- 20 Marks
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)
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