Audit Approach 5 / 5

Sample
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Question 5a

You are an audit manager working for Raven & Co, a firm of Chartered Certified Accountants. You specialise in the audits of companies in the information technology industry. Issues have recently arisen in relation to two different clients which require your attention.

(a) Gull Co is a large, private company which is currently owned by the Brenner family, who own the majority of the company’s shares. Following the completion of the audit this year, the finance director, Jim Brenner, contacted you and told you that the family is considering listing the company on the stock exchange. They would like to recruit one of your audit partners for a six-month period to help prepare for the listing. As the board is concerned that the necessary skills and personnel to support the listing are not currently present within the company, Jim Brenner has also requested that your firm assist them in identifying and recruiting new members to the board.

Currently, most of the executive director roles are performed by family members, except for the directors of operations and human resources, who are both long-serving employees. The board operates no audit committee and there is only one non-executive director, who works elsewhere as an IT consultant. Other than the recruitment of new board members, Gull Co is not planning on making any changes to its governance structure prior to or subsequent to listing.

Gull Co has a financial year ending 31 March 2017, and audit planning is scheduled to take place in January 2017.

Required:
In relation to the information provided for Gull Co, comment on:

(i) The ethical and professional matters in relation to the recruitment requests made by Gull Co;

(ii) The implications the governance structure and proposed listing may have on the audit process.
Note: The total marks will be split equally between each part. (10 marks)

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Question 4b

You are an audit manager in Cedar & Co, responsible for the audit of Chestnut Co, a large company which provides information technology services to business customers. The finance director of Chestnut Co, Jack Privet, contacted you this morning, saying:

‘I was alerted yesterday to a fraud being conducted by members of our sales team. It appears that several sales representatives have been claiming reimbursement for fictitious travel and client entertaining expenses and inflating actual expenses incurred.

Specifically, it has been alleged that the sales representatives have claimed on expenses for items such as gifts for clients and office supplies which were never actually purchased, claimed for business-class airline tickets but in reality had purchased economy tickets, claimed for non-existent business mileage and used the company credit card to purchase items for personal use.

I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses. All of the alleged fraudsters have been suspended pending an investigation, which I would like your firm to conduct.

We will prosecute these employees to attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your firm would need to provide an expert witness in the event of a court case. Can we meet tomorrow to discuss this potential assignment?’

Chestnut Co has a small internal audit department and in previous years the evidence obtained by Cedar & Co as part of the external audit has indicated that the control environment of the company is generally good. The audit opinion on the financial statements for the year ended 31 March 2011 was unmodified.

Required:

Explain the matters that should be discussed in the meeting with Jack Privet in respect of planning the investigation into the alleged fraudulent activity. (6 marks)

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