CFE Exam Quiz 52

Some employees might ring a “no sale” or other noncash transaction to mask the theft of sales. The false transaction is entered on the register so that it appears that a sale is being made. The perpetrator opens the register drawer and pretends to place the cash he has just received in the drawer, but in reality, he puts it in his pocket. To the casual observer, it looks as though the sale is being properly recorded. Some employees might also rig their registers so that a sale can be entered on the register keys, but will not appear on the register logs. The employee can then safely skim the sale. Anyone observing the employee will see the sale entered, the register drawer open, etc., yet the register log will not reflect the transaction. When the ribbon is removed from the register, the result is a blank space on the register log where the skimmed sale should have been printed. Unusual gaps between transactions on a register log might mean that someone is skimming sales.

Checks received through the mail are a frequent target of employees seeking illicit gains. Theft of incoming checks usually occurs when a single employee is in charge of opening the mail and recording the receipt of payments. This employee simply steals one or more incoming checks instead of posting them to customer accounts. (See the “Theft of Incoming Checks” flowchart that follows.) When the task of receiving and recording incoming payments is left to a single person, it is all too easy for that employee to make off with an occasional check. The theft of checks is not usually complicated, but it is sometimes more difficult to conceal a check theft scheme than other forms of skimming. If the stolen checks were payments on the victim company’s receivables, then these payments were expected. As receivables become past due, the victim company will send notices of nonpayment to its customers. A customer is likely to complain when he receives a second bill for a payment he has already made. In addition, the cashed check will serve as evidence that the customer made his payment. The methods used to conceal check theft schemes will be discussed later in this section.

A criminal generally prefers to steal currency rather than checks if given the opportunity. The reasons why are obvious. First, currency is harder to trace than a check. A cashed check eventually returns to the person who wrote it and might provide evidence of who cashed it or where it was spent. Endorsements, bank stamps, and so forth might indicate the thief’s identity. Currency, on the other hand, disappears into the economy once it is stolen. The second reason that currency is preferable to a check is the difficulty in converting the check. When currency is stolen, it can be spent immediately. A check, however, must be endorsed and cashed or deposited before the thief can put his hands on the money it represents. To avoid this problem, employees who steal unrecorded checks will frequently substitute them for receipted currency. The check for currency substitution is very common. While these substitutions make it easier for a crook to convert stolen payments, the problem of concealing the theft still remains. The fact that the stolen checks are not posted means that some customers’ accounts are in danger of becoming past due. If this happens, the perpetrator’s scheme is in danger because these customers will almost surely complain about the misapplication of their payments.

It is generally more difficult to conceal the skimming of receivables than the skimming of sales because receivables payments are expected. The victim organization knows the customer owes money and it is waiting for the payment to arrive. When unrecorded sales are skimmed, it is as though the sale never existed. But when receivables are skimmed, the absence of the payment appears on the books as a delinquent account. To conceal a skimmed receivable, a perpetrator must somehow account for the payment that was due to the company but never received. There are a number of common techniques fraudsters use to conceal the skimming of receivables.

Lapping customer payments is one of the most common methods of concealing receivables skimming. Lapping is the crediting of one account through the abstraction of money from another account. It is the fraudster’s version of “robbing Peter to pay Paul. Because lapping schemes can become very intricate, fraudsters sometimes keep the second set of books on hand detailing the true nature of the payments received. In many skimming cases, a search of the fraudster’s work area will reveal a set of records tracking the actual payments and how they have been misapplied to conceal the theft. It might seem odd that people would keep records of their illegal activity on hand, but many lapping schemes become extremely complicated as more and more payments are misapplied. The second set of records helps the perpetrator keep track of the funds that were stolen and which accounts need to be credited to conceal the fraud. Uncovering these records, if they exist, will greatly facilitate the investigation of a lapping scheme. While lapping is more commonly used to conceal receivables skimming, it can also be used to disguise the skimming of sales. Employees sometimes steal all or part of one day’s receipts and replace them with the receipts from the following day. This type of concealment requires the employee to delay making the company deposit until enough money can be collected to recoup the stolen funds. If an organization rigidly adheres to a deposit schedule, it is unlikely that lapping will be effective in concealing this type of fraud.

