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Internal Audit Observation and Inquiry in Action
Episode 42nd September 2021 • Audit Bites • Robert Berry
00:00:00 00:44:58

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Good auditors must be able to observe.

Great auditors must be able to inquire.

Observation and inquiry are two of the pillars of our profession.

So why are so many of us bad at it?

In this episode of Audit Bites, we'll show an example of horrible observation and inquiry and talk about 3 tips that can make us better at it.

Join us for the episode #004.

While you're here, Join our mailing list. We give a way free CPEs each month.

Go to www.auditbites.com.

https://youtu.be/Ch7rrP3vTvQ

Transcripts

Rob Berry:

Hey friends welcome to episode number four.

Rob Berry:

Today's topic, observation and inquiry in action.

Rob Berry:

audit bites is the first, the very first live show to talk about audit. The very first one till all your friends. Were on all podcasting platforms, we have videos on YouTube, we are everywhere that you want to be. And you can get CPE just for watching me go to WWW dot audit bytes.com if you want to know more, see more, do more, be more. Today's topic, observation and inquiry. Look, it is

Rob Berry:

and anytime I can get good referrals, it makes me happy. And they said Clarence said Robert is a good guy. Thanks for you know, thanks for saying that Clarence. I'll send you that bribery check later. And pozo is here as always, from NYC and my buddy keyshawn keyshawn. You know, we hadn't talked in a while, man, but I'd love to catch up with you sometime. So let's make that happen. Now Joe is

Rob Berry:

hobby, getting rid of her hobby if she spent $53 million on it, right. She spent the money breeding horses. She pleaded guilty to her crimes and was sentenced to 19 and a half years of prison. It was so bad that they made a documentary about this. Now, side note, I think they're going to make a documentary about our other friend at theranos. They've already made one but I think we'll see another

Unknown:

So let's take a look at how Rita pulled off this scheme. There were six legitimate city of Dixon accounts at Fifth Third Bank. She routinely move funds into the legitimate capital development fund, or read and then set up an additional seventh account no one knew about. To get the process started. She created phony invoices to justify payments for imaginary capital projects, such as fixing

Rob Berry:

All right. So if you guys could actually hear the audio let me know because I want to make sure that everything is working. Now Heather was saying, Let's go, Heather. You just heard it. Now. Tell me what you think now that you've heard it. Joe? Always the ever helpful person says yes, there are two movies on Elizabeth Holmes planned one starring Jennifer Lawrence and one starring

Unknown:

So who really is responsible for finding fraud? Is the auditor's who did the annual audit for the town? Is it the bank Where the city held their bank accounts? Is it the city council who ran the town? Or is it the residents?

Rob Berry:

Now, I don't know about you, but I think she asked a really good question. Who is responsible for finding the fraud? So here's what I'm going to ask you guys. Should auditors be responsible for finding fraud? And here's how I want you to answer it. If you think auditor should be responsible, type one in the chat if they should not be responsible, type two. And if you think well, it's

Rob Berry:

in with one puzzle says three. It's complicated. No absolute assurance. But fraud risk. assessments are broken. More data analytics should be used in audits so much I could say offline and puzzle I'm sure the next time we talk I'm going to hear all about it. So for those of you who don't know pozo in our friends, I love my friend pose Oh to death. And then mark agrees with me. He says names are so

Unknown:

They had not only did they not separate individual functions among multiple people. They didn't separate any functions among any people.

Unknown:

Read or picked up the mail, made deposits, updated the journals and Ledger's prepared and signed checks, move investment monies and reconcile the bank accounts. There was very little segregation of duties within the city. Rita literally did it all.

Rob Berry:

Alright, so you guys heard that Rita literally Get it all. Now Heather says she's still waiting on her shirt. Heather, let me check on your shirt. And I'll send you an email today, because it should be on its way to you. But if not, we'll handle that Heather actually want a shirt at another giveaway that we had you guys. So he kind of pays to come wherever I am right? Amy says, cool. I

Unknown:

It was clear to me that city of Dixon was a victim and I thought I could make a difference and help the city in the taxpayer. So do you believe that the city had any responsibility in detecting? Do I believe the city of Dixon had any responsibility themselves to identify the fraud that was committed by Ria credit? Well, and I think on equivalently, the answer is no.

