Answer the following tasks: (Case study)

DO NOT USE AI AND DO NOT PLAGIARIZE OR ELSE I WILL RATE YOU BADLY.

1. You are the senior auditor in charge of the audit of Potholders Ltd, a retailer of garden pots and gnomes. Your audit firm has been auditor for the last four years. Historically, the firm has had a competent and qualified internal audit team upon whose work you have placed significant reliance. Management is well respected and is viewed to have high integrity, although there was some friction last year when the auditor discovered sales cut-off errors, which reduced profit and had an adverse impact on management bonuses under the new bonus scheme.

While the company has been very profitable, drought and water restrictions have placed pressure on management to maintain profitability. In planning the audit you become aware of the following facts:

1. There is a cash shortage caused by recent business expansions and falls in cash inflow.

2. The accounts payable balance has increased by 30 per cent on last year.

3. Days in debtors has increased from 45 days to 63 days.

4. Due to the difficulty of maintaining sales levels, credit checks are not always carried out.

5. Internal audit department staff levels have been halved.

6. After a recent series of thefts, control over inventory has been tightened. When goods are received they are counted and inspected and, after a pre-numbered goods received advice is prepared, the goods are moved to an enclosed storage area with adequate security, including closed-circuit TV. Goods are released from the store only upon receipt of a properly authorised requisition form.

7. In the past, all purchases were made centrally at head office. However, store managers are now asked/allowed to purchase direct from local suppliers in order to obtain inventory at lower prices and avoid transport costs. Some store managers in North Queensland are importing from Indonesia.

Your tasks:

1. Outline the facts that increase inherent risks at the financial statement level.
2. Outline inherent risks at the account level for inventory and accounts receivable.
3. Outline the facts that increase or decrease control risk.

2. Consider the following non-audit services. Outline the possible threats to independence and the measures that could be implemented to protect independence.

(a) Preparing accounting records and financial statements

(b) Valuation services

(c) Internal audit services

(d) IT systems services

(e) Temporary staff assignments

(f) Acting for or assisting an assurance client in the resolution of a dispute or litigation

(g) Legal services

(h) Recruiting senior management for an assurance client

(i) Corporate finance and similar activities

3. You have completed the CPA program while working for a mid-tier auditing firm in Hong Kong. You are now on secondment with the firm in Sydney for two years. On arrival in Sydney you are informed that you will be working on the audit of JBR Ltd, a company that specialises in the management of retirement villages. One reason you have been put on the audit is that the company is considering expanding into Hong Kong and possibly other major Asian cities.

You ascertain that management is well respected in the industry and the audit firm and management have developed a good working relationship over the last five years. In fact, you note a recent press release that states the company uses conservative accounting methods compared to other firms in the industry. In a recent newspaper report you note a quote from the CEO stating, We pride ourselves on the quality of the financial statements. Our auditors are very reputable and we rely heavily on them for the preparation of our financial statements'.

Your task:

Do you believe it is necessary that an engagement letter be sent out for this recurring audit engagement?

4. Bernie Ebbers presided over the expansion of a small, local company, Long Distance Discount Service, to a multi-billion dollar international corporation (Jennings 2003, p. 410). Long Distance Discount Service was established by Ebbers in 1983 and evolved to public company status as WorldCom in 1989.

Ebbers was CEO of WorldCom and its predecessor from 1983 until shortly before WorldCom filed for bankruptcy in 2002. Ebbers was seen as both the driving force of the company he formed and a major contributor to its failure. Prosecutors have claimed that Ebbers 'was WorldCom, and WorldCom was Ebbers.... He built the company. He ran it. Of course he directed this fraud'.

Ebbers was convicted and sentenced to 25 years in prison for his involvement in the WorldCom bankruptcy. Prosecution testimony at the six-week trial portrayed Ebbers as obsessed with keeping WorldCom's stock price high. World Com's former finance chief claimed that Ebbers repeatedly ordered him to 'hit our numbers'. This was interpreted as an order to falsify the books in order to meet Wall Street expectations. The urgency to meet Wall Street expectations was twofold. Ebbers had a strategy to make WorldCom the 'number one' stock on Wall Street (Jennings 2003, p. 430). In addition, Ebbers had personal loans of some USD 415m with WorldCom and a further USD 890.2m from various banks, including Citigroup, Bank of America and JP Morgan Chase. Ebbers had used his WorldCom shares as collateral for the loans. If the share price fell, the banks would require more collateral. Prosecutors have maintained that the loans plus the rewards and power associated with being CEO of WorldCom created a 'perfect storm of corruption', leading to Ebbers's demands to 'hit our numbers'

Your task:

Outline the fraud risk factors for WorldCom