Short-term skimming is not a distinct method for stealing sales and receivables, but rather a distinct way of using skimmed money. The peculiar aspect to short-term skimming is that the fraudster keeps the stolen money only for a short while before eventually passing the payment on to his employer. The employee merely delays the posting. In a short-term skimming scheme, an employee steals an incoming payment and then places the skimmed funds in an interest-bearing account or in short-term security. The employee earns interest on the skimmed payments while they remain under his control. Eventually, he withdraws the principal and applies it to the customer’s account, but retains the interest for himself.

Skimming can sometimes be detected by reviewing and analyzing all journal entries made to the cash and inventory accounts. Journal entries involving the following topics should be examined:
• False credits to inventory to conceal unrecorded or understated sales
• Write-offs of lost, stolen, or obsolete inventory
• Write-offs of accounts receivable accounts
• Irregular entries to cash accounts

In analyzing the cash receipt process, it is important to meet the following control objectives:
• Cash receipts must be complete. Each day’s receipts must be promptly collected and deposited in full.
• Each receivable transaction recorded must be legitimate and have supporting documentation.
• All information included in the transaction must be correctly verified as to amount, date, account coding, and descriptions.
• The cash must be safeguarded while in the company’s physical possession.
• There must be appropriate personnel responsible for overseeing cash control processes.
• Cash register log totals should be reconciled to the amount of cash in the drawer.
• An independent listing of cash receipts should be prepared before the receipts are submitted to the cashier or accounts receivable bookkeeper.
• An independent person should verify the listing against the deposit slips.
• Authenticated deposit slips should be retained and reconciled to the corresponding amounts in the cash receipts records.
• The bank deposit should be made by someone other than the cashier or the accounts receivable clerk. A person independent of the cash receipts and accounts receivable functions should compare entries to the cash receipts journal with:
 Authenticated bank deposit slips
 Deposit per the bank statements

As cash is received, whether at a register or through the mail, it is important to ensure that the employees responsible for completing these important tasks are informed of their responsibility and properly supervised.
• Access to the register must be closely monitored and access codes must be kept secure.
• All employees should have unique access codes to the cash registers. The time periods that each access code is used should be checked against
employee work schedules to ensure an employee’s access code was not used in his absence.
• An employee other than the register worker should be responsible for preparing register count sheets and reconciling them with register totals.
• Popular concealment methods must be watched for. These methods, discussed earlier, include checks for cash, reversing transactions, register log
destruction or alteration, and sales cash counts.
• Complete register documentation and cash must be delivered to the appropriate personnel in a timely manner.
• Cash thefts are sometimes revealed by customers who have either paid money on an account and have not received credit or, in some cases, have noticed
that the credit they have been given does not agree with the payment they have made. Complaints and inquiries are also received frequently from
banks.

Cash larceny can be detected by reviewing and analyzing all journal entries made to the cash accounts. This review and analysis should be performed on a regular basis. If an employee is unable to conceal the fraud through altering the source documents, such as the cash register log, then he might resort to making a journal entry directly to cash. In general (except in financial institutions), there are very few instances in an everyday business activity where an independent journal entry is necessary for cash. One of these exceptions is the recording of the bank service charge. However, this is an easy journal entry to trace to its source documentation, namely the bank statement. Therefore, all other entries directly to cash are suspect and should be traced to their source documentation or explanation. Suspect entries will generally credit the cash account and correspondingly debit various other accounts such as a sales contra account or bad debt expenses.

• Ensure proper separation of duties of key personnel.
• Review the check and cash composition of the daily bank deposit during unannounced cash counts and during substantive audit tests of cash receipts.
• Review the entity’s records of the numerical series of printed prenumbered receipts, and verify that these receipts are used sequentially (including
voided documents).
• Review the timeliness of deposits from locations to the central treasurer function.
• Observe locations’ cash receipting operations.
• Prepare and review a schedule of all cash receipting functions from a review of revenue reports, from cash receipt forms at the central treasurer
function, and from discussion with knowledgeable employees.
• Prepare and analyze an inventory of all imprest and change funds by purpose, amount, custodian, date, and location.
• Audit all revenue sources on a cycle.
• Periodically use comparative analytical reviews to determine which functions have unfavorable trends.
• Determine reason(s) why revenue has changed from previous reporting periods.
• Confirm responses obtained from managers by using alternative records or through substantive audit tests.
• Adhere to a communicated policy of unannounced cash counts.

