Question

You are one of the Audit Partners of XYZ Certified Chartered Accountants Firm. You have seen a new prospective client, Performance Auto Parts Corporation. Performance Auto Parts has three locations specializing in the sale of motor vehicle auto parts as well as repair to motor vehicles. The business is owned by a widow, Mrs. Armstrong, who inherited the business upon the passing of her husband. Mrs. Armstrong has no relevant business operation skills or knowledge of the industry in which the business operates. She currently is dependent on her team of accounting clerks, led by a Financial Controller to be ethical. The Financial Controller has ultimate authority and makes decisions in all areas of the operations. Mrs. Armstrong does not require a report on the business performance. She is required to sign on all cheques but does not question the expense as long as the Financial Controller authorizes it. The accounting staff consists of six young persons with no prior accounting experience or qualification. Two accounting clerks are located at each of the business locations. They have been trained solely by the Financial Controller. The Financial Controller is paid a bonus, which is a percentage of the net profit. He was overheard by a client expressing his frustration that he has not been able to meet his monthly expenses even though he plays such a key role in the organization. You have successfully managed to schedule a meeting with Mrs. Armstrong.

i. Explain the elements of fraud and why her business is at risk.

ii. Provide an explanation of two advantages and two disadvantages to Mrs. Armstrong and or company.

iii. The responsibilities of both management at Performance Auto Parts and your firm regarding the performance of an external audit

Answer 1

1) ELEMENT OF FRAUD IN PERFORMANCE AUTOPART CORPORATION

In PAC all operation decisions are taken by Financial controller by his sole concern with out any discussions with other management members and even Mrs. Armstrong is over relayed on financial controller on running of her business,in which she lacks knowledge in controling entity. The below statement indicates how fraud may arise and how it lead PAC business to risk

Bonus of Financial Controller

Performance based pay is a good motivating factor for management so as they tends to acheive maximum performance of duty. Which will increase their pay as well as the company's value which is the primary objective. At PAC pay of bonus to financial controller based on net profit figures tends misstatement in financial statement as the more profit the more will be his bonus.

This misstated net profit figures will be relayed and company has to bear unwanted tax effect.

Payments without further authorisation

In PAC Mrs. Armstrong will sign the cheque with no more question if veified by financial controller. Here araises a threat of fraud. Higher amount payments should be authorised by more than one responsible person and only there after the cheque could be signed with detailed report.

If current practice follows this risk the company to a great loss of money and leading to liqudity crisis .

Accountants With No Experience

PAC consist of 6 unexperience accountants with low knowledge in relevent field of accounting may lead the financial accounting records having higher number of error. It is also noticable that only two of three business location has accounts ledger clerk will lead to missing of more transactions to record and higher potential of fraud

Financial controller is the only offical oversee fellow accountants will lead to loss of management time of Financial controller in planning Operational activities.

The more Financial controller spend on overseeing accountants the more operational actiities will be inefficent.

2) Advantages of Company

a.Operations of company is managed by experienced offical

PAC's activities are led and operated by cheif financial controller who has relevent experience in running auto spare parts and repair business. This will be a great advantage to PAC because this offical manages what he is excel. The better experienced manager can plan better business opportunities and which give company good financial performance and PAC will became more profitable under this management.

Experienced management can offer company by creating more value to the holder of the entity, Mrs.Armstrong will be benefited from having financal controller leading operational actiities.

b) Performance based Pay to Financial Controller

Offering performance related pay to management members is a good option for any company to motivate management to be more efficent and dedicated towards completing alinged tasks. As the member aim for higher bonus payment which inturns helps company owmer to get increased value to the company.

A fair measurement system(should not based on accounting figures like net profit) should be in place their for measuring their performance so tht the bonus package to be efficent to get expected result.

Disadvantage to company

a) Bonus Based on Net profit Figure

In PAC bonus to financial controller is being paid out on the basis of accounting net profit figure in income statement. Where the Financial controller has the power to effect on these statements as he leads the accounts team and he has the final authority on it. This will tends to doing of fraud by financial controller in getting paid more bonus by misstating accountig records,

b) Finance clerk at Two business location

PAC has Three major business locations where activities of autopart sales and repair takesplace. For hese two of locations has accounts clerk and one doesn't. The one with no clerk leads to material missing of entries and more potential for happening fraud in place.

3) Responsibilities Of PAC Management

Access to accounting Records and transactions

The management of PAC co should provide external auditor with all set of accounting records and transactions. It is the duty of the management of RAC company to give all records , at the the same time is the right of an auditor to get access to those.

Explanation to Auditor if required by auditor

Management should give valid explanations for any accounting estimations made by manager. The basis of personal judgement on accounting records should be discussed with auditor.

Responsibility Of XYZ auditor

Ensure the presentation of Financial statement in true and fair manner

Auditor should evaluate the overall presentation of financial statements which is done in accordance with relevent standards and quality as recognised by accounting bodies.

Ensure Financial Record has all underlying assets/liability in accounting record

It is the responsibility of an auditor to verify that all items in accounting record are presented in FS with true and fair manner as there is no over/understatement of assets or liabilities

Visit Business locations to ensure Controls are there

Auditor should visit branches to ensure financial controls are there as a part of audit. If in case has not visited auditor to ensure proper returns are made in related to those branch not visited.