Answer of Cases/ Short Questions relating to Responsibilities

Question/ Case 1 Answer:

Directors are responsible for:

 Keeping proper accounting records

 Disclosing with reasonable accuracy at any time the financial position of the company

 Ensuring that the financial statements comply with applicable IAS and IFRS.

Question/ Case 2 Answer:

 Review and obtain photocopies of documents which have aroused her suspicions.

 Enquire into reasons for altered pages in books/documents etc.

 Investigate any apparent override/circumvention of company procedure, e.g. cancelling

a sales invoice instead of raising a credit note.

 Review previous management letters for any weaknesses facilitating misappropriations.

 Consider credit controller’s motives for putting chief accountant under suspicion, e.g.
working relationship/job threat.

 Take note of chief accountant’s standard of living; appropriate to his status?

 Consider whether past dealings with chief accountant have ever cast doubt on his
integrity.

 Increase analytical procedures on revenue and receivables, e.g. monthly revenue/

receipts of major customers/ extend circularization if trade receivables collection period
has increased.

 Discuss with engagement partner, who may wish to discuss with client (e.g. board of
directors).

Question/ Case 3 Answer:

Requirement (a) Informing the client:

i. Report to appropriate level of management.

ii. If believe that management or employees with significant roles in internal control are
involved or fraud results in material misstatement in financial statements report to those
charged with governance (e.g. audit committee).
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 iii. If integrity/ honesty of management or those charged with governance is in doubt, seek
legal advice.

Requirement (b) Audit report:

i. If error is corrected, no need to qualify.

ii. If correction is not made, then report should be appropriately qualified.

iii. If outcome of fraud is uncertain then a significant uncertainty paragraph should be

included.

iv. If outcome can be determined and amount is not adjusted in the financial statement
except for/disagreement.

Question/ Case 4 Answer:

Actions

 Check bank statement to confirm employee’s assertion.

 Report to nominated officer/ money laundering officer in firm.

 Avoid tipping off.

Reasons

 Represents proceeds of crime under Money Laundering Act.

 Criminal offence if auditor does not report suspicions of money laundering.

Question/ Case 5 Answer:

Auditor’s responsibilities

 To identify material misstatements in the financial statements.

 Plan, perform and evaluate work in order to have a reasonable expectation of detecting
material misstatement in the financial statements.

 No obligation to prevent fraud although it may act as a deterrent.

MD’s perception

 Auditor responsible for ALL fraud

 Lacks an understanding of materiality

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  Directors often rely on auditors for monitoring they should undertake themselves.

Alpha

 Fraud was not material to Alpha financial statements and consequently not auditor’s
responsibility.

Question/ Case 6 Answer:

Requirement (a) and (b)

Notes for a training session for junior staff on how to identify related party
transactions

Purpose of the training

To assist junior staff in the application of IAS 24 Related Party Disclosures and ISA 550 Related
Parties, and specifically on how to identify related party transactions.

Related parties

IAS 24 defines related parties as individuals or entities (e.g. companies) with more than a
simple business relationship with the client. This would be because they are directors, owners
or major investors of the client and can include family and close friends of the directors or
owners.

At the start of each audit you will be provided with an up-to-date list of known related parties.
It is important that if you come across any transactions involving these parties during the audit
you should record them on the audit file.

The directors should provide us with a complete list of these related party transactions.
However, we need to be certain that their list is complete, and by comparing the transactions
you find with the list from the directors we can obtain evidence as to its reliability.

General audit procedures

Unless we determine that the risk of non-disclosure of related party transactions is high, we
gain a significant amount of evidence needed from general audit procedures. These are listed in
(b) below.

Additionally, they may intentionally or otherwise leave out certain transactions from the list they
provide and you therefore need to be aware of indicators of potential undisclosed related party
transactions. These are given in (a) below.

