BUACC5935 Financial Audit Fraud Assignment Sample

• Subject Code : BUACC5935
• University : Federation University My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Auditing

Auditing and Assurance Services - Part A

Auditing and Assurance Services - Solution 1

1. Relying on the information in ASA 240 (refer to link above). Explain the difference between the responsibility of management and those charged with governance and the auditor in relation to the prevention and detection of fraud.

Though ASA 240 deals with frauds in an audit of a financial report and the auditor’s responsibility towards its, but surely it also gives a clear distinction between the responsibility of both the parties’ i.e Auditor and Management which as per ASA240 is:-

Responsibility of Management: It is the primary responsibility of the management for the prevention and detection. It is management duty to design a robust mechanism to prevent, which can reduce the chances for fraud in a required place. System should be like that it should persuade individuals to not commit fraud due to like hood of punishment and sure detection. This involves the honesty and ethical culture in overall governance. 

Responsibility of Auditor: An Auditor who has conduct the audit must take a written assurance from the Management responsible for the governance to provide financial statement and report which is free from material misstatement. There are few inherent limitations in audit procedures and because of this some material misstatements of the financial report may get slipped and is not detected, so it is very important that audit plan is prepared in detail and performed in accordance with Australian Auditing Standards to prevent such frauds and misrepresentation.

As described in ASA 200,4 the potential effects of inherent limitations are particularly

As per one of classical case of Harris Scarfe , there was a good debate happened that time about the responsibly of Auditors and Management , And as one of the research study on the subject by O. Kavrar and B. Yılmaz,2004.

It was observed in this case:- Management’s Responsibility Vs Auditor’s Responsibility It are often determined that the most unethical issues arise from the management of Harris Scarfe also from the audit firms Ernst & Young and Pricewaterhouse Coopers. Management’s act, inflating the annual profit, conflicts with the ethical behavior which should be implemented. According to Gay & Simnett [3], sections 292-306 of Corporations Act 2001 require the directors to prepare annually financial reports, director’s declaration and any other necessary information in a true and a fair view, unless exempted under s.301 (2). Besides that, section 296(1) of Corporations Act 2001 states that directors have to prepare the company’s financial records according to accounting standards. In the above case it was concluded that there is no doubt that accounting irregularities are less likely to occur in an organization with effective corporate governance practices. However, the study above showed that the corporate governance practices in Harris Scarfe were less than ideal. Neither the board of directors nor the audit committee possessed the recommended degree of independence to enable them to act an optimal level.

Auditing and Assurance Services - Solution 2

In general society there is perception about the auditor, that Auditor is kind of financial police who has the ability and authority to check and detect various or any type of fraud and if company is being audited by a good reputed Auditors chances of fraud and misstatement are almost nill.

But there is limitation of audit also which society may not know due to lack of knowledge related to accounting standards, e.g the public was seeking answers after that big corporate collapse in Australia somewhere in 2010. Everyone thought that how come it is possible that in spite of audit by such big and reputed auditors the company was able to manage such fraud and misstatements. There was a belief that this may be due to gap in expectation between users of the financial statements and Auditors. There are few question which keep on arising due to society perception about the Auditors like

Should an auditor have seen the early sign of such collapses? And is it under the roles and responsibility of Auditory? And is it fair to blame Auditors for such collapses?

All these questions arise due to lack of knowledge about this profession in general and overall perception attached to this profession.

Audit is not a guarantee of truthfulness and fairness of that entities operations, according to ISA (International Standard on Auditing), the auditor’s opinion does not assure the future viability for the efficiency or effectiveness with which management has conducted the affairs of the entity. Audit also does not give assurance that company’s financial status is what it is shown.

Auditing and Assurance Services - Solution 3

3. Provide three reasons why an auditor presumes that there are potential risks of fraud relating to revenue recognition in entities. Make sure that you explain your reasons clearly.

It is the duty of every Auditor to start the process of audit with a doubt, they have to be a critics eyes to safeguard the interest of the company, govt and all the stakeholder’s involved. So, Auditor have to presume that there are potential risks of fraud in recognizing the revenue, which helps them to prepare that questionnaire which gives faith of fairness and transparency to all stakeholders.

