In: Accounting
Fraud, Professional Ethics and Auditor Independence
a) When assessing a client’s integrity, the auditor will consider the client’s willingness to allow the auditor full access to information required to form an opinion and pay a fair amount for the work completed. Explain why.
b) Mike is a very experienced auditor with unique expertise in the mining industry. As a result, Mike has been the lead audit partner for the audit at BKK Oil for the last seven years. Recently, Mike was approached by the board of BKK with an offer of employment as a director starting in two years’ time. The only condition was that the audit work (for the year ended 30 June 2020) must be finished in six weeks and the independent auditor’s report signed off before 15th August 2020, as the Annual General Meeting (AGM) has been scheduled for early September. Mike is aware that the audit of BKK normally takes at least nine weeks.
i) Identify and explain TWO possible threats to audit independence.
ii) Suggest appropriate actions and safeguards that could be put in place to reduce the threat to an acceptable level.
c) Two months before the end of the financial year, Greenlight Resort terminated the contract of one of its senior sales managers. Her employment was terminated after it was discovered she had worked in collusion with several customers to commit fraud. This included giving special discounts on room rates and event services, and reducing customers’ period of stay and value of other services provided. The manager would then take direct payments from the customers. During the investigation process, it was discovered that the manager was the only one allowed to access the customer database and had authorisation to update prices. For more than two years, the manager had never taken any annual leave.
i) Identify and explain TWO fraud risk factors.
ii) Identify TWO key accounts that are potentially affected by the fraud. For each account, identify ONE key assertion that is at risk.
i) Authorisation by the shift supervisor of all overtime hours worked.
ii) Review of overtime payment records by the project manager.
Briefly explain the purpose of each of the above control procedures, and identify whether the procedure recommended is a ‘prevent’ or ‘detect’ control.
c) You are reviewing the test result in relation to accounts receivable at Ryan’s Tools as below:
Test description | Conclusion |
A number of customers’ credit memos were selected and checked to ensure pricing and discounts have been reviewed and authorised by the sale manager. Four out of 20 memos tested had not been authorised and incorrect discounts were applied in these memos. A follow-up of the four memos with deviations did not highlight a pattern or specific reason for the errors. | Accepted as the errors in discount amounts recorded were immaterial. |
i) Is the above test a test of controls or a substantive test of details? Explain your answer. What type of procedure did the auditor use?
ii) Determine the key assertion addressed by the test procedure. Suggest ONE alternative testing procedure that can be used to test the assertion identified.
iii) Explain why the conclusion reached is appropriate or inappropriate, and outline the key additional audit procedure that you believe needs to be performed.
Answer question
test of be Selecting are c)) In the above given case , auditor followed procedure of test details from the records and verifying authorization and discounts given and reason for discounts Test of details the procedures followed by the auditor to detect material misstatement fraud related transaction of account Balances It includes trading figures to supporting documentation to determine 4 transaction are valid properly classified , accurate and complete Tests o details also include recalculation and confirming recorded information.
the transaction addressed by the test procedure of Specific control and re performance of transactions 11 The key assertion is Occurrence: It tests whether actually took place o not by vouching with Supporting documents Vouching includes taking a recorded amount and tracing it the supporting document Test of controls can be the alternative procedure that can be followed by Inquiries of Management about the Occurrence of transaction . observations back to of discounts and conclusions reached by the auditor is appropriate why because auditor reviews the documentation- buy vouching supporting documents and also verified authorization of Sale manager. Accuracy applied as per discount policy reviewed by calculating the amount accuracy and the errors in discount amounts are not material i e which not result in qualified opinion and hence the conclusion reached is correct - Additional audit procedure that can be performed is test of controls which includes observation, Inspection re performance, Recalculation and in a Substantive manner: are confirmation