Rob Berry:

All right, so as you just heard, at least one person believes that the city is not responsible for the fraud that occurred. So take note auditors take note. Attorneys don't believe that the victims of fraud are responsible for detecting that fraud. That was pretty telling. Heather says no clip. Thanks, Heather. There wasn't a clip up there. All you saw was me. But I fixed that. So now

Unknown:

I did not meet Rita crundwell when I was prosecuting this case, and nor have I ever met her for purposes of my prosecuting this case to see addiction she was for all intensive purposes irrelevant.

Rob Berry:

Alright, so you heard our attorney here. He said meeting her was irrelevant. But we still need to figure out who was responsible for identifying the fact that she was stealing. Right? So in this case, who were these auditors that we're talking about? And why is everyone trying to blame the auditors. And I love my audience because Mark says, sad when the attorney has to ask the question

Unknown:

was who was responsible for identifying the fact that she was stealing the money

Unknown:

developed to cosy have a relationship with so many people that were involved in this thing. She directed the audit. I mean, she was the one that really in my mind, the selected Clifton knew to continue to do the auditing and so forth.

Unknown:

Clifton is a top 10 public accounting firm in the United States. The city of Dixon was a client of Clifton's local office. They were hired. By the city to do the annual audit. And in addition, they were involved in the city's day to day operations.

Unknown:

They made a conscious, intentional decision to get all of the money for every financial aspect of that city.

Rob Berry:

Alright guys, so this accounting firm, not only did the annual audit, but they prepare the financial statements as well. So essentially, they were they were auditing themselves. Yeah, so they were auditing themselves. Now, let's take a listen to what happened during some of the depositions because what we have here is actual evidence from when they were deposed in court. So let's just

Unknown:

They made that decision. They were there, either Clifton was at the City Hall, or the city hall people were dropping financial documents off there at least once a day.

Unknown:

What has come to light in the depositions of one of the partners at Clifton, he testified that they did all the accounts payable, they actually cut checks, they did payroll, they did other consulting services, aside from the fact that they will have to defend against the accusation that they should have discovered this fraud. I think they have a bigger issue to defend. And that is an independence

Rob Berry:

All right. So you guys, you guys hit it on the head. Mark says the attorney gets a third of the pot. And then Heather says it is the blame game. But Joe dealing being it is a conflict of interest. Big time. Heather says they should not have done both services. And Clarence rounds out the comments. Every time something goes wrong. It is the auditor's fault. Right, we do get a bullet we

Unknown:

The city argued that the auditors knew or should have known that the invoices were phoning.

Unknown:

Here's a proper invoice from the Illinois Department of Transportation. This is the way they're supposed to look. And that's the invoice from Rita crundwell. And a nine year old could identify the difference between those. They are the field audit team looked at these false invoices and failed to do anything at all that they were taught in accounting school to follow up, whether it be talk to

Rob Berry:

Oh, sorry, guys. So misspelled words, missing phone numbers, fake invoices that look nothing like the real invoices. Sorry about that audio issue. We're back now. It's like those email scams, you get where the diction is all off and the grammar is wrong. Right. No one really believes that Jeff Bezos is trying to sell us a bunch of Bitcoin. So let's Talk about the fictitious projects

Unknown:

By the posting number of the individuals that were responsible for the field audit work and the actual generation of the work papers for Clifton, when they did the work for the city of Dixon.

Unknown:

If at any point in time Clifton was doing the audit, and they would have walked down the hallway to ask a simple question of the city engineer. Excuse me, can you tell me about this project? Do you agree the subsequent events would have identified Rita's theft? Yes.

Rob Berry:

All right. So this was a reenactment of the actual deposition, where he asked the auditors seeing this invoice, realizing that this is a fake invoice, all of the markers that he pointed out that were indicators that it was fake. If your auditors had said, Let's go down and talk to the engineer to make sure that this project is legitimate because this invoice looks fake. Would that have

Unknown:

Do you agree with me had that been done? The fraud would have been identified and Rita would have been arrested? Yes.

Unknown:

There was 179 as we counted of those false invoices, and they fail to react to any one of them. They missed it over and over and over again. They missed it.

