Why are supplier audits conducted periodically by the buyer in the context of fraud prevention?

• A. To ensure that the buyer's employees receive higher commissions.
• B. To reduce the buyer's tax liability.
• C. To detect and prevent fraudulent activities such as kickbacks or false billing by suppliers.
• D. To increase the supplier's production capacity.

Answer: (C)

Verified step by step guidance

1. Understand the purpose of supplier audits: Supplier audits are conducted to ensure compliance with agreed-upon terms, quality standards, and ethical practices. They are a key control mechanism in financial accounting and fraud prevention.
2. Identify the context of fraud prevention: Fraud prevention involves detecting and mitigating risks such as kickbacks (illegal payments to employees for favoring a supplier) or false billing (invoicing for goods or services not provided).
3. Evaluate the options provided: Analyze each option to determine its relevance to fraud prevention. For example, ensuring higher commissions for employees or reducing tax liability is unrelated to fraud prevention.
4. Focus on the correct rationale: Supplier audits help uncover irregularities in transactions, such as inflated invoices or unauthorized payments, which are critical for detecting and preventing fraud.
5. Conclude with the correct answer: The primary reason for conducting supplier audits in the context of fraud prevention is to detect and prevent fraudulent activities such as kickbacks or false billing by suppliers.