Enhancing Independence And Identifying Fraud Risk Factors In Audit: A Case Study

Threats to Audit Independence and Safeguards

a.The identification of the potential threats of the independence for the follows cases are provided below in the following points:-

1. Financial interest: The degree of the financial interest can be easily measured by showing the enhancement of the structure and also the financial interest can be easily designed to gain the financial control over the system. Therefore, the case study of the Red Ribbon Ltd is showing the clash of the financial accounts and also conducts the audits. Therefore the financial interest threat can be determined in this case as the potential threat of the independence(Rahman, 2015).      
2. A close relationship with assurance client: It is defined as the term which is being used for showing the close business relationship between the assurance client and the assurance team. As David Jackson is a member of the audit team, he had been offered a job in the Jupiter Ltd for which he was continuing the auditing process. Henceforth it can be proved to be potential issues of the independence as it should not be done directly.
3. Recent services with assurance clients:  It is defined as the period of which the audit assurance is being depicted to be showing the appropriate structure for the client and also the assurance team is being served as the officer or the director for the assurance client (Ricchiute, 2006).  As per the case study of the Fruity Juices Ltd., the managing director is considered to be too much concerned about the staff’s time and also it is depicted to be asking the unnecessary questions to the client who is being considered as the threat as per the potential issue of the independence is being considered in this case study.  
4. Family and personal relationship: It is being defined as the family member who is being defined to be showing to be continuing the financial statements and also the enhancement of the director is influenced by showing the assurance of the close member who is influencing the subject of the matter. The case study clearly focuses on the Eric lay that is considered as the long-time friend, and also e is being appointed as the audit manger which is being explained as the threat as it is considered as the potential threat to the independence (Saxena et al., 2010).   
5. Provision of taxation services to the financial statement clients: The provision of the services can be easily structured by showing the enhancement of the structure which is being explained in this case. The case study also illustrates the situation which is Super Trooper Ltd (STL) and is also illustrated as the advice which is being shown in this case is depicted to be a potential threat to the independence(Shim, Siegel and Shim, 2012).

b.The safeguards that should be implemented to decrease the independence threats are as follows:

Financial interests: The client should have reviewed the trial balance account. The accountants and auditors of the company analyzed the values of the items in the trail balance. The misstatement in the trial balance means a misrepresentation of the financial values.   The audit team should take responsibility to check all the items (Beechy and Conrod, 2008).

A close relationship with the assurance client: The most important thing that should be determined and analyzed is the skills and knowledge of Daniel Jackson. The management of the company should establish a relationship with Daniel Jackson in order to understand his views, thinking, and capabilities. The audit team should take appropriate steps before recruiting Daniel Jackson.

Recent services with assurance client: The audit team should be provided with adequate independence while conducting the audit. The audit team should prepare a questionnaire sheet before asking questions to the staff members. The questionnaire will help to provide all the necessary information in a given time. It will not waste time, and all the information can also be collected (Britton and Waterston, 2013).

Family and personal relationship: The roles and responsibilities should be specifically defined to the Eric Lay. The performance of the company depends on the performance of the staff members. The Eric Lay has to follow the rules and regulation and carry out all the activities as per the guidelines of the company.

Provision of taxation services to the financial statement clients:  The company should follow the taxation rules and procedures as per the Australian Taxation Office. The company has to pay the tax as per the law (Spiceland, 2010).       

c.As per the overall independence is being considered, the explanation provided is appropriately achieved by showing the enhancement of the explanations which is being provided as per the case is provided in this case (Weil, 2017)

Identification of the activities that are part and not the part of the auditors’ responsibilities related to the fraud under ISA 240

As per the ISA 240 is undertaken for the purpose of assessing the responsibilities of the auditor related to the fraud, it is described as the intentional act which is being undertaken by the one or more individuals in between the management. Therefore, the structure of the work can be easily illustrated by the movements which are made on the part of the governance, employees and the third parties that are involved in using the deception for obtaining the unjust or the illegal advantages.

Activities That Are Part of and Not Part of the Auditor’s Responsibilities Related to Fraud under ISA 240

As per the ISA 240, it is defined to be dealing with the auditor’s responsibilities which are related to the fraud in an audit of the financial statements and also the assessment of the risk materials are appropriately undertaken by measuring the due to fraud in the materials. The identification and the assessment of the risks regarding the inquiry of the management are being depicted by showing the appropriate structure which is being constructed by showing the enhancement of the structure and also the misstatement is being identified as per the investigation of the auditor is being provided. The activities that are identified in the case of the WMD is the Wealth Management division of the Eastpac Bank shows the fraud identification of the responsibilities that are as follows:-

• Ensuring all the materials are fraud instances and are detected by showing the enhancement of the system.
• Responding appropriately is detecting the ability for identifying the fraud, and also the entity’s financial statements can be made susceptible to the financial systems. The inquiries of the management can be appropriately conducted by showing the appropriate structure of the work (Welch, 2014).
• Determination of the management activities which are identified as the part of the potential fraud instances is depicted to be showing the appropriate instances that are related to the affecting fraud entity.
• The testing of the appropriate journal entries which are recorded in the general ledger and the other adjustments are depicted to be showing the preparation of the financial statements.