Rob Berry:

So 179 times, there were false invoices, and no one caught it. So what do we observe so far? First, read ahead, entirely too much control. That is very first thing that we see here. Second, the audit firm had a conflict of interest because well, they prepare the financial statements and essentially they will auditing themselves in third. The field auditors missed fake documents on too

Rob Berry:

link and if you sign up you will get $500 for 18 hours of CPE. So now my friends back to the story. We are talking about Rita crundwell. And she stole over $50 million. From the town of Dixon, an astute lawyer noticed well possible negligence on the part of the auditors and now he is helping the city sue the auditors. I just showed you some of the fake invoices that his work nine year old

Unknown:

If the auditors are not to be held responsible for identifying the theft of millions and millions of dollars every year, why have them in the first place?

Rob Berry:

Now I think you guys heard that why have auditors in the first place but he's not done yet? My friends?

Unknown:

I think most people are they're under the impression that these audits are going to uncover.

Rob Berry:

You just heard from one of the town's citizens he's an average Joe. I think that the average Joe kind of thinks that auditors are there to prevent and or detect fraud. But while we're going down this trail, let's go back to the deposition with Clifton, the accounting firm, and let's see what they had to say as it relates to auditors and their role in preventing and or detecting fraud. So

Unknown:

No auditors are not responsible for finding fraud, nor should they be they became reporting and disclosing police making sure that the corporation's public corporations in particular, were following the appropriate regulations. Am I defending these particular orders? No.

Unknown:

I just did not see, in light of the overwhelming negligence of cliftonlarsonallen employees which came out in these depositions on cross examination I just did not see how they could win the case of federally kountry.

Rob Berry:

Alright, so you see the accounting firm is saying auditor should not be responsible. And then the other representative here from PricewaterhouseCoopers said that he doesn't believe auditors should be responsible for detecting fraud but our lawyer that we see pictured here, he's having trouble with that. But as I said earlier, observation and inquiry should have at least been used here

Unknown:

I deposed both of the current as well as the former head of the Clifton office index. And both of those individuals were also the key people involved every year and performing the work for Rita credit wells, personal income tax returns.

Unknown:

Is it unusual that somebody would have over $300,000 cash flow out without being explained by their tax returns? Well, it wouldn't be unusual.

Unknown:

In 2005, there's over $300,000 that Clifton in preparing Rita crundwell. his tax returns, identifies as money coming into Rita crundwell, for which there's no documentation, all his city employee who makes 80 some $1,000 a year.

Unknown:

Other than just writing it down and claiming it that's the most that she had in terms of documentation. Correct.

Unknown:

Correct.

Unknown:

You never asked her for anything further. True. True.

Rob Berry:

Now, I don't know if you guys missed that. But did you hear the accounting firm also did read us personal income taxes. And they saw that she had $300,000 in revenue coming in as income. And they didn't ask her where it came from. But they knew that she only made well, she made less than $100,000 a year in her job. So this accounting firm, prepared the financial statements, audited

Rob Berry:

her personal income taxes? They could have asked the question based on their observations. So let's just take it back.

Rob Berry:

Have you guys seen a kid? Or have you ever been around kids? or Do you have kids? They question everything right. That's what you need to do. As an auditor. First thing you need to do is look at it like a child and appear it says why they hate your auto reports, please ignore that this should be three keys to observation and inquiry, my dad, but the first thing you want to do is look at it like

Rob Berry:

that you can do is well, ask questions. Don't question people. You see, your goal is to find out the truth and you need to put your bias aside and collect the facts. The other thing you need to do is stop power ticking. You're testing attributes. What is that you ask? Well, back in the day, we used to call it power taking when auditors would just go through and they had testing attributes, and

Rob Berry:

there was no segregation of duties. This woman was responsible for everything, but also the accounting firm that prepared the books for the town was the same accounting firm that did the financial statement audit. So there was a conflict of interest there. She also submitted fake invoices that they did not pick up on and they didn't do any observation and inquiry and simply asked the

Rob Berry:

So your three things to do in order to have good observation and inquiry. as Joe said, We are going back to the basics. One, look at it like a child to ask questions, don't question people. And three, you are going to push for logical answers. I am Robert Berry, and this is episode number four of audit bites, go to audit bites.com. To see past replays, tell all your friends about this, give us good

Rob Berry:

Thank you for joining us on this episode of audit bytes. If you want to do more, see more, be more, check out our website that are calm where you will find quality training, audit merge. Yes, we have had shirts and other apparel as well as pairs copies of this podcast and the Friday frausto podcast www.att.com Thanks for joining us.

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