Fraud risk – NBC Institute

AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

Question

Mr. Johnson is the Senior Partner of Johnson, Odewole, Thomas & Co., Chartered Accountants. During the last audit of Mandarin Manufacturing Plc, which the firm did with Messrs Ark Professional Services (APS) for the year ended 30 September, 2020, Mr. Johnson expressed displeasure on some of the conclusions reached by APS on certain audit areas. The manager in charge of the audit at Johnson, Odewole, Thomas & Co. had drawn Mr. Johnson’s attention to matters marked “For Partner’s Attention.” Discussions with the corresponding partner of APS on these matters were considered unsatisfactory.

Mr. Johnson’s views differed significantly from those of the corresponding partner of APS. It was agreed to proceed to the board meeting where these disputed positions would be presented and discussed with the directors before a final decision was reached. Of significance is the acquisition of a property from a former staff member for the opening of a new branch warehouse. The acquisition process was hurried and exceeded the capital expenditure provisions for the period. Mr. Johnson’s team viewed the acquisition as a potential fraud on the company, while APS aligned with the director of finance, who considered it a normal transaction.

At the board meeting to discuss the financial statements, members were divided between the two audit firms’ views, leading the chairman to reschedule the meeting. He requested additional information on both parties’ positions and asked them to harmonize their views before the next meeting the following day.

Required:

a. Evaluate the justification or otherwise of an entity having joint auditors. (8 Marks)

b. Following the concerns of Johnson, Odewole, Thomas & Co., present the options available to the firm. (5 Marks)

c. Discuss the points on which the Chairman needs to base his decision, according to standard acquisition procedures. (7 Marks)

d. If the Chairman agrees with the position of Johnson, Odewole, Thomas & Co., determine the reporting requirement and draft an appropriate report for inclusion in the auditors’ report. (6 Marks)

e. Discuss the composition of items that could be marked “For Partner’s Attention” during the conclusion of an audit process. (4 Marks)

Answer

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Tags: Acquisition, Audit report, Fraud risk, oint Audit, Partner's Attention
Level: Level 3

Topic: Group audit
Series: NOV 2022

AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

Question

You are carrying out the audit of the sales system of Sofa Limited, a company that manufactures office furniture. The company has annual sales revenue of N150 million. All the shares are owned by Sofi and her husband Andy. Neither is involved in the running of the business. The chairman is responsible for running the business, but does not own any of the company’s shares.

The bookkeeper maintains all the accounting records and prepares the annual financial statements.

A stand-alone computer is used to maintain the accounting records, including those of the sales system. Standard accounting software is used, which was purchased from an independent supplier. For the sales system, a sales ledger is maintained to which sales invoices, credit notes, cash, and discounts are posted. When sales invoices are posted and credit notes are input into the computer, the value is updated in both the sales ledger and the nominal ledger.

You have determined that the documents and personnel involved in the sales ledger are as follows:

When order is received by telephone, it is recorded by the sales clerk in the sales department. This is usually done on a notepad.
The sales clerk will then pass the sales order to the stores, to the goods outwards department where the office furniture is kept.
If the goods ordered are in inventory, then the goods will be loaded onto one of the delivery trucks. A two-part dispatch note will be prepared to accompany the sales order. This is usually done before the stores have received the sales order from the sales department.
The goods are delivered to the customer together with the top copy of the goods dispatch note.
The driver on his return will inform the sales department that the delivery has been successful and will maintain the last copy of the goods dispatch note in the stores.
At the end of the week, the sales department prepares a sales invoice for the customer.
When the post is received, it is opened by a staff of the sales department.
The person opening the post will both make a list of all the cheques
received and that same person will then go to the bank and bank the
cheques. Upon return, the remittances and cheque paying-in book are
passed to the book keeper for updating the receivables ledger.
The receivables ledger is reviewed by the book keeper on a monthly basis
to see which customers are above their credit terms and will inform the
sales staff who to telephone and chase their debt.

Required:

a. Identify and describe eight weaknesses in the sales system of Sofa Limited. (8 marks)

b. Provide recommendations to rectify each of the weaknesses identified. (8 marks)

c. Explain why segregation of duties is important in an internal control system. (4 marks)

Answer

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Tags: Control weaknesses, Fraud risk, Internal Control, Sales System, Segregation of Duties
Level: Level 2

Series: MAY 2016

AA – Nov 2014 – L2 – Q4 – Fraud and Error

Describe how internal and external auditors handle fraud and error risks, and evaluate specific fraud risks at Rock Holidays.

Question

Fraud and error present risks to an entity. Both internal and external auditors are required to deal with risks in an entity. However, the responsibilities of internal and external auditors in relation to the risk of fraud and error differ.

Required:

a. Explain how the internal audit function helps an entity with the risk of fraud and error. (7 Marks)

b. Explain the responsibilities of external auditors with respect to the risk of fraud and error in an audit of financial statements. (7 Marks)

c. Rock Holidays is an independent travel agency. It does not package holidays itself. It takes commission on holidays sold to customers through its chain of high street shops. Staff are partly paid on a commission basis. Well-established tour operators run the holidays that Rock Holidays sells. The network reservations system through which holidays are booked and the computerized accounting system are both well-established systems used by many independent travel agencies.

Payments by customers, including deposits, are accepted in cash and by debit and credit cards. Rock Holidays is legally required to pay an amount of money (based on its total sales for the year) into a central fund maintained to compensate customers if the agency should cease operations.

