City Construction Company Limited (CCCL) is involved in the construction of large buildings and shopping plazas. The company commenced its business in 2008 by establishing an office in Islamabad and has grown rapidly. It currently has offices in five major cities of the country and as many as 25 projects are in various stages of execution. A substantial portion of the work is done through sub-contractors. Payment to sub-contractors is based on certificate of work completion which is issued by the supervisor in charge of each project. The certificate is sent through email to the finance department. The payment is credited directly into the bank accounts of the sub-contractors. Recently, the management has discovered that the project supervisor of a large project had issued a fraudulent work completion certificate. The preliminary investigation indicated that some other sub-contractors have also been paid fraudulently in the past and the practice was ongoing for the past three years. The management of CCCL has asked your audit firm to conduct an investigation into the matter. Your initial discussion with the client has revealed the following: (i) For the past five years the external auditors of the company are H.A.M.D & Co. Chartered Accountants. They had issued unqualified audit reports for all those years and had not reported any internal control weakness in their management letters. (ii) Prior to approaching your firm, CCCL wanted to give this assignment to H.A.M.D & Co. However, they expressed their inability to undertake the investigation work. Required (a) State the matters your firm should consider and the procedures that should be followed prior to the acceptance of this assignment. (b) State the basic objectives of the above investigation. (c) Recommend the controls which the management should put in place, to avoid such frauds in future.
City Construction Company Limited (CCCL) is involved in the construction of large buildings and shopping plazas. The company commenced its business in 2008 by establishing an office in Islamabad and has grown rapidly. It currently has offices in five major cities of the country and as many as 25 projects are in various stages of execution.
A substantial portion of the work is done through sub-contractors. Payment to sub-contractors is based on certificate of work completion which is issued by the supervisor in charge of each project. The certificate is sent through email to the finance department. The payment is credited directly into the bank accounts of the sub-contractors.
Recently, the management has discovered that the project supervisor of a large project had issued a fraudulent work completion certificate. The preliminary investigation indicated that some other sub-contractors have also been paid fraudulently in the past and the practice was ongoing for the past three years.
The management of CCCL has asked your audit firm to conduct an investigation into the matter. Your initial discussion with the client has revealed the following:
(i) For the past five years the external auditors of the company are H.A.M.D & Co. Chartered Accountants. They had issued unqualified audit reports for all those years and had not reported any internal control weakness in their management letters.
(ii) Prior to approaching your firm, CCCL wanted to give this assignment to H.A.M.D & Co. However, they expressed their inability to undertake the investigation work.
Required
(a) State the matters your firm should consider and the procedures that should be followed prior to the acceptance of this assignment.
(b) State the basic objectives of the above investigation.
(c) Recommend the controls which the management should put in place, to avoid such frauds in future.
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