two types of misstatement in a financial report that may arise from fraud
You are an audit manager at Hogan & Associates and have been assigned to the audit of Looking Good Ltd (LGL) for the year ending 30 June 2013. LGL is an Australian manufacturer, wholesaler and retailer of women’s handbags and shoes. LGL manufactures all its products at its Brisbane factory and sells via retail outlets throughout Australia. LGL is listed on the Australian Securities Exchange and Hogan & Associates has been its auditor for several years.
In recent years, LGL has been finding it difficult to meet its projected profit
During the planning stage of the audit, you become aware of the following matters:
· LGL has significant loans from its bank. The bank has indicated that it is concerned about LGL’s ability to meet specific loan covenants, particularly the return on total assets (net profit/total assets).
· The aged trade
· In order to reduce costs, LGL changed one of its major suppliers of raw materials in February 2013 to a cheaper overseas supplier. However, the number of product returns has increased significantly since April 2013, and your discussions with management have indicated that the increased returns have involved customer complaints concerning the quality of the product.
· Your review of the payroll system has indicated that when an employee is hired or terminated, the payroll clerk immediately prepares the paperwork and enters the information into the master file of the payroll computer system.
· The payroll department at LGL’s head office processes payroll on a weekly basis. All timesheets that are submitted by factory workers are signed off by the factory manager. The timesheets are input into the computer by the factory manager and payment is then made by the payroll department.
Required:
a) Describe the two types of misstatement in a financial report that may arise from fraud.
b) For each matter listed in first three bullet points above, outline how each matter is a fraud audit risk factor in relation to LGL’s financial report.
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