1.

The type of fraud described in the problem here is what we call a conflict of interest, which
is a type of corruption.

The controls that we could implement on this type of fraud are:

The home improvement center should include in their company handbook a policy
declaring its position on business transactions where employees have an interest, which
could be either financial or nonfinancial, for example, those businesses are owned or
operated by a family member. If business transactions with employees are allowed, the
home improvement center should require notification from the employees and proper
authorization by the management prior to the business transactions.

The home improvement center’s accounting department should also implement the use of
a valid vendor file. If a vendor or supplier is not on the list, then management approval
should be required before making transactions with them.

The management in the accounting department of the home improvement center should
use independent authentication by reviewing management reports that summarize the
business’s activities. The management should be able to detect changes in the expenses,
cost of goods or raw materials, accounts payable balances, etc. They should also compare
the information from previous years and detect significant changes in their profits from
increased supplies/raw materials expenses and decreased sales due to the over-priced
lumber.

The management should also increase their supervision to their employees, supervising the
roles of the purchasing agent would lead to the causes of the costs from other suppliers
were not compared.

2. The type of fraud described in the problem here is an example of economic extortion.

Pro-active methods should be used by the management and the auditors of the company to
discover these types of the frauds, because with the absence of records, these are difficult
to detect, but here are some controls or methods that we could also use:

In an investigation of any acquisitions of economic extortion, an independent auditor should

be selected.

They should also create a public policy which is framed by the building authority, to give
equal opportunity to all the contractors, in the process of bidding.