ACC 213: AUDITING AND ASSURANCE SERVICES II/

ACC 214: PUBLIC SECTOR AUDITING AND ASSURANCE SERVICES II

Question 1
You are the audit senior at MONIN Associates, auditing the financial statements of
"KALISHA Limited," a manufacturing company. During the preliminary analytical
procedures, you notice an unusual increase in inventory turnover days compared to
the previous year and the industry average. Further inquiries with the warehouse
manager reveal that a significant portion of the inventory is now stored in a newly
leased off-site warehouse. However, the warehouse lease agreement, upon review,
seems unusually favorable to KALISHA Limited, raising your suspicions. The Chief
Accountant, when questioned about the discrepancies, explains that the increased
inventory is due to anticipated higher sales in the coming year. However, market
research suggests a potential slowdown in the industry.

Required
In light of the above scenario,
(a) Explain the auditor's responsibility in relation to fraud and errors during a
financial statement audit.
(b) Describe the three elements of the fraud triangle and explain how these elements
might be present in the KALISHA Limited scenario, providing specific examples
based on the information provided.
(c) Explain how an audit differs from a fraud investigation and what steps MONIN
Associates should consider taking next given the circumstances at KALISHA
Limited

Question 2
You are auditing "Agile Innovations," a tech startup. During your review of bank
reconciliations, you notice several large, round-sum payments to a "consultant" that
lack proper documentation. The CFO explains that these payments were for
specialized marketing services, but you are unable to find any evidence of such
services being rendered. Furthermore, the consultant's address appears to be a
residential property.

Required
(a) Describe the auditor's responsibility regarding the detection of material
misstatements, including those caused by fraud, in this situation. What specific
procedures should you consider performing given the suspicious nature of these
payments?
(b) Explain the concept of "management override" of internal controls and how it
could be a factor in this scenario. What audit procedures are particularly
designed to address the risk of management override?
(c) Differentiate between direct and indirect evidence of fraud. Provide examples
of each type of evidence that might be relevant in investigating the payments to
the consultant.

Question 3
You are the audit manager for "Global Logistics," a shipping company. You notice a
significant increase in revenue in the last quarter of the fiscal year, which is
inconsistent with industry trends and the company's own performance in the previous
quarters. Further investigation reveals that several large shipments were recorded as
revenue despite not being shipped until the following fiscal year.

(a) Explain the importance of professional skepticism in auditing and how it should
be applied to the audit of revenue recognition in this scenario. What specific
questions should you ask management regarding the unusual revenue increase?
(b) Describe the "opportunity" element of the fraud triangle and how it might be
present in this scenario. What internal control weaknesses could contribute to
the premature recognition of revenue?
(c) Discuss the auditor's communication responsibilities if, after further
investigation, you conclude that the revenue recognition was intentionally
manipulated. To whom should you report your findings, and what information
should be included in your communication?

Question 4
You are auditing "Precision Manufacturing." During the physical inventory count,
you discover discrepancies between the recorded inventory quantities and the actual
quantities on hand. Several items listed in the inventory records could not be located.
The warehouse manager explains that these discrepancies are due to normal spoilage
and obsolescence. However, you find that the recorded amounts of spoilage and
obsolescence are significantly lower than the discrepancies you identified.

Required
(a) Explain the auditor's responsibility for the physical verification of inventory.
What specific procedures should you perform in light of the discrepancies you
discovered?
(b) Describe the "rationalization" element of the fraud triangle and how it could be
a factor in this scenario. Provide examples of rationalizations that might be used
to justify the theft or misappropriation of inventory.
(c) Compare and contrast the roles of an independent auditor and a forensic
accountant in investigating potential fraud related to inventory. When might it
be necessary to engage a forensic accountant?

Question 5
You are the auditor of "International Trading Co." During your review of expense
accounts, you discover several large payments to overseas agents that are classified as
"commissions." However, the amounts of these commissions seem unusually high
compared to industry standards. You also find evidence that suggests these payments
may be related to obtaining lucrative contracts in foreign countries.

Required
(a) Explain the auditor's responsibility for detecting illegal acts, including bribery,
during a financial statement audit. What are the limitations of the auditor's
ability to detect such acts?
(b) Discuss the ethical considerations for an auditor who suspects that a client has
engaged in bribery. What steps should the auditor take, and what factors should
they consider?
(c) Describe the potential consequences for the company and its management if it is
determined that bribery has occurred. How could these consequences impact
the financial statements?

Question 6
You are auditing "Community Services," a non-profit organization. A whistleblower
has contacted you alleging that the organization's treasurer has been using the
organization's funds for personal expenses. The whistleblower provides you with
copies of bank statements that appear to support these allegations.

Required
(a) Explain the importance of internal control in preventing and detecting the
misappropriation of assets. What specific control weaknesses might have
contributed to the treasurer's alleged actions?
(b) Describe the different types of fraud that could occur within a non-profit
organization. How do the risks of fraud in non-profits differ from those in for-
profit companies?
(c) Discuss the steps you should take in response to the whistleblower's allegations.
What procedures should you perform to investigate the alleged
misappropriation of assets, and how should you document your findings?