their copy of the issued requisition form back to the warehouse office, where it is matched to
the original copy.
5.
Recording: After ensuring that the 2 requisition form copies match, the warehouse office personnel posts the issuance to the Kardex
system.
End of Month: At the end of each month, the D.I.R.T. billing department uses the Kardex fulfilled requisition data to create an invoice for FlexRod for the material charges incurred, including a 5% procurement markup and additional equipment rental fee as agreed upon per the contract’s
reimbursement terms (broken).
1.
Review: The invoice is checked for mathematical accuracy (broken), but the contract is not consulted to confirm the validity of the
charges.
2.
Submission: The materials invoice, combined with the labor charges, is submitted to Flex-Rod for payment.
Materials Category
Amount Charged
Summary Workpaper:
Amount per Vendor Invoice Amount Used per Expert
Amount per Calculation
Estimated Over/Undercharge
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Audit Process—Invoicing Materials
Audit Objective
Risk in Area Under
Audit
To determine materials
 Theft of goods by
were actually used to
employees.
date.
 Inferior quality of
goods purchased by
contractor.
 Actual not in line
with specs.
 Poor workmanship.
 Theft of goods by
outsider.
 Requisition forms
not being used.
 Security shifts not
in-line with
workers’ hours.
Existing Controls to
Mitigate Risks
 Security guard
reviews
documents for all
persons coming in
and out.
(ineffective)
 Warehouse
approves
requisition forms.
(ineffective)
Types of Evidence





Requisition forms
Analysis by contractor
Invoices by suppliers
Walkthrough
Physical inventory
count
Audit Steps












Hire: Hire outside contractor for walkthrough of
plant to determine quantity and quality of goods
used.
Inventory: Physically count the inventory on hand
in the warehouse.
Obtain: Original invoices from all suppliers.
Gather: The quality and quantity of goods
purchased via the original supplier invoices.
Compare: Compare invoices-contractor specsgoods on hand.
Determine: Is the difference a result of theft or
collusion between purchasers and suppliers?
Interview: Purchasing and construction
employees regarding materials used.
Separate: The expensive items from the
inexpensive items.
Secure: Secure all goods.
Require: Require a requisition slip for all
materials used in the construction process.
Review: Have the managers review requisition
slips daily.
Inventory: Ensure physical count is taken
periodically.
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Audit Process
Procedures for Accurate Billing of Labor






Management:
o Management lays out weekly labor budget and schedule based on project need.
Employees:
o Employees sign in at time clock at the guard house in the morning.
o Employees sign out at time clock at the guard house in the evening.
o Employee completes a daily time report.
o Employee submits his/her daily time report to the payroll clerk #1 in the field office at the end of the week.
Payroll clerk:
o Summarizes the daily time reports for the week.
o Forward the reports to the foremen and/or superintendent sign the summary.
Foremen and superintendent:
o Foremen and/or superintendent sign the summary.
o Summary is forwarded to the home office for processing.
Home office returns the payroll register along with the paychecks to Attn: Payroll Clerk #2.
Payroll Clerk #2:
o Payroll clerk #2 distributes checks to employees on pay day.
o Application of overhead rates and payroll taxes per the contract.
# of Scheduled
hours
# of employees
scheduled
Budgeted Versus Actual Labor Hours Worksheet
Average hourly rate per
Budgeted Labor Cost
(Hours Scheduled * #
payroll records
of Employees * Rate)
Actual Labor Cost
Variance
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Flex-Rod Case
07/17/2012
Audit Process – Billing of Labor
Audit Objective
Labor: Accurate
labor charges to
project.
Risk in Area Under Audit
Existing Controls
to Mitigate Risks
 Fraud committed by workers
billing more hours than they
work.
 Foremen and
Superintendent
sign daily
summary reports.
 Budget overruns.
 Security hours of operation
provides opportunity for
fraud.
 Low productivity.
 Security to
ensure each
employee signs
in and out on
daily timecard.
Types of Evidence

Observations

Documentation:

 Poor supervisor oversight.
 Overcharging of hours.
 Loss of productivity.
 Employees do not use sign-in
sheets.
 Supervisors fail to review
sign-in sheets.
 Loss of reputation/client.
 Flex-Rod may be charged for
too much FICA and
unemployment taxes due to
fraudulent hours.


o
Timecards
o
Summary log
o
Work schedule
Interviews:
o
Employees
o
Payroll clerk
o
Foremen
o
Superintendent
o
Security
Analytical
procedure of hours
worked
Compare budgeted
allotment to project
status
Audit Steps
 Observation: Observe the process of employees
completing their daily time reports.
 Observation: Observe the process of employees
entering and leaving the work site to determine
control.
 Interview: Interview payroll clerk to determine the
verification of the accuracy timecards.
 Interview: Interview Foremen to determine how
accuracy of timecards is ascertained.
 Interview: Interview Superintendent to determine
how accuracy of timecards is ascertained.
 Interview: Interview Security to determine controls to
prevent employees from signing each other in and out.
 Examine: Review employee log to determine whether
start and end time is recorded by all employees.
 Examine: Compare summary report and timecards for
accuracy.
 Analyze: Summary of Procedures work paper to
determine accuracy of time reporting.
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Flex-Rod Case
07/17/2012
Audit Process
Procedures for Deliveries




