Chapter 20/21 Errors, Frauds & Unlawful acts[1] and Related parties You are the audit supervisor of Maple & Co and are currently planning the audit of an existing client, Sycamore Science Co (Sycamore), whose year-end was 30 April 2015. Sycamore is a pharmaceutical company, which manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of $35.6 million and profit before tax of $5.9 million. Sycamore’s previous finance director left the company in December 2014 after it was discovered that he had been claiming fraudulent expenses from the company for a significant period of time. A new finance director was appointed in January 2015 who was previously a financial controller of a bank, and she has expressed surprise that Maple & Co had not uncovered the fraud during last year’s audit. During the year Sycamore has spent $1.8 million on developing several new products. These projects are at different stages of development and the draft financial statements show the full amount of $1.8 million within intangible assets. In order to fund this development, $2.0 million was borrowed from the bank and is due for repayment over a ten-year period. The bank has attached minimum profit targets as part of the loan covenants. The new finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of May over $0.5 million of goods sold in April were returned. Maple & Co attended the year-end inventory count at Sycamore’s warehouse. The auditor present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled. During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of $210,000. Required: b) What is the difference between Error and Fraud (as defined in auditing) and how shall the auditor address each of them? (c) Why do you think Maple & Co. were not able to detect the fraud in their previous audit?
Chapter 20/21 Errors, Frauds & Unlawful acts[1] and Related parties
You are the audit supervisor of Maple & Co and are currently planning the audit of an existing client, Sycamore Science Co (Sycamore), whose year-end was 30 April 2015. Sycamore is a pharmaceutical company, which manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of $35.6 million and profit before tax of $5.9 million.
Sycamore’s previous finance director left the company in December 2014 after it was discovered that he had been claiming fraudulent expenses from the company for a significant period of time. A new finance director was appointed in January 2015 who was previously a financial controller of a bank, and she has expressed surprise that Maple & Co had not uncovered the fraud during last year’s audit.
During the year Sycamore has spent $1.8 million on developing several new products. These projects are at different stages of development and the draft financial statements show the full amount of $1.8 million within intangible assets. In order to fund this development, $2.0 million was borrowed from the bank and is due for repayment over a ten-year period. The bank has attached minimum profit targets as part of the loan covenants.
The new finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of May over $0.5 million of goods sold in April were returned.
Maple & Co attended the year-end inventory count at Sycamore’s warehouse. The auditor present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled.
During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of $210,000.
Required:
b) What is the difference between Error and Fraud (as defined in auditing) and how shall the auditor address each of them?
(c) Why do you think Maple & Co. were not able to detect the fraud in their previous audit?
e) Question (d) solution has been provided to you, use this solution to answer the following three questions
i. What other audit risks could arise from management override of controls (identify at least 3), and what should be the auditors’ response?
ii. What is the relevance of materiality for risk no. 4 in the solution?
iii. Rank the each of the 8 risks in solution (d) as high or low – if you have ranked a risk high, explain why in 1-2 lines only. Use the following template:
|
Audit Risk |
High/Low |
Reason |
|
1 |
High |
... |
|
2 |
... |
... |
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