• Ensure proper separation of duties of key personnel.
• Review the check and cash composition of the daily bank deposit during unannounced cash counts and during substantive audit tests of cash receipts.
• Review the entity’s records of the numerical series of printed prenumbered receipts, and verify that these receipts are used sequentially (including
voided documents).
• Review the timeliness of deposits from locations to the central treasurer function.
• Observe locations’ cash receipting operations.
• Prepare and review a schedule of all cash receipting functions from a review of revenue reports, from cash receipt forms at the central treasurer
function, and from discussion with knowledgeable employees.
• Prepare and analyze an inventory of all imprest and change funds by purpose, amount, custodian, date, and location.
• Audit all revenue sources on a cycle.
• Periodically use comparative analytical reviews to determine which functions have unfavorable trends.
• Determine reason(s) why revenue has changed from previous reporting periods.
• Confirm responses obtained from managers by using alternative records or through substantive audit tests.
• Adhere to a communicated policy of unannounced cash counts.

Register Disbursement Scheme Red Flags
• There is inappropriate employee separation of duties. For example, register counting and reconciling should not be done by the cashier.
• Cashiers, rather than supervisors, have access to the control keys necessary for refunds and voids.
• The register employee has the authority to void his own transactions.
• Register refunds are not carefully reviewed.
• Multiple cashiers operate from a single cash drawer without separate access codes.
• Personal checks from cashiers are found in the register.
• Voided transactions are not properly documented or approved by a supervisor.
• Voided cash receipt forms (manual systems) or supporting documents for voided transactions (cash register systems) are not retained on file.
• There are missing or obviously altered register logs.
• There are gaps in the sequence of transactions on the register logs.
• An excessive number of refunds, voids, or no-sales appear on the registration records.
• Inventory totals appear forced.
• There are multiple refunds or voids for amounts just under the review limit.

Register Disbursement Scheme Red Flags
• There is inappropriate employee separation of duties. For example, register counting and reconciling should not be done by the cashier.
• Cashiers, rather than supervisors, have access to the control keys necessary for refunds and voids.
• The register employee has the authority to void his own transactions.
• Register refunds are not carefully reviewed.
• Multiple cashiers operate from a single cash drawer without separate access codes.
• Personal checks from cashiers are found in the register.
• Voided transactions are not properly documented or approved by a supervisor.
• Voided cash receipt forms (manual systems) or supporting documents for voided transactions (cash register systems) are not retained on file.
• There are missing or obviously altered register logs.
• There are gaps in the sequence of transactions on the register logs.
• An excessive number of refunds, voids, or no-sales appear on the registration records.
• Inventory totals appear forced.
• There are multiple refunds or voids for amounts just under the review limit.

Prevention of Register Disbursement Schemes
• Review the segregation of duties of key employees who staff the register, as well as the duties of their supervisors.
• As cash is received, ensure that the employees responsible for completing these important tasks are informed of their responsibilities and properly
supervised.
• Ensure that an employee other than the register worker is responsible for preparing register count sheets and reconciling them with register totals.
• Make sure that complete register documentation and cash are delivered to the appropriate personnel in a timely manner.
• Be aware that cash thefts are sometimes revealed by customers who have paid money on an account and have not received credit or have been credited
for an amount that does not agree with the payment they have made. Complaints and inquiries are also received frequently from banks.
• Closely monitor access to the register and keep access codes secure.
• Analyze the number of refunds to detect multiple small refunds.
• Communicate and adhere to the company policy of performing unannounced cash counts.
• Maintain the presence of a manager or supervisor near the area of the cash register as a deterrent to theft.
• Review supporting documents for voided and refunded transactions for propriety (i.e., legitimacy and approvals).
• Review the numerical sequence and completeness of cash register logs.

Prevention of Register Disbursement Schemes
• Review the segregation of duties of key employees who staff the register, as well as the duties of their supervisors.
• As cash is received, ensure that the employees responsible for completing these important tasks are informed of their responsibilities and properly
supervised.
• Ensure that an employee other than the register worker is responsible for preparing register count sheets and reconciling them with register totals.
• Make sure that complete register documentation and cash are delivered to the appropriate personnel in a timely manner.
• Be aware that cash thefts are sometimes revealed by customers who have paid money on an account and have not received credit or have been credited
for an amount that does not agree with the payment they have made. Complaints and inquiries are also received frequently from banks.
• Closely monitor access to the register and keep access codes secure.
• Analyze the number of refunds to detect multiple small refunds.
• Communicate and adhere to the company policy of performing unannounced cash counts.
• Maintain the presence of a manager or supervisor near the area of the cash register as a deterrent to theft.
• Review supporting documents for voided and refunded transactions for propriety (i.e., legitimacy and approvals).
• Review the numerical sequence and completeness of cash register logs.

