Question

This problem is based on the JA Tires data.. As part of risk assessment procedures, you have been asked to perform some preliminary data analytics on the sales file to assess whether individual transactions or classes of sales transactions represent increased inherent risk because they are large, unusual, or involve related parties. You can perform this analysis using Excel.

Required:

a.   Identify the five largest sales transactions. Indicate whether you believe these transactions should require an increase in inherent risk. Do you believe any of these transactions individually, or in the aggregate, should be considered a significant risk? [NOTE: Significant risk is a defined term.]
b.   Identify any other transactions that appear to involve unusual product numbers, customers, or prices.
c.   Customer 1027, New York Tire Depot, is considered a related party to JA Tires. What is the total amount of sales to this customer?

Please show how to solve on excel : show steps :

Answer 1

Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of internal control. In a financial audit, inherent risk is most likely to occur when transactions are complex, or in situations that require a high degree of judgment in regard to financial estimates. This type of risk represents a worst-case scenario because all internal controls in place have nonetheless failed.

Inherent Risk

Understanding Inherent Risk

Inherent risk is one of the risks auditors and analysts must look for when reviewing financial statements, along with control risk and detection risk. When conducting an audit or analyzing a business, the auditor or analyst tries to gain an understanding of the nature of the business while examining control risks and inherent risks. If inherent and control risks are considered to be high, an auditor can set the detection risk to an acceptably low level to keep the overall audit risk at a reasonable level. To lower detection risk, an auditor will take steps to improve audit procedures through targeted audit selections or increased sample sizes.

Companies operating in highly regulated sectors, such as the financial sector, are more likely to have higher inherent risk, especially if the company does not have an internal audit department or has an audit department without an oversight committee with a financial background. The ultimate risk posed to the company also depends on the financial exposure created by the inherent risk if the process for accounting for the exposure fails.

Significant unusual transactions as significant transactions that are outside the normal course of business for the company or that otherwise appear to be unusual due to their timing, size, or nature. 1. A significant unusual transaction does not necessarily need to occur infrequently.

B.

Types of Suspicious Activities or Transactions

Money Laundering using cash transactions
unusually large cash deposits made by an individual or company whose ostensible business activities would normally be generated by cheques and other instruments;
substantial increases in cash deposits of any individual or business without apparent cause, especially if such deposits are subsequently transferred within a short period out of the account and/or to a destination not normally associated with thecustomer;
customers who deposit cash by means of numerous credit slips so that the total of each deposit is unremarkable, but the total of all the credits is significant;
company accounts whose transactions, both deposits and withdrawals, are denominated by cash rather than the forms of debit and credit normally associated with commercial operations (e.g. cheques, Letters of Credit, Bills of Exchange, etc.);
customers who constantly pay in or deposit cash to cover requests for money transfers, bankers drafts or other negotiable and readily marketable money instruments;
customers who seek to exchange large quantities of low denomination notes for those of higher denomination;
frequent exchange of cash into other currencies;
branches that have a great deal more cash transactions than usual (Head Office statistics detect aberrations in cash transactions);
customers whose deposits contain counterfeit notes or forged instruments;
customers transferring large sums of money to or from overseas locations with instruments for payment in cash; and
large cash deposits using night safe facilities, thereby avoiding direct contact with bank staff.
Money Laundering using bank accounts
customers who wish to maintain a number of trustee or client accounts which do not appear consistent with the type of business, including transactions which involve nominees;
customers who have numerous accounts and pay in amounts of cash to each of them in circumstances in which the total of credits would be a large amount;
any individual or company whose account shows virtually no normal personal banking or business related activities, but is used to receive or disburse large sums which have no obvious purpose or relationship to the account holder and/or his business(e.g. a substantial increase in turnover on an account);
reluctance to provide normal information when opening an account, providing minimal or fictitious information or, when applying to open an account, providing information that is difficult or expensive for the institution to verify;
customers who appear to have accounts with several institutions within the same locality, especially when the bank is aware of a regular consolidation process from such accounts prior to a request for onward transmission of the funds;
matching of payments out with credits paid in cash on the same or previous day;
paying in large third party cheques endorsed in favour of the customer;
large cash withdrawals from a previously dormant/inactive account, or from an account which has just received an unexpected large credit from abroad;
customers who together, and simultaneously, use separate tellers to conduct large cash transactions or foreign exchange transactions;
greater use of safe deposit facilities and increased activity by individuals; the use of sealed packets deposited and withdrawn;
companies’ representatives avoiding contact with the branch;
substantial increases in deposits of cash or negotiable instruments by a professional firm or company, using client accounts or in-house company or trust accounts, especially if the deposits are promptly transferred between other client, company and trust accounts;
customers who decline to provide information that in normal circumstances would make the customer eligible for credit or for other banking services that would be regarded as valuable;
insufficient use of normal banking facilities (e.g. avoidance of high interest rate facilities for large balances); and
large number of individuals making payments into the same account without an adequate explanation.
Money Laundering using investment related transactions
purchasing of securities to be held by the institution in safe custody, where this does not appear appropriate given the customer’s apparent standing;
request by customers for investment management or administration services (either foreign currency or securities) where the source of the funds is unclear or not consistent with the customer’s apparent standing;
large or unusual settlements of securities in cash form; and
buying and selling of a security with no discernible purpose or in circumstances which appear unusual.
Money Laundering by offshore international activity
customer introduced by an overseas branch, affiliate or other bank based in countries where production of drugs or drug trafficking may be prevalent;
use of letters of credit and other methods of trade finance to move money between countries where such trade is not consistent with the customer’s usual business;
building up of large balances, not consistent with the known turnover of the customer’s business, and subsequent transfer to account(s) held overseas;
unexplained electronic fund transfers by customers, foreign currency drafts or other negotiable instruments to be issued;
frequent requests for travelers cheques or foreign currency drafts or other negotiable instruments to be issued; and
frequent paying in of travelers cheques or foreign currency drafts particularly if originating from overseas.
Money Laundering involving financial institution employees and agents
changes in employee characteristics, (e.g. lavish lifestyles or avoiding taking holidays);
changes in employee or agent performance, (e.g. the salesman selling products for cash has remarkable or unexpected increase in performance); and
any dealing with an agent where the identity of the ultimate beneficiary or counterpart is undisclosed, contrary to normal procedure for the type of business concerned.
Money Laundering by secured and unsecured lending
customers who repay problem loans unexpectedly;
request to borrow against assets held by the institution or a third party, where the origin of the assets in not known or the assets are inconsistent with the customer’s standing; and
request by a customer for an institution to provide or arrange finance where the source of the customer’s financial contribution to deal is unclear, particularly where property is involved.
Sales and dealing staff
New Business
Although long-standing customers may be laundering money through an investment business it is more likely to be a new customer who may use one or more accounts for a short period only and may use false names and fictitious companies.
Investment may be direct with a local institution or indirect via an intermediary who “doesn’t ask too many awkward questions”, especially (but not only) in a jurisdiction where money laundering is not legislated against or where the rules are not rigorously enforced.

