Question 6. Fraud, Going Concern & Subsequent Events (13 marks)

(a) Rosslyn has a renovation business which she owner-manages. A family friend, Jason, has asked if she would renovate his sunroom and outdoor area, offering to pay cash for a good price because he feels unable to afford full retail prices. Jason suggests Rosslyn can do the work off the books because she will not need any paperwork and thus can avoid including it in her taxable income for the year.

Required:

Identify a fact that illustrates (is an example of) each of: (3 marks)

• a pressure/incentive for fraud:

• an opportunity for fraud:

• a rationalisation of fraud.

Would you judge this situation a higher or lower fraud risk for Rosslyn? (1 mark)

(b) XZA Ltd. is an audit client manufacturing high tech irrigation equipment. It is financed through a mix of long-term debt and short-term bank loans. During your risk assessment (planning) phase you noted one of XZAs long-time customers, LowTech Ltd., has indicated commencing manufacturing its own equipment. LowTech Ltd accounts for 35% of XZAs annual sales revenue. The strength of the Australian currency against foreign currencies has caused intense competition within the industry because of the adverse impact on the demand for locally produced equipment. Local customers are increasingly indicating the likelihood of purchasing from overseas suppliers because of the significantly reduced costs. XZAs bank has requested cash flow forecasts for the coming year as support for the current financing arrangements.

Required: Identify any risks to XZA continuing as a going concern AND briefly explain the impact on your audit for the current year from the risks identified. (5 marks)

(c) Consider each of the following two separate situations (1) and (2) for your audit client Materialworld Ltd. (4 marks)

• their balance date is 30 June, 2019
• your fieldwork was completed on 20 August, 2019
• their financial report and auditors report were signed on 3 September, 2019.

Required: Indicate if each situation (1) and (2) is an example of an adjusting or non-adjusting subsequent event. Provide a brief justification for your decision. (2 marks each)

1. On 18 August, 2019 you discovered a debtor (a/c receivable) as at 30 June, 2019 had gone bankrupt on 3 August, 2019. The cause of the bankruptcy was an unexpected loss of a major lawsuit issued against the debtor on 15 June, 2019.

2. On 18 August, 2019 you discovered the companys major debtor had gone bankrupt on 3 August, 2019. The cause of the bankruptcy was a major uninsured fire at one of the debtors premises on 15 July, 2019.