Case Study (Set 2)

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Ramapo College Of New Jersey *

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ACCT-610

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Accounting

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Apr 3, 2024

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docx

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Jared Dimock Forensic Accounting Professor Pettit Case Study 5: American Food Suppliers Inc. Question 1: What lessons can be learned from the American Food Suppliers case with regard to over reliance on third party confirmations? The lessons that can be learned from this case in regard to over-reliance on third party confirmations is that auditors should retain a healthy level of professional skepticism throughout their audit and do extra substantive revenue testing in addition to vendor confirmations. Question 2: What alternative substantive tests may have been available to the auditors of American Food Suppliers? How do the alternate procedures differ from typical accounts receivable confirmations when confirming vendors receivables? Asking suppliers for copies of contracts is one alternative substantive test that auditors may have used in this situation. Thus, rebate rates would be verified. To find out what is owed to American Food, they could also ask vendors for a proof of "accounts payable" to American Food. These alternate methods would assist in identifying exact amounts owed by vendors and uncover any major financial deception by American Food. Question 3: What mistakes were likely made by auditors of American Food Suppliers and what responsibility does the auditor have to uncover fraud? One of the auditor’s mistakes is by placing an excessive amount of trust in independent verification. Third party confirmation may not be sufficient substantive testing to test below materiality when auditing a company that claims extremely high sales. Even if it is, auditors had a responsibility to preserve objectivity in their work and should have considered alternative methods before expressing their judgement. The sole duty an auditor has is to offer a conclusion about any findings. They must notify the party who hired them for the audit, such as the board of directors, if a misstatement is material. Question 5: Define professional skepticism. Do you think that the auditors of American Food Suppliers exercised enough professional skepticism? Why or why not? Professional skepticism is a crucial mindset that improves the auditor's capacity to see and react to circumstances that could point to potential misrepresentation. Regardless of their relationship with the organization, auditors must constantly keep in mind that there is a chance that data will be wrong or misstated and that they should always ask for documentation to support their calculations and workpapers. This is skepticism on the job. I think the American Food auditors did not exhibit enough professional skepticism. Upon seeing such high income statistics, if I were the manager arranging this audit, I would have made sure to include further testing along with the third party verification.

Question 6: What is the difference between a financial statement audit and a forensic audit? When would each type of audit be performed? The difference between a financial statement audit and a forensic audit is that for a financial statement audit, an auditor examines all items on a trial balance/two-year comparison for all accounts that are above material. The calculation of materiality uses revenue. Auditors then examine each account and make judgments based on the findings. A forensic audit refers to the technique of investigating and discovering fraud. Investigative techniques are needed in order to identify the fraud's perpetrator. When a group having an interest in a company, like a board of directors, hires them, they execute a financial statement audit. Auditors are employed because investors are more likely to feel satisfied with a company when an audit is conducted and results are clear. When fraud is suspected and the offender needs to be found, forensic auditors are employed. Question 7: Who acted unethically in this case? What were the consequences? In this instance, American Foods' suppliers and staff both committed unethical behavior. Under pressure from management, staff members were coerced into skewing rebates. Vendors who also tampered with the numbers did so while being aware that they were acting unethically. Consequences include criminal proceedings in which executives admitted to plotting with suppliers; a civil fine was imposed as a result. Additionally, probation and home detention were granted to the former CFO. Vendors pleaded guilty and acknowledged giving auditors fake confirmations. Question 8: Apparently, many people within American Food Suppliers knew of the fraud and either helped perpetrate the fraud or at a minimum did not notify the auditors or regulatory agencies. What options were available to the employees who knew about the fraud and want to do something about it? Employees who were aware of fraud and wished to take action against it may have provided auditors with information in an anonymous manner without much risk of punishment. Interviews are a common practice for auditors, and the purpose of these conversations is to learn anything an employee may be aware of but did not disclose during the audit. Case Study 8: Knottyville Country Club: Asset Misappropriation Question 1: List in detail the various internal control weaknesses and weaknesses in the monitoring system that existed at the Knottyville Country Club. Lack of task segregation is one of Knottyville's internal control weaknesses. The sole person in charge of the finances and check writing is Fancy. Furthermore, the second authorizer frequently signs blank checks, making their main regulation of dual signatures on checks ineffective. There is clearly a lack of task separation. Additionally, it is unlawful to deduct money from employees' paychecks to make up for losses. The most likely time for this to have been discovered and reported was during payroll reconciliations. As for the monitoring system, Fancy's extravagant trips and expensive cars remained undiscovered in that system for a number of years. She was also allowed to deposit money into and transfer funds between the club account and her personal account, which is another example of ineffective segregation of duties. Finally, Fancy had complete control over which suppliers the club used.

Question 2: You are hired as an expert CPA to institute effective internal controls and monitoring systems at the Knottyville Country Club. What controls and monitoring systems would you recommend? List them in detail. There are some controls that, as a skilled CPA, I would advise Knottyville to put in place. First, at each meeting, the board should go over the monthly financials and, at the very least, compare them to the previous two months. This is done to make sure that the figures remain stable and appear reasonable in light of the club's performance. All employees should also be subject to background checks. This would guarantee the moral character of the workforce. Another control to implement would be making sure that segregation of duties is followed when it comes to dual check-signing and bank reconciliations. This implementation will help make sure that no one else is able to do a repeat of what Fancy has done by overdrawing from the Knottyville Country Club’s business account to suit their own needs. As for the system monitoring, a professional, external bookkeeper from a CPA firm should be hired. By doing this, it will be easier to preserve some degree of independence, and the CPA company will also be able to answer for the activities of their bookkeeper. In addition, the board should mandate an annual audit of the financial statements. The board is free to pick any CPA company they like. If the audit is released without any recommendations, this will guarantee that the club's books are in order.

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