Most check tampering schemes do not consist of a single occurrence but instead, continue over a period of time. Therefore, concealing fraud is arguably the most important aspect of the scheme. If an employee intended to steal a large sum of money and escape to another country, hiding the fraud might not be so important. But the vast majority of occupational fraudsters remain, employees of their companies, as they continue to steal from them, which makes concealment the key to the crime. Concealment of the fraud means not only hiding the criminal’s identity but also hiding the fact that a fraud has even occurred. The most successful frauds are those in which the victim organization is unaware that it is being robbed. Obviously, once a business learns that it is being victimized, it will take steps to find the source and put a stop to the scheme.

Copies of the bank reconciliations and account analysis should be obtained along with the complete set of bank statements on all checking and savings accounts, as well as certificates of deposit and other interest-bearing and non-interest-bearing accounts. From the reconciliations, perform the following tests:
• Confirm the mathematical accuracy of the reconciliation.
• Examine the bank statement for possible alterations.
• Trace the balance on the statement back to the bank cut-off and bank confirmation statements.
• Compare the sum of the balance to the company’s ledger.
• Trace the deposits in transit to the bank cut-off statement to ensure recording in the proper period.
• Examine canceled checks and compare them to the list of outstanding checks.
• Sample supporting documentation of checks written for a material amount.
• Verify supporting documentation on outstanding checks written for a material amount.
• Verify the accuracy of nonoperational-cash or cash-equivalent accounts (CDs and other investment accounts). Analysis should include the verification
of the institution holding the funds, interest rate, maturity date, beginning and ending balances, and current period activity. Book and bank
balances should be compared and any accruals of interest analyzed

The following irregularities might indicate fraud:
• Voided checks might indicate that employees have embezzled cash and charged the embezzlement to expense accounts. When the expense is paid (from accounts payable), fraudulent checks are marked and entered as void and removed from distribution points. An account-balancing journal entry is then made. The list of voided checks should be verified against physical copies of the checks. Bank statements should be reviewed to ensure that voided checks have not been processed.
• Missing checks might indicate lax control over the physical safekeeping of checks. Stop payments should be issued for all missing checks.
• Checks payable to employees, with the exception of regular payroll checks, should be closely scrutinized. Such an examination might indicate other schemes, such as conflicts of interest, fictitious vendors, or duplicate expense reimbursements.
• Altered endorsements or dual endorsements of returned checks might indicate possible tampering.
• Returned checks with obviously forged or questionable signature endorsements should be verified with the original payee.
• Altered payees on returned checks should be verified with the intended payee.
• Duplicate or counterfeit checks more than likely indicate fraud. These checks might be traceable to the depositor through bank check coding.
• An examination of all cash advances might reveal that not all advances were properly documented and, therefore, inappropriate payments have been made to employees.
• A questionable payee or payee address on a check should trigger a review of the corresponding check and support documentation.

When a person is authorized to sign company checks, preparing the checks is easy. The employee simply writes and signs the documents the same way he would with any legitimate check. In most situations, check signers are owners, officers, or otherwise high-ranking employees and thus have or can obtain access to all the blank checks they need. Even if company policy prohibits check signers from handling blank checks, the perpetrator can normally use his influence to overcome this impediment. What employee is going to tell the CEO that he can’t have a blank check? The most basic way an employee accomplishes an authorized maker scheme is to override controls designed to prevent fraud. Most authorized signatories have high levels of influence within their companies. The perpetrators use this influence to deflect questions about fraudulent transactions. A common authorized maker scheme is one in which a majority owner or sole shareholder uses his company to pay personal expenses directly out of company accounts. Instead of paying personal expenses, the perpetrator might cut checks directly to himself, his friends, or his family. Using the fear of job security as a weapon, the owner can maintain a work environment in which employees are afraid to question these transactions. High-level managers or officers might also use their authority to override controls in companies with absent or inattentive owners. Intimidation can play a large part in the commission and concealment of occupational fraud schemes involving powerful individuals