Management:
o All scheduled deliveries are reported in advance to management.
o Manager provides guard a list of scheduled deliveries.
o Vendors are notified which gate to report for deliver.
Guard:
o Receives list of scheduled deliveries.
o Records (checks-off) deliveries as they arrive:
 Noting time of delivery
 And registration number
o Guard provides delivery ticket to driver to be received by either: (authorizing entrance)
 Warehouse supervisor
 Construction Forman
o Construction delivery are instructed to use Gate C for drop-off.
o Guard calls appropriate party to advise of delivery.
Warehouse supervisor or construction foreman: (or authorized designee)
o Receives authorization ticket.
o Attaches authorization ticket to Bill of Lading.
o Delivery contents are matched to Bill of Lading.
o Contents are stored in secure location.
Receiving Clerk:
o Verifies documentation.
o Enters information in Kardex.
# of deliveries
scheduled
# of deliveries
made
Deliveries Workpaper
Time of delivery
Delivery Ticket#
Warehouse/Construction
Kardex Verification
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Flex-Rod Case
07/17/2012
Audit Process – Secure Deliveries
Audit Objective
Risk in Area Under Audit
Existing Controls
to Mitigate Risks
Delivery: All
deliveries arrive at
Gate A and are
recorded, tracked.
 Weak Controls compromise
security.
 Deliveries are to
arrive at Gate A
(but not always
followed).

Observations
 Observation: Observe the process of deliveries.

Documentation:
 Observation: Observe the process of security guard
when delivery is made.
 Fence around
perimeter (but is
in disrepair).

 Poor security process; parties
entering site are not
monitored.
 Security hours of operation
provide opportunity for
unauthorized access.
 Theft of materials/goods not
properly secured.
 Lack of security provides
opportunity for fraud.
 Fraud committed by workers
taking materials/ goods that
do not arrive through Gate A.
Types of Evidence
o
Visitor Log
Interviews:
o
Guard
o
Receiving
clerk
o
Foremen
o
Supervisor
o
Security
Audit Steps
 Interview: Interview guard to determine the delivery
visitor procedures.
 Interview: Interview construction foreman to
determine deliveries made directly to Gate C.
 Interview: Interview warehouse manager to
determine who is authorized to receive deliveries.
 Examine: Receiving reports to determine who has
signed for deliveries.
 Examine: Compare receiving reports to supplies
ordered and delivered.
 Analyze: Compare records in Kardex system to
verify if information recorded in system matches
goods ordered, delivered and received.
18
Flex-Rod Case
07/17/2012
Audit Process
Procedures for Fuel Processing:
 Gasoline and diesel fuel tanks locked when not in use.
 Record equipment identification numbers and gallons dispensed in log.
Equipment VIN
Audit Process
Audit Objective
To determine how
much fuel costs
should have been
charged to the
project to date.
Mileage Driven
(Current – Beg.)
MPG per
Manufacturer
Risk in Area Under Audit



Employees may be stealing
fuel and excess cost may be
charge to Flex-Rod.
D.I.R.T. may run out of
needed fuel due to lack of
record keeping causing
delay in completion of
project.
D.I.R.T. is unable to
determine cost of project.
Estimated Fuel Cost
Estimated Gallons Used
(Mileage / MPG)
Existing Controls
to Mitigate Risks
 Gasoline and
diesel fuel
tanks locked
when not in
use.
 Equipment
identification
number and
gallons
dispensed
recorded in
log.
Types of Evidence
Documentation:
o Equipment
maintenance
records.
o Fuel purchases
records from
supplier.
o Equipment
specification
records from
manufacturer.
Analysis
Avg. Cost/Gal.
Estimated Fuel Costs
(Mileage x Avg.
Cost/Gal.)
Audit Steps
Equipment Maintenance Records: To determine
starting mileage point for equipment since the beginning
of project find mileage from maintenance record closest
to the beginning of the project.
Calculate: To determine total mileage driven for each
piece of equipment since the start of the project subtract
beginning mileage form audit step 1 from current mileage
for each piece of equipment.
Manufacturer Specifications: To determine miles per
gallon obtain manufacturer specifications for each piece
of equipment.
Calculate: To determine estimate of total gallons used
for project for each piece of equipment divide total miles
driven by miles per gallon to get total gallons for each
piece of equipment. Sum total gallons for each piece of
equipment to get total gallons used.
Fuel Purchase Records: To determine average costs per
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Flex-Rod Case
07/17/2012
Audit Process
Audit Objective
Risk in Area Under Audit
Existing Controls
to Mitigate Risks
Types of Evidence
Audit Steps
gallon during construction period obtain fuel delivery
records from supplier.
Calculate: To determine average cost per gallon sum
total gallons and total costs from each fuel purchase
record and divide total costs by total gallons.
Calculate: To determine total cost of fuel multiply total
gallons by average cost per gallon.
20