MP221 Forensic Accounting and Fraud Examination Assignment Sample

Contents

Question-1:

Question-2:

Question-3:

Question-4:

References:

Auditing and Assurance - Question 1

1. As per IAS-37; Provisions, Contingent Asset and Liabilities, management is responsible to account for it and reflect them in financial statements. Since the claim has been filed but not yet approved, no adjustment is needed. But it needs to disclose in F/S because it would have a significant effect on users of financial statements. If the management does not disclose the information the auditor shall ask them to do so and if they refused to do so auditor shall express qualified opinion.
2. A provision can be recognized only if,

• There must be a present obligation as a result of past event.
• The outflow of economic benefits must be probable (50%)

Since they are based only on estimations and does not have probable effect, auditor is not required to take any action. The auditor opinion in this will remain unmodified.

• As settlement exists and is the result of a past event, it is an adjusting event as it existed at balance sheet date. Since the settlement was done before the closing of financial year so balance of $150,000 ($300,000-$150,000) should be provided in the current years financial statements. If not provided in F/S auditor shall ask the management to do so otherwise auditor will give qualified opinion.

1. This is an adjusting event case as debtor goes into liquidation after balance sheet date that confirms that condition existed at B/S. The situation occurred after the F/S was signed and issued but it would have material effect on Financial Statement if no adjustment is made.
2. If subsequent event occurs after the issuance of F/S, it is not required to be adjusted or disclosed. In given scenario the flood occurred after the finalization of F/S and audit report and therefore auditor is not liable to make any adjustments.

Auditing and Assurance - Question 2

1. As per IAS-08, financial statements shall be adjusted retrospectively if there is any error in the prior year statements. F/S shall reflect the correction of prior period error.

In the given case, the company is not willing to make backdated adjustments. Therefore it is a scope limitation and its effect is material. It is the responsibility of auditor to ask management to correct the errors if they refused to do so the auditor shall determine its implications on audit report. And shall give Modified opinion.

1. Depending upon policy of company if the company records the inventory on arrival than no adjustment is needed. And the auditor opinion in this case will be unmodified.

But if the company’s policy is to recognize it when the goods are in transit then it should be reflected and recognized in financial statements. Considering the goods purchased is of material amount, it needs to adjusted and reflected in F/S by the management. But it is not shown in financial statements. Therefore it is a material misstatement. Auditor’s responsibility in this regard is to ask the management to make necessary adjustments. If they refused to do so auditor shall express qualified opinion.

• In the given case, the increment in profit has been showed by 50% but in actual it has raised only by 14%. Since the 50% rise reflects material amount it is material misstatement.

Auditor’s responsibility in this is to discuss the matter with the management and request them to adjust it in financial statements. If they refuses to do so, auditor shall consider its implications on audit report and shall give modified opinion (qualified opinion because it is the scope limitation whose effect is material).

1. When the auditor is unable to obtain sufficient appropriate audit evidence, on which his decision is to base there is a scope limitation.

In the given case auditor is unable to conduct the stock take due to flood. Therefore shall try to perform alternative procedures. If auditor is unable to obtain the evidence from alternative procedures also Auditor shall then consider its effect on audit report. And he shall express qualified opinion as the effect is material.

1. According to going concern assumption, entity shall continue to operate in foreseeable future (at least 12 months).

Management has the responsibility to make assessment whether material uncertainty exists or going concern assumption is accurate. If uncertainty exists it should be disclosed appropriately.

Auditor shall perform procedures to obtain evidence whether material uncertainty exists or not and shall consider its implications on audit report.

In the given scenario client has disclosed adequately. But it is difficult for the entity to continue its operation as the profit is declining. Therefore it is the responsibility of auditor whether going concern assumption is accurate. Financial statements are prepared on going concern basis therefore auditor shall give adverse opinion.

Auditing and Assurance - Question 3

1. Risk: On Valuation of stock (stock is recorded in financial statements at appropriate amounts and adjustment related to valuation has been recorded.), chance of fraud and theft.