The following are examples of circumstances which forces an auditor to think about the risks of frauds that may indicate the possibility that the financial report may contain a material misstatement resulting from fraud.

Discrepancy in Accounting record may be following:

May be a transactions is recorded wrongly like not recorded completely or timely or with a wrong amount , accounting period or may be in wrong head.

A record or an entry which is without a proper documentary support or evidence.

Adjustment entries generally done at the end of financial period with significant affect.

Unauthorized access to systems and records which by mistake also can result into issues related to fraud and misstatements

Auditing and Assurance Services - Solution 4

Following are two case examples of revenue frauds or misstatement by some Australian companies which was published in media and journals, reports as below Provide two case examples of revenue misstatements that have been reported in the media. 

As per the report of the reputed media publication Reuters:

Business News

November 27, 2019 / 9:27 AM

Sydney (Reuters) - The CEO and chairman of Australia’s Westpac Banking Corp (WBC.AX) are out after financial crime watchdog AUSTRAC accused the bank of 23 million breaches of anti-money laundering laws, including payments related to child exploitation.

The Westpac breaches are just the latest in a long line of finance sector scandals in Australia, enough to prompt a year-long inquiry into industry misconduct that was held in 2018.

Here are some involving major companies:

2014 - A Senate inquiry finds Commonwealth Bank of Australia’s (CBA.AX) financial planners forged client signatures to facilitate profit-generating product switches between 2006 and 2010, among widespread misconduct.

2017 - AUSTRAC accuses CBA of allowing 55,700 payments of A$10,000 or more to pass through its branches and “intelligent” electronic teller machines without being reported to the authorities as required. In a court filing, AUSTRAC says many of the payments were made by people convicted of drug dealing, using CBA to launder drug money by sending it offshore.

Co Harris Scarfe Limited has experienced one of the biggest corporate collapses in Australia with debts of $265 million. Undoubtedly, the results of this collapse have negatively affected on the accounting profession as well as the auditing profession in Australia. At that time in Australia, in the beginning of 2000s and 2001, other collapses occurred as well. For instance, the collapse of HIH Insurance, OneTel and Ansett Australia all happened over and over in a short time span in the beginning of 2000s. The recent debate about the corporate collapses and accounting scandals had a main point about the need for structure to assure that financial declarations contain dependable information for decision making process.

Auditing and Assurance Services - Part B

Auditing and Assurance Services - Solution 1

Business risk is the kind of exposure which might affect the company by lowering its profits or lead it to fail.

Something which threatens a company’s ability to meet its financial goal or target is known as business risk.

Anything that threatens a company's ability to meet its target or achieve its financial goals is called business risk. The source of such risks may be from anywhere so it is not always to blame managers or company owner. It may be internal or external source.

Business risk may be influenced by following:-

• Competitions or competitors
• Government regulations
• Economic or overall political environment
• Some Natural Calamities
• Customer preferences and demands, Volumes of Sales etc.

As per the Auditor’s annual report Following risk are in terms of various risk management areas for Woodside:-

Management Risk framework is designed to provide a consistent approach to identify , assess and manage risk which has potential to affect materiality and long term or short term objectives.

The Framework is aligned with the intent of the International Standard ISO31000 for risk management and assesses potential risk in areas such as health and safety, environment, finance, reputation and brand, legal and compliance, social and compliance consequences.

But still Auditor feels that like any other big and large company. Woodside may also have following business risks and as per their annual report they have identified such risk as follow:

Commodity Risk :-The Group's income is presented to ware value vacillations. Ware value dangers are estimated by observing and stress testing the Group's figure budgetary situation to supported times of low oil and gas costs. This examination is routinely performed on the Group's portfolio and as required, for discrete tasks and acquisitions. As at the detailing date, the Group had no budgetary instruments with material introduction to ware value hazard.