Competitive bids are confidential. They are supposed to remain sealed until a specified date when all bids are opened and reviewed by the procuring entity. Accordingly, employees of a procuring entity can leak pre-bid information or confidential information from competing bidders to a favored bidder, giving that bidder an unfair advantage in the bidding process. Thus, in such schemes, the employee does not alter the specifications to suit the vendor; instead, he gives the favored vendor a head start on planning his bid and preparing for the job. Typically, these schemes involve a corrupt vendor who pays a procurement employee for the right to see the specifications earlier than the competition. Consequently, the person or persons who have access to sealed bids are often the targets of unethical vendors seeking an advantage in the process.

Most companies only reimburse certain employee expenses. Which expenses a company will pay for depends to an extent upon policy, but in general, business-related travel, lodging, and meals are reimbursed. One of the most basic expense reimbursement schemes is perpetrated by simply requesting reimbursement for a personal expense by claiming that the expense is business-related. (See the “Mischaracterized Expenses” flowchart that follows.) Examples of mischaracterized expenses include claiming personal travel as a business trip, listing dinner with a friend as “business development,” and so on. Employees submit the receipts from their personal expenses along with their expense reports but concoct business reasons for the incurred costs. The false expense report induces the victim organization to issue a check, reimbursing the perpetrator for his personal expenses. In cases involving airfare and overnight travel, a mischaracterization can sometimes be detected by simply comparing the employee’s expense reports to his work schedule. Often, the dates of the so-called “business trip” coincide with a vacation or day off. Detailed expense reports allow a company to make this kind of comparison and are therefore very helpful in preventing expense schemes.

A common element to mischaracterized expense schemes is the failure to submit detailed expense reports, or any expense reports at all. Some companies allow employees to simply turn in receipts without explaining the business purpose of the listed expenses. This makes it exceedingly easy for an employee to turn in a receipt from a restaurant and receive a check to reimburse him for a “business dinner.” Other companies provide employees with company credit cards or procurement cards and allow employees to spend company funds without providing detailed information justifying the purchase, sometimes not even requiring receipts. Requiring detailed information means more than just supporting documents; it should mean precise statements of what was purchased, as well as when, where, and for whom the purchase was made. Even when detailed expense reports are required, it might be difficult to detect a mischaracterized expense reimbursement scheme. For example, suppose a traveling salesman goes on a trip and runs up a large bar bill one night in his hotel, saves his receipt, and lists this expense as “business entertainment” on an expense report. Nothing about the time, date, or nature of the expense would readily point to fraud, and the receipt would appear to substantiate the expense. Short of contacting the client who was allegedly entertained, there might be little a victim organization can do to identify the expense as fraudulent.

The most fundamental example of an overstated expense reimbursement scheme occurs when an employee alters a receipt or other supporting documentation to reflect a higher cost than what the employee actually paid. The employee might use correction fluid, a ballpoint pen, or some other method to change the price reflected on the receipt before submitting an expense report. If the company does not require original documents as support, the perpetrator generally attaches a copy of the receipt to the expense report. Alterations are usually less noticeable on a photocopy than on an original document. Businesses should require original receipts and ink signatures on expense reports for precisely this reason. As with other expense frauds, overstated expense reimbursement schemes often succeed because of poor controls. In companies where supporting documents are not required, for example, fraudsters simply lie about how much they paid for a business expense. With no support available, it could be very difficult to disprove an employee’s false expense claims.

Another way to overstate a reimbursement form is the “over purchasing” of business expenses. This method is typically used by employees seeking reimbursement for travel expenses. Assume an employee is scheduled to make a business trip to another city. The employee purchases an airline ticket far in advance of the trip when rates are low. When it is close to the day of the trip, the employee purchases another ticket to the same destination.
This ticket will be more expensive than the first one. To further increase the price, the second ticket might include several stops and layovers on a very circuitous route. The employee removes the passenger receipt coupon from the second ticket and then returns it for a full refund. He actually flies on the first (less expensive) ticket he purchased but attaches the receipt from the more expensive ticket to his expense report.