Therefore reconciliation of stock has to be made to identify correct amount of stock held.

Procedures: Investigate: the receipt In and out for 20 days. And check the stock after 20 days. Calculate the amount of stock by working backwards.

Recalculation: Calculate again and identify errors.

Scan Ledger: Scan ledger to identify unusual entries and possible misclassification.

Inquiry:  Inquiry/discuss with the management.

Inspection/Vouching: Examination of transactions with its supporting documentary evidence.

1. Risk: There is the weakness in the clients internal control system. Therefore, reliance on controls cannot be placed. Internally generated reports may have error. SODs may not be properly implemented therefore increasing the risk of fraud.

Therefore the auditor has to increase the risk assessment procedures. The auditor will rely more on test of details.

Procedures: They may include:

Recalculation: consists of checking the mathematical accuracy of documents and records that can be done electronically/ manually.

Re-performance: Auditor will perform independently procedures or controls that were originally performed by the client as a part of their internal control system.

• Risk: High risk of fraud and misstatement is present. Management may inflate the sales figures. Cut-off issues may arise. Sales should therefore be booked when risk and reward is transferred to the concerned party. Otherwise they may book sales and inflate it. Materiality will be affected as it is usually a percentage of asset or revenue. Low materiality means more work has to be performed now.

Procedures: Control testing of new process. Check cut-off (transactions and events belong to correct accounting period).

Going Concern: High competition and decline in sales may result in going concern issue. Therefore auditor needs to check the going concern assumption.

Auditing and Assurance - Question 4

Threats:

Self Interest Threat: Threat that judgment of a team member will be inappropriately influence because of a financial interest held by an assurance team member.

• In given case, there is an overdue audit fees for which the work has been provided to Launch Ltd.
• Launch Ltd has offered the role of financial controller to audit team senior. (Employment negotiations).

Self-Review Threat: Threat that assurance team member will not appropriately evaluate result of previous service performed by himself or by another individual of his firm. In the given case:

• The firm has been providing services of tax, advisory and assurance to client for the past six years. Therefore work conducted by auditor can be included in other services.

Familiarity Threat: Threat that assurance team member will be too sympathetic to the interest of client because of long or close relationship with client. 

• There is a long association of assurance team members and client staff.

Intimidation Threat: Threat that assurance team member is deterred from acting objectively.

Safeguards:

• Fees should be paid before signing of audit report. Agree repayment with strict schedule.
• Non assurance services should not be performed by assurance team member.
• If service is performed by assurance team member a senior member (not part of audit team) should review the work. Remove the concerned team member who has association with a senior person.
• Review the work done by team member.
• Discuss the matter with Those Charged with Governance.

Part-ii:

Auditors must comply with the code of ethics established under ISA. Auditors should exercise professional and moral assessment when carrying out professional task. These include:

Integrity: Auditor should be straight forward, honest, fair and truthful in his professional dealings and business relationship.

Professional competence and due care: It imposes that auditor should act diligently in accordance with the applicable standards and requirements on timely basis, strives for improvement of skills.

Objectivity: Auditor should not compromise his professional judgment because of bias, undue influence or conflict of interest.

In the given case it is the ethical duty of auditor to reveal that Big Dumper & Pharma Ltd has no contract. If any irregularity exists company must have to pay a large penalty that will ultimately affect the financial performance. Therefore they should disclose this fact.

References for Forensic Accounting and Fraud Examination

Johari, R. J., Mohd‐Sanusi, Z., & Chong, V. K. (2017). Effects of auditors' ethical orientation and self‐interest independence threat on the mediating role of moral intensity and ethical decision‐making process. International Journal of Auditing, 21(1), 38-58.

Kranacher, M. J., & Riley, R. (2019). Forensic accounting and fraud examination. John Wiley & Sons.

Nacif, S. S. (2018). Disclosure level and compliance with IAS 37: is there any residual legal tradition effect among companies cross-listed in the US? (Doctoral dissertation).

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