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Why is the Auditor Really Asking about Misappropriation of Assets?

Ideally, as auditors, we rotate the staff we question during our annual audit internal control assessments.  Typically, we inquire of their knowledge of fraud, including such things as “misappropriation of assets.”  In some cases, lower level staff members of the auditee have difficulty coming up with answers, and will offer a negative response without appearing to give the question much thought.  This may reflect a casual attitude by management which could cause an entity to be vulnerable to fraud.

Fraud committed through misappropriation will differ depending upon the industry or organization and its operating characteristics.  Some of the more commonly committed misappropriation of assets includes:

• Theft of cash, including currency and financial instruments easily converted to cash such as checks or money orders;
• Assets readily converted to cash such as gems, computer chips or bearer bonds;
• Inventory items of high value, high demand, or small size;
• Easily portable, readily marketable equipment or fixed assets without appropriate ownership identification.

Management must be aware of assets’ susceptibility and respond with appropriate internal control directed to identify and mitigate existing weaknesses.  Policies must be defined, adopted and communicated to every level of staff to ensure effective internal control to prevent misappropriation of assets.  What the auditor is really asking is:  Are there controls in place?  Have those controls/policies been overridden?  Have there been deviations from existing internal control policies or procedures?

Jill Collins