Foreign Exchange Risk:- Foreign trade chance emerges from future duties, budgetary resources and monetary liabilities that are not named in US dollars. Most of the Group's income is designated in US dollars. The Group is presented to remote cash hazard emerging from working and capital use brought about in monetary standards other than US dollars, especially Australian dollars. Estimating the presentation to remote trade chance is accomplished by normally observing and performing affectability examination on the Group's monetary position. A sensibly conceivable change in the swapping scale of the US dollar to the Australian dollar (+12%/ - 12% (2018: +12%/ - 12%)), with every single other variable held steady, would not materially affect the Group's value or the benefit or misfortune in the present time frame. Allude to Notes C.1, C.2, D.2, D.4 and D.7 for detail of the groups of money and money reciprocals, enthusiasm bearing liabilities, receivables, payables and rent liabilities held at 31 December 2019. So as to support the outside trade hazard and loan cost chance (allude to Section C) of a Swiss Franc (CHF) designated medium term note, Woodside holds various cross-money financing cost trades (allude to Note C.2). The point of this fence is to change over the fixed intrigue

Liquidity Risk

Management Liquidity risk arises from the financial liabilities of the Group and therefore the Group’s subsequent ability to satisfy its obligations to repay financial liabilities as and once they fall due. The liquidity position of the Group is managed to make sure sufficient liquid funds are available to satisfy its financial commitments during a timely and cost-effective manner. The Group’s liquidity position is continually reviewed, including income forecasts, to work out the forecast liquidity position and maintain appropriate liquidity levels. At 31 December 2019, the Group features a total of $6,952 million (2018: $3,918 million) of obtainable undrawn facilities and cash at its disposal. The maturity profile of interest-bearing liabilities is disclosed in Note C.2, trade and other payables are disclosed in Note D.4 and lease liabilities are disclosed in Note D.7. Financing facilities available to the Group are disclosed in Note C.2.

Credit Risk Management

Credit risk is that the risk that a counterparty won't meet its obligation under a financial instrument or customer contract, resulting in a loss to the Group. Credit risk arises from the financial assets of the Group, which comprise trade and other receivables and deposits with banks and financial institutions. The Group manages its credit risk on trade receivables and financial instruments by predominantly handling counterparties with an investment grade credit rating. Customers who wish to trade on unsecured credit terms are subject to credit verification procedures. Receivable balances are monitored on an ongoing basis. As a result, the Group’s exposure to bad debts isn't significant. The Group’s maximum credit risk is restricted to the carrying amount of its financial assets.

Operational Risk

It may be risky operationally because of their existence in, though it scattered but still a major portion of the overall operation is based Scaborough gas field. So in case any emergency or natural or political or any environment may create a huge problem for the overall operations of the company.

As per Woodside Annual report, it is now holds the following interest in Joint Operations relating to the Scarborough development: • a 75% interest in WA-1-R and a 50% interest in WA-62-R, which together contain the Scarborough gas field; • a 50% interest in WA-61-R which contains the Jupiter gas field; and • a 50% interest in WA-63-R which contains the Thebe gas field.

Auditing and Assurance Services - Solution 3

2. Results of the analytical Procedures …, Key Ratios and Trend Analysis as required by the question

With the help of financial data following ratios were calculated and few trends were established related to Income, Earning per share their production cost etc.

From the above figures we can see that there are huge difference in Earnings from 2018 to 2019, which indicates about the some discrepancy about the data which demands a recheck if everything is fine, may be an operational issue which has increased the production cost and there by a major dip has come in the earning from year 2018

Auditing and Assurance Services - Solution 3

Inherent risk: Considered the foremost pernicious of the main audit risk components, inherent risk cannot be easily avoided through increased auditor training or creating controls within the auditing process. Nevertheless, it's one among the risks auditors and analysts must search for when reviewing financial statements, a standard samples of Inherent Risk

Inherent risk is common within the financial services sector. the explanations include the complexity of regulating financial institutions (the large and ever-changing amount of rules and regulations), the massive networks of related companies, and therefore the development of derivative products and other intricate instruments which require complicated calculations to assess.

Financial institutions often have longstanding and sophisticated relationships with multiple parties. A company could be involved several different entities directly , each controlling special-purpose vehicles and other off-balance sheet entities. Each organizational structure level may need large numbers of investor and client relationships. Related parties are notoriously less transparent than separate entities, too.long with control risk and detection risk.

