Internal Auditing - Case Study Example

Internal AuditingThis case involves fraud that occurred as a result of a lapse in the internal control system within the organization. Mark J. Krenik, a former U.S Air Force civilian employee, was involved in a criminal act that involved fraud. He opened bank accounts under the name ST Systems Corporation and Hughes STX. The two bank account accounts were under his control. His fraudulent activities were discovered by bank employees as he made attempts to withdraw a large sum of money.From this case, it is evident that US Air Force did not have stringent internal control mechanisms to prevent fraud.

One of the internal control mechanisms that the organization failed to utilize optimally is preventive control. Preventing control in internal auditing is essential because it is the first barrier that protects the organization from risks that are detrimental to its performance, growth and financial stand. The principal risks are operating errors, technological malfunction, negative regulatory pronouncements such as unfair suspensions of employees, and fraud. In Krenik’s case, the risk that internal audit failed to stop was Fraud.

Had there been a strong internal control, the organization would have developed a transparent payment system such as e payables systems that would have prevented fraud (Rezaee, 2002). Detective control plays a key role in spotting irregularities that have already happened within the organization. The aim of detective control is to develop necessary methodologies and tools that can easily spot errors and irregularity within the functional areas of the organization. In this internal auditing measure, internal auditors are useful when testing risky processes and procedures.

In Kreniks case, the organization failed to detect fraud because it did not have an ardent detective control mechanism that would have detected financial malpractices and it took the intervention of the bank to detect the fraud. Failure to regularly reconcile financial documents between US Air force and the supplier and inability to make appropriate and regular follow -up of payment procedures provided a loop hole through which fraud occurred (Frigo, 2002).Corrective control in internal auditing assists in correcting irregularities and errors that have been spotted within the organization’s financial data and operations.

In Krenik’s case, the corrective measures to prevent future frauds are developing a strong preventive control measures such as prompt and through reconciliation of transactions with the suppliers, developing electronic payment system that is efficient and fast, and conducting regular checks on financial statements’ information. In addition, the organization should continuously train its staff on measures of detecting and preventing financial and operational malpractice. Policies should be developed to ensure that there is inter-management communication between US Air Force and its suppliers, to ensure that orders for equipments and payments are accurate (Rezaee, 2002).

In conclusion, internal auditing is essential because it improves operations of the organization, prevent irregularities, and ensure that data and processes are implemented in line with organization’s goals. The main types of internal control are corrective control, preventive control and detective control. Internal control shields the organization from irregularities that can have negative effects on its performance. ReferencesFrigo, M.(2002). A Balanced Scorecard Framework for Internal Auditing Departments.

Boston: Altamonte Springs.Rezaee, Z. (2002). Financial Statement Fraud: Prevention and Detection. New York: Wiley.