The following situations will usually give rise to the need for additional enquiries:

a personal client for whom verification of identity proves unusually difficult and who is reluctant to provide details;
a corporate/trust client where there are difficulties and delays in obtaining copies of the accounts or other documents of incorporation;
a client with no discernible reason for using the firm’s service, e.g. clients with distant addresses who could find the same services nearer their home base; clients whose requirements are not in the normal pattern of the firm’s business which could be more easily serviced elsewhere; and
any transaction in which the counterparty to the transaction is unknown
Intermediaries
There are many clearly legitimate reasons for a client’s use of an intermediary. However, the use of intermediaries does introduce further parties into the transaction thus increasing opacity and, depending on the designation of the account, preserving anonymity. Likewise there are a number of legitimate reasons for dealing via intermediaries on a “numbered account” basis; however, this is also a useful tactic which may be used by the money launderer to delay, obscure or avoid detection.

Any apparently unnecessary use of an intermediary in the transaction should give rise to further enquiry.

Dealing patterns & abnormal transactions
The aim of the money launderer is to introduce as many layers as possible. This means that the money will pass through a number of sources and through a number of different persons or entities. Long-standing and apparently legitimate customer accounts may be used to launder money innocently, as a favour, or due to the exercise of undue pressure.

Examples of unusual dealing patterns and abnormal transactions may be as follows:

Dealing patterns
A large number of security transactions across a number of jurisdictions;
Transactions not in keeping with the investor’s normal activity, the financial markets in which the investor is active and the business which the investor operates;
Buying and selling of a security with no discernible purpose or in circumstances which appear unusual, e.g. churning at the client’s request;
Low grade securities purchased in an overseas jurisdiction, sold locally and high grade securities purchased with the proceeds; and
Bearer securities held outside a recognized custodial system.
Abnormal transactions
a number of transactions by the same counter-party in small amounts of the same security, each purchased for cash and then sold in one transaction, the proceeds being credited to an account different from the original account;
any transaction in which the nature, size or frequency appears unusual, e.g. early termination of packaged products at a loss due to front end loading; early cancellation, especially where cash had been tendered or therefund cheque is to a third party;
transfer of investments to apparently unrelated third parties;
transactions not in keeping with normal practice in the market to which they relate, e.g. with reference to market size and frequency, or at off-market prices; and
other transactions linked to the transaction in question which could be designed to disguise money and divert it into other forms or to other destinations or beneficiaries.
Settlements
Payment
Money launderers will often have substantial amounts of cash to dispose of and will use a variety of sources. Cash settlement through an independent financial adviser or broker may not in itself be suspicious; however, large or unusual settlements of securities deals in cash and settlements in cash to a large securities house will usually provide cause for further enquiry. Examples of unusual payment settlement may be as follows:
a number of transactions by the same counter-party in small amounts of the same security, each purchased for cash and then sold in one transaction;
large transaction settlement by cash; and
payment by way of cheque or money transfer where there is a variation between the account holder/signatory and the customer.

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