And if we see the numbers above and this trends of Return on equity which was 8 % in 2018 and came down to 2% in 2019 and production cost trend also shows that cost in 2018 has gone sharply high indicating some inherit risk. Earning has gone down almost 500% down which is not a normal situation and required further investigation.

If we see the Income trend of last 5 years we can see there is not much variation and trend line is also rising upwards straight showing increase in revenue year by year and cost has also showing a similar trend.

Auditing and Assurance Services - Solution 4

Risk of material misstatement is the risk that the financial statements contain a material misstatement due to fraud or error prior to the audit, In the above case of Woodside financial statement we can easily make out seeing revenue and cost trend that they are ok but still there is operational cost which has increased sharply showing a different trend which might be result either some misstatement or some big calculation error in the overall financial system may be for this year or past years. For Key Account which may have inherit risk is COST OF REVENUE which is production cost the percentage has % from last few years

So there may be a risk of an error of omission which has occurred and skipped from audit also

Control risk: Control risk occurs when a financial misstatement results from a lack of proper accounting controls in the firm. This is most likely to surface in the form of fraud or lazy accounting practices.

Or maybe it is a misstatement from the company side with some bad intention or kind of fraud

Detection Risk: It is also possible that auditors simply fails to detect easy to notice error also in financial statements. This is known as detection risk. Usually to detect such risks , auditors generally increase the sample size for testing and auditing.

Auditing and Assurance Services - Solution 5

Audit Materiality – The concept of materiality is adopted by the Auditor both in performing and planning of the audit. The Auditor followed the materiality concept as it relates to the importance of the transaction, and to determine any discrepancies. The Auditor followed the materiality because at the final stage they will express their opinion as to whether the financial statement is prepared with all the appropriate materials.

Planning Materiality generally refers to the misstatement amount set by the auditors at the initial stages of Audit program based on the overall financial statements.

Planning materiality used by the auditor to assess whether the misstatement as individual or aggregate materially misstated in the financial statements, and such misstatements could also be misleading and user might make a wrong decision based on that incorrect financial information.

Example and calculation:

• For example, as per the extract from entity financial statements, total assets amount USD 1,000K and total revenues amount USD 500K.
  Based on auditor understanding associated with the possible risks that would possibly happen, the auditor decides to settle on 0.8% of total sales revenue as materiality. supported this, we get USD 4K because the planning materiality of monetary statements.
  • This 4K planning materiality is that the amount that set by the auditor to assess the materiality to the financial statements during their audit If misstatement is found and therefore the amount is adequate to or above this, adjustment is required.
  • By using the 4K of designing materiality, we will calculate performance materiality (tolerable misstatements) to financial statements.
  • As mention above, the auditor must set the performance materiality to but financial statements’ materiality or planning materiality. it's normally calculated by setting the share of designing materiality. Let say from 50% to 80% for the financial statements that have fewer risks to financial statements.
  • However, for financial statements that have high risks of misstatement, the performance materiality is generally low percentages of designing materiality. In such a case, auditors rank from 20% or 30% something.

Conclusion on Auditing and Assurance Services

Planning material is that the materiality to financial statements that auditors set within the planning stages. It is often an equivalent because the materiality concept within the context of the budget.
Any misstatements or omission that reach planning materiality level required adjustment to make sure that the financial statements are true and fair.

Reference List for Auditing and Assurance Services

https://www.investopedia.com/ask/answers/041615/what-are-some-examples-inherent-risk.asp

https://business.tutsplus.com/tutorials/the-main-types-of-business-risk--cms-22693

https://in.reuters.com/companies/WPL.AX/key-metrics

https://cleartax.in/s/standard-on-auditing-sa-240-the-auditors-responsibility-relating-to-fraud-in-an-audit-of-financial-statements

https://docplayer.net/15678024-Auditing-standard-asa-240-the-auditor-s-responsibilities-relating-to-fraud-in-an-audit-of-a-financial-report.html

https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2019-FRL.pdf

https://www.reuters.com/article/us-westpac-regulator-factbox/factbox-five-years-of-australian-finance-scandals-idUSKBN1Y109M

http://www.joebm.com/vol5/477-EM0013.pdf

https://www.bizcommunity.com/Article/196/511/197676.html

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