If you notice any such transactions, record them on the audit file. If there is a significant
number of such transactions, immediately ask the manager for specific guidance on what action
to take.
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(a) List of possible features which would lead you to investigate a particular transaction to
determine whether it is a related party transaction.

i. Transactions which have unusual terms of trade, e.g. unusual prices, interest
rates, guarantees and repayment terms.

ii. Transactions which appear to lack a logical business reason for their occurrence.

iii. Transactions which are overly complex.

iv. Transactions which involve previously unidentified related parties.

v. Transactions which are processed in an unusual manner.

(b) Summary of the general audit procedures you would perform to ensure that all material
related party transactions have been identified.

i. Obtain a list of current known related parties, e.g. directors, other companies
with common directors, family members of directors, significant private company
investments of directors, associate or joint venture companies, key personnel
and significant investors (>20%).

ii. Ensure that the permanent file is updated for related parties.

iii. If it is the first year of the audit perform company search; otherwise review
statutory records to confirm directorships, other directorships and significant
investors.

iv. Discuss the list of related parties as disclosed by the directors as to its accuracy
and completeness.

v. Enquire of directors as to whether there have been any material transactions

with the related party, e.g. loans, purchase or sale of assets, consultancy fees.

vi. List all transactions disclosed by the directors.

vii. Review the accounting records before and after the year end for any large or
round sum amounts; investigate and analyze with reasons.

viii. Analyze all loans receivable or payable, and seek confirmation of identity of
lender or borrower.

ix. Review board minutes and enquire as to whether the company has provided any
guarantees.

x. Analyze the details of guarantees given and review the terms.

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 xi. Include confirmation of all related party transactions or lack of them within the
letter of representation.

xii. Check the accuracy of disclosure within the context of IAS 24.

Question/ Case 7 Answer:

Requirement (a) Notes for meeting regarding fraud

Before meeting

i. Check terms of engagement letter. Were there any special duties agreed with client
(specifically, any extra work on branch audits)?

ii. Schedule responses to this letter from the client.

iii. Check that the letter contained the usual paragraph regarding purpose of audit
procedures.

Why fraud not discovered

i. Remind Ray that the prevention and detection of errors and fraud are primarily the
responsibility of management.

ii. The purpose of audit procedures is not to discover errors and fraud, but to enable the
auditor to form his opinion on the financial statements: reasonable expectation of
discovering error and fraud.

iii. Weaknesses were pointed out in the last management letter, covering all branches of
similar size, together with suggestions for improvement.

iv. Discuss management’s response – reasons why suggestions not implemented.

v. Audit working papers give details of the work done at Goose Green, which was in
accordance with ISAs.

Effect on the accounts

i. Amount material in context of branch – particularly as it may have turned a profit into a
loss – but probably not in the general context of the company (3.3% of profit before
tax). 20X1 accounts do not need adjustment unless fraud found to be more extensive.

ii. Potential effect of control weaknesses not considered material enough to warrant a
qualification in 20X1 accounts, but this matter is reviewed each year.

iii. Qualification possible this year if there is significant breakdown in controls and/or an
actual fraud (has the Goose Green fraud continued into 20X2?).
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Requirement (b) Areas to consider to establish extent of fraud/ loss and why
Area
 How long the particular clerk has worked
at the Goose Green (GG) branch.
 Relationships between staff at the GG
branch.
 Other branches with poor control
environments (all?).
 Relationships between staff at the GG
branch (especially the sales ledger clerk)
and staff at other branches.
 Whether the GG branch manager runs
other branches.
 How the fraud was discovered (chance or
management control).
 Recoverability of the amount from the
clerk.
 Likelihood of false claims from credit
customers (i.e. having heard of the fraud,
customers claim to have settled their
accounts).
 Adequacy of fidelity insurance.
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Why consider
 To establish how long the fraud is likely to
have gone on.
 Possibility of collusion.
 To establish general likelihood of fraud at
other branches.
 Could the fraud have been 'sold' to staff at
other branches?
 Could indicate other branches where fraud
might be undetected.
 If by management control, then provides
some comfort that other frauds would be
detected and therefore, generally, fraud
less widespread.
 To establish actual monetary loss.
 To establish any knock-on monetary loss.
 Is the loss recoverable?