The activities that are identified as not the part of the activity are illustrated as below in the following points: –

• The auditor is also identified to be responsible for overriding the controls and the procedures used for recognizing the facts of the auditing procedures which is depicted to be detecting an effective error and also it is identified to be not an effective process for detecting the fraud.
• Evaluation of the accounting policies that are selected by the entity and also may be indicative of the fraud (Weil, 2017).  

a.The risk of material misstatement is referred to the risk that the financial statements of the company have been misstated to the material degree. The auditors are responsible to determine and evaluate the risk. The accounts that can be at risk are current assets and current liabilities.  Current assets are the accounts in the balance sheet that can be convertible easily into cash. Current liabilities are the amount due to that need to be paid to the creditors (Bragg, 2013). The increase or decrease in the current assets can lead to increase or decrease in the total assets. The increase in the current liabilities can lead to the increase or decrease in the total liabilities. The increase or decrease in the values of the items in the balance sheet leads to the change in the total value of the organization.

bThe bank wants that the company should maintain the current ratio, shareholders’ fund to the total assets ratio and minimum net sales. The company has maintained the current ratio which is 1.2. The shareholders’ fund to the total assets ratio is also maintained which is around 30%. The net sales of the company are $350000, and the bank wants a minimum sales revenue of $100,000 per quarter. Thus, the company has to increase its net sales revenue.

c.The going concern is the assumptions that are made in accounting. The company makes assumption in order to continue the operation for a specific period that is necessary to carry out the obligations, objectives, and commitments (Christensen, Cottrell and Budd, 2016). The three factors that should be assumed are as follows:

• The net sales of the company have to increase with the increase in the quality of products and recruitment of skilled labor.
• The product cost should be decreased that will increase the gross profit margin.
• The focus should on increasing the returns for the shareholders.  The market share depends on the performance of the company. The profit margin should be increased, and liabilities should be decreased.

Misstatements in Financial Report and Fraud Risk Factors in Audit Procedures

d.The management has to increase the financial performance of the company. The factors can impose a significant impact on the audit planning. The audit plan is a guideline that needs to be followed while conducting the audit (Dicksee and Montgomery, 2009). The auditors take help from the plan in keeping the cost of audit at a reasonable level as well as avoiding any misunderstanding with the client. The auditor has to consider all the factors before planning and preparing the financial statements of the company. It is very much important to decrease the cost and increase the sales revenue and returns of the company.     

a.The audit report clearly shows the misstatements in the financial report. The actual figure of sales revenue and debtors’ level was above the above the budgeted figure. The internal control issue within the company are as follows:

• The company was not able to maintain its sales revenue which is due to the decrease in the quality of the product and services, increase in the cost and unavailability of skilled labor.
• The debtors’ level was also not maintained that means the company was unable to collect all the due amounts (Holton, 2012).

b.The fraud in the auditing leads to the increase or decrease in the value of the company.  The two fraud risk factors in the company are as follows:

• If there is not appropriate financial information or audit standard, then the accountants or auditors can make changes in the financial statements.
• If the employees are not happy with the company, then can engage in fraud activities (Powers and Needles, 2012).

c.The financial report of the company shows its accounting results and performance. The report clearly shows that the sales revenue is at high risk because it can be altered easily. The sales revenue is much lower than the budgeted result. The accountants and auditors can make changes in the sales revenue account (Kieso, Weygandt and Warfield, 2006). The sales revenue of the company has decreased, and the bank stated that the sales revenue should be $100,000 per quarter. But, the company was unable to achieve the sales revenue value and the employees of the company can make changes in order to achieve the desired results. However, the misstatements in the values of the financial statements can lead to increase or decrease in the value of the company. Fraud can occur within the company.

d.The audit procedures that need to be followed by the auditor is that recording all the financials transactions in an appropriate manner.  The accounting software should be used to record and estimate all the value of the financial statements (Parrino, 2015). The financial transaction should be posted in journal, ledger, trial balance, income and balance sheet of the company. The transactions should be tested twice, and the external auditor should test the financial records.            

References

Beechy, T. and Conrod, J. (2008). Intermediate accounting. Toronto: McGraw-Hill Ryerson.

Bragg, S. (2013). Financial analysis. Hoboken, N.J.: Wiley.

Britton, A. and Waterston, C. (2013). Financial accounting. Harlow: Financial Times Prentice Hall.

Christensen, T., Cottrell, D. and Budd, C. (2016). Advanced financial accounting. New York, NY: McGraw-Hill Education.

Dicksee, L. and Montgomery, R. (2009). Auditing. [Charleston, SC]: BiblioLife.

Holton, R. (2012). Global Finance. Hoboken: Taylor & amp; Francis.

Kieso, D., Weygandt, J. and Warfield, T. (2006). Intermediate accounting. Vol. 1. Chichester: John Wiley.

Parrino, R. (2015). Corporate Finance. Singapore: John Wiley & Sons.

Powers, M. and Needles, B. (2012). Financial accounting. [Mason]: South-Western, Cengage Learning.

Rahman, N. (2015). Corporate Finance. North Ryde: McGraw-Hill Australia.

Ricchiute, D. (2006). Auditing. Mason, Ohio: South-Western/Thomson Learning.

Saxena, R., Srinivas, K., Rai, U. and Rai, S. (2010). Auditing. Mumbai [India]: Himalaya Pub. House.

Shim, J., Siegel, J. and Shim, J. (2012). Financial accounting. New York: McGraw-Hill.

Spiceland, J. (2010). Intermediate accounting. Toronto, ON: McGraw-Hill Ryerson.

Weil, R. (2017). Financial accounting. [Place of publication not identified]: Cengage Learning.

Welch, I. (2014). Corporate finance. Los Angeles: Ivo Welch