Describe the nature of the risks arising from fraud and error to which Rock Holidays is subject. (6 Marks)

Answer

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Tags: Auditor Responsibilities, Corporate Governance, External audit, Fraud risk, Internal Audit, Rock Holidays
Level: Level 2

Topic: Fraud and Error

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

Question

Afrak and Associates is an Audit Firm that has been providing audit and assurance services for over 20 years. The firm has recently received a request from a new client, XYZ Ltd., to provide audit services. The audit engagement will cover the financial statements for the year ended December 31, 2022.

Required:
Explain FIVE (5) factors Afrak and Associates must consider prior to accepting the audit engagement, paying attention to, risk areas that may give rise to liability, including fraud, error, and non-compliance.
(10 marks)

Answer

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Tags: Audit Engagement, Audit Risk, Client Acceptance, Ethical considerations, Fraud risk
Level: Level 2

Topic: Audit and Assurance Risk Environment, Professional and Ethical Considerations
Series: NOV 2023

AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

Question

Required:

a. Evaluate the justification or otherwise of an entity having joint auditors. (8 Marks)

b. Following the concerns of Johnson, Odewole, Thomas & Co., present the options available to the firm. (5 Marks)

c. Discuss the points on which the Chairman needs to base his decision, according to standard acquisition procedures. (7 Marks)

d. If the Chairman agrees with the position of Johnson, Odewole, Thomas & Co., determine the reporting requirement and draft an appropriate report for inclusion in the auditors’ report. (6 Marks)

e. Discuss the composition of items that could be marked “For Partner’s Attention” during the conclusion of an audit process. (4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Acquisition, Audit report, Fraud risk, oint Audit, Partner's Attention
Level: Level 3

Topic: Group audit
Series: NOV 2022

AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

Question

The bookkeeper maintains all the accounting records and prepares the annual financial statements.

You have determined that the documents and personnel involved in the sales ledger are as follows:

When order is received by telephone, it is recorded by the sales clerk in the sales department. This is usually done on a notepad.
The sales clerk will then pass the sales order to the stores, to the goods outwards department where the office furniture is kept.
If the goods ordered are in inventory, then the goods will be loaded onto one of the delivery trucks. A two-part dispatch note will be prepared to accompany the sales order. This is usually done before the stores have received the sales order from the sales department.
The goods are delivered to the customer together with the top copy of the goods dispatch note.
The driver on his return will inform the sales department that the delivery has been successful and will maintain the last copy of the goods dispatch note in the stores.
At the end of the week, the sales department prepares a sales invoice for the customer.
When the post is received, it is opened by a staff of the sales department.
The person opening the post will both make a list of all the cheques
received and that same person will then go to the bank and bank the
cheques. Upon return, the remittances and cheque paying-in book are
passed to the book keeper for updating the receivables ledger.
The receivables ledger is reviewed by the book keeper on a monthly basis
to see which customers are above their credit terms and will inform the
sales staff who to telephone and chase their debt.

Required:

a. Identify and describe eight weaknesses in the sales system of Sofa Limited. (8 marks)

b. Provide recommendations to rectify each of the weaknesses identified. (8 marks)

c. Explain why segregation of duties is important in an internal control system. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Control weaknesses, Fraud risk, Internal Control, Sales System, Segregation of Duties
Level: Level 2

Series: MAY 2016

AA – Nov 2014 – L2 – Q4 – Fraud and Error

Describe how internal and external auditors handle fraud and error risks, and evaluate specific fraud risks at Rock Holidays.

Question

Required:

a. Explain how the internal audit function helps an entity with the risk of fraud and error. (7 Marks)

b. Explain the responsibilities of external auditors with respect to the risk of fraud and error in an audit of financial statements. (7 Marks)

Describe the nature of the risks arising from fraud and error to which Rock Holidays is subject. (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Auditor Responsibilities, Corporate Governance, External audit, Fraud risk, Internal Audit, Rock Holidays
Level: Level 2

Topic: Fraud and Error

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Engagement, Audit Risk, Client Acceptance, Ethical considerations, Fraud risk
Level: Level 2

Topic: Audit and Assurance Risk Environment, Professional and Ethical Considerations
Series: NOV 2023

Question Tag: Fraud risk

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AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

AA – Nov 2014 – L2 – Q4 – Fraud and Error

Describe how internal and external auditors handle fraud and error risks, and evaluate specific fraud risks at Rock Holidays.

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

AA – Nov 2014 – L2 – Q4 – Fraud and Error

Describe how internal and external auditors handle fraud and error risks, and evaluate specific fraud risks at Rock Holidays.

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

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AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

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AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

You're reporting an error for "AA – May 2016 – L2 – Q4 – Internal Control Systems"

AA – Nov 2014 – L2 – Q4 – Fraud and Error

Describe how internal and external auditors handle fraud and error risks, and evaluate specific fraud risks at Rock Holidays.

You're reporting an error for "AA – Nov 2014 – L2 – Q4 – Fraud and Error"

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

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AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

You're reporting an error for "AAA – Nov 2022 – L3 – SB – Q1 – Group Audits"

AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

You're reporting an error for "AA – May 2016 – L2 – Q4 – Internal Control Systems"

AA – Nov 2014 – L2 – Q4 – Fraud and Error

Describe how internal and external auditors handle fraud and error risks, and evaluate specific fraud risks at Rock Holidays.

You're reporting an error for "AA – Nov 2014 – L2 – Q4 – Fraud and Error"

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

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