One way to generate reimbursement for a fictitious expense is to create fraudulent support documents, such as false receipts. Using simple computer software, it is easy for employees to create realistic-looking counterfeit receipts at home. These counterfeits are often very sophisticated, even including the logos of the stores in which goods or services were allegedly purchased. Computers are not the only means of creating support for a fictitious
expense. Some employees use calculator tapes, others cut and paste old receipts from suppliers and some use software to generate fictitious receipts. Unfortunately, not all companies require receipts to be attached to expense reports. Checks written by the employee or copies of his personal credit card bill might be allowed as support in lieu of a receipt. Some employees write personal checks that appear to be for business expenses and then photocopy these checks and attach them to reimbursement requests. In actuality, nothing is purchased with the checks; they are destroyed after the copies are made. The perpetrator ends up receiving a reimbursement from his employer without ever actually incurring a business expense. The same method can be used with credit cards, where a copy of a statement is used to support a purchase. Once the expense report is filed, the perpetrator returns the item and receives a credit to his account.

The least common of the expense reimbursement schemes involve multiple reimbursements. This type of fraud involves the submission of a single expense more than one time. The most frequent example of a multiple reimbursement scheme is the submission of several types of support for the same expense. In cases where a company does not require original documents as support, some employees even use several copies of the same support document to generate multiple reimbursements. Rather than file two expense reports, employees might also charge an item to the company credit card, save the receipt, and attach it to an expense report as if they paid for the item themselves. The victim organization, therefore, ends up paying twice for the same expense.

Below is a list of red flags of material cost mischarging schemes:
• Previously delivered items are transferred from ongoing jobs to open work orders.
• Items scheduled for delivery in the distant future are transferred from ongoing jobs to open work orders.
• The contractor transfers items at costs that are substantially different (higher or lower) from actual costs.
• There are mass transfers of items from one job order to various other job orders.
• Materials, supplies, or components used in production are different than those used in the proposal or contract.
• The contractor includes unnecessary or obsolete items in proposals.
• The contractor charges cost to the original job order when there is no physical inventory left on the job site.
• There is an increase in transfers of items to inventory write-off or a scrap account.
• The contractor makes transfers to any type of holding the account.
• The contractor does not properly account for the materials.
• There are initial billings for actual material costs in excess of negotiated costs.
• Later billings show a downward adjustment in material costs as labor or overhead costs increases.
• Improper billing costs become apparent.
• Vague terms are used to bid materials based solely on management’s judgment or rough estimates.
• The contractor failed to report excess or residual inventory.
• The contractor gives poor explanations for a high percentage of noncompetitive subcontractor awards.
• There is no clear audit trail to verify propriety of material charges.
• Internal controls over the shipping, receiving, and warehouse receipt for goods or services are weak.
• Weak internal controls allow numerous opportunities to adjust material charges.

Although securities are the least likely asset to be misappropriated, the loss of security misappropriation cases has the potential to be extremely high. To avoid falling victim to misappropriation of securities scheme, management must maintain proper internal controls over the company’s investment portfolio, including proper separation of duties, restricted access to investment accounts, and periodic account reconciliations.

Below is a list of red flags of material cost mischarging schemes:
• Previously delivered items are transferred from ongoing jobs to open work orders.
• Items scheduled for delivery in the distant future are transferred from ongoing jobs to open work orders.
• The contractor transfers items at costs that are substantially different (higher or lower) from actual costs.
• There are mass transfers of items from one job order to various other job orders.
• Materials, supplies, or components used in production are different than those used in the proposal or contract.
• The contractor includes unnecessary or obsolete items in proposals.
• The contractor charges cost to the original job order when there is no physical inventory left on the job site.
• There is an increase in transfers of items to inventory write-off or a scrap account.
• The contractor makes transfers to any type of holding the account.
• The contractor does not properly account for the materials.
• There are initial billings for actual material costs in excess of negotiated costs.
• Later billings show a downward adjustment in material costs as labor or overhead costs increases.
• Improper billing costs become apparent.
• Vague terms are used to bid materials based solely on management’s judgment or rough estimates.
• The contractor failed to report excess or residual inventory.
• The contractor gives poor explanations for a high percentage of noncompetitive
subcontractor awards.
• There is no clear audit trail to verify propriety of material charges.
• Internal controls over the shipping, receiving, and warehouse receipt for goods or
services are weak.
• Weak internal controls allow numerous opportunities to adjust material charges.