Describe controls to prevent and detect fraud, including tone at the top, segregation of duties, authority levels, and detective controls such as whistleblower hotlines, reconciliations, and supervisory reviews.

At Kesgrave Supplies, a single accounts clerk can add a new vendor to the master file, enter that vendor's invoices, and release the resulting payments with no second person involved. The chief audit executive wants the control that would best PREVENT a fictitious-vendor fraud in this process. Which control should the auditor recommend?

• ASegregate the duties so that vendor set-up, invoice entry, and payment release are each performed by a different member of the finance staff.check_circle Correct
• BIntroduce a monthly reconciliation of the vendor master file against payments made, so any fictitious vendor and its payments can be identified after each period has closed.
• CInstall a confidential whistleblower hotline that lets staff report a colleague they suspect of setting up and paying a fictitious vendor within the accounts team.
• DHave a supervisor review a sample of completed payments each week to confirm that the vendors which received them are genuine and properly approved.

Why A is correct: Splitting these incompatible duties removes the opportunity for one person to create and pay a fictitious vendor, which is a preventive control that stops the fraud before it can occur.

Why B is wrong: A reconciliation is tempting because it would eventually expose a false vendor, but it surfaces the fraud only after money has left, so it detects rather than prevents what the stem asks to stop.

Why C is wrong: A hotline is a detective control that relies on someone noticing and reporting; it does not stop the clerk creating and paying a false vendor, so it cannot prevent the fraud.

Why D is wrong: A supervisory review can catch a fraud already committed, but it operates after the payment is made and does not remove the one-person opportunity the stem asks to prevent.