Nature of risks arising from fraud and error: Stone Holidays
Stone Holidays is subject to all of the risks of error arising from the use of computer systems.
If programmed controls do not operate properly, for example, the information produced may
be incomplete or incorrect. Inadequate controls also give rise to the risk of fraud by those who
understand the system and are able to manipulate it in order to hide the misappropriation of
assets such as receipts from customers.
All networked systems are also subject to the risk of error because of the possibility of the
loss or corruption of data in transit. They are also subject to the risk of fraud where the
transmission of data is not securely encrypted.
All entities that employ staff who handle company assets (such as receipts from customers)
are subject to the risk that staff may make mistakes (error) or that they may misappropriate
those assets (fraud) and then seek to hide the error or fraud by falsifying the records.
Stone Holidays is subject to problems arising from the risk of fraud perpetrated by customers
using stolen credit or debit cards or even cash. Whilst credit card companies may be liable
for such frauds, attempts to use stolen cards can cause considerable inconvenience.
There is a risk of fraud perpetrated by senior management who might seek to lower the
amount of money payable to the central fund (and the company’s tax liability) by falsifying
the company’s sales figures, particularly if a large proportion of holidays are paid for in cash.
There is a risk that staff may seek to maximize the commission they are paid by entering
false transactions into the computer system that are then reversed after the commission has been paid.
Wilfykil answered the question on April 12, 2019 at 09:41
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Fraud and error present risks to an entity. Both internal and external auditors are required to deal
with risks to the entity.
(Solved)
Fraud and error present risks to an entity. Both internal and external auditors are required to deal
with risks to the entity.
Required:
Explain how the internal audit function helps an entity deal with the risk of fraud and error.
Date posted:
April 12, 2019
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Answers (1)
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You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
and similar items via two divisions: mail order and on-line...
(Solved)
You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
and similar items via two divisions: mail order and on-line ordering on the Internet. Parker is a
new audit client. You are commencing the planning of the audit for the year-ended 31 May 2005.
An initial meeting with the directors has provided the information below.
The company’s turnover is in excess of Kshs85 million with net profits of Kshs4 million. All profits
are currently earned in the mail order division, although the Internet division is expected to return
a small net profit next year. Turnover is growing at the rate of 20% p.a. Net profit has remained
almost the same for the last four years. In the next year, the directors plan to expand the range of
goods sold through the Internet division to include toys, garden furniture and fashion clothes. The
directors believe that when one product has been sold on the Internet, then any other product
can be as well.
The accounting system to record sales by the mail order division is relatively old. It relies on
extensive manual input to transfer orders received in the post onto Parker’s computer systems.
Recently errors have been known to occur, in the input of orders, and in the invoicing of goods
following dispatch. The directors maintain that the accounting system produces materially
correct figures and they cannot waste time in identifying relatively minor errors. The company
accountant, who is not qualified and was appointed because he is a personal friend of the
directors, agrees with this view, The directors estimate that their expansion plans will require a
bank loan of approximately Kshs30 million, partly to finance the enhanced web site but also to
provide working capital to increase inventory levels. A meeting with the bank has been scheduled
for three months after the year end. The directors expect an unmodified auditor’s report to be
signed prior to this time.
Required:
Identify and describe the matters that give rise to audit risks associated with Parker .
Date posted:
April 12, 2019
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Answers (1)
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Ajio is a charity whose constitution requires that it raises funds for educational projects. These
projects seek to educate children and support teachers in certain countries
(Solved)
Ajio is a charity whose constitution requires that it raises funds for educational projects. These
projects seek to educate children and support teachers in certain countries. Charities in the
country from which Ajio operates have recently become subject to new audit and accounting
regulations. Charity income consists of cash collections at fund raising events, telephone
appeals, and bequests (money left to the charity by deceased persons). The charity is small
and the trustees do not consider that the charity can afford to employ a qualified accountant.
The charity employs a part-time bookkeeper and relies on volunteers for fund raising. Your firm
has been appointed as accountants and auditors to this charity because of the new regulations.
Accounts have been prepared (but not audited) in the past by a volunteer who is a recently
retired Chartered Certified Accountant.
Required:
Describe the risks associated with the audit of Ajio under the headings inherent risk, control risk and detection risk and explain the implications of these risks for overall audit risk
Date posted:
April 12, 2019
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Answers (1)
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List and explain the audit tests to be performed on income and expenditure from fund raising events.
(Solved)
List and explain the audit tests to be performed on income and expenditure from fund raising events.
Date posted:
April 12, 2019
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Answers (1)
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Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in...
(Solved)
Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in the sale of specific
products, for example, seeds, garden furniture, and agricultural fertilizers. The company has an
internal audit department which provides audit reports to the audit committee on each division
on a rotational basis.
Products in the seed division are offered for sale to domestic customers via an Internet site.
Customers review the product list on the Internet and place orders for packets of seeds using
specific product codes, along with their credit card details, onto Rhapsody Co’s secure server.
Order quantities are normally between one and three packets for each type of seed. Order details
are transferred manually onto the company’s internal inventory control and sales system, and
a two part packing list is printed in the seed warehouse. Each order and packing list is given a
random alphabetical code based on the name of the employee inputting the order, the date, and
the products being ordered.
In the seed warehouse, the packets of seeds for each order are taken from specific bins and
dispatched to the customer with one copy of the packing list. The second copy of the packing list
is sent to the accounts department where the inventory and sales computer is updated to show
that the order has been dispatched. The customer’s credit card is then charged by the inventory
control and sales computer. Bad debts in Rhapsody are currently 3% of total sales.
Finally, the computer system checks that for each charge made to a customer’s credit card
account, the order details are on file to prove that the charge was made correctly. The order file
is marked as completed confirming that the order has been dispatched and payment obtained.
Required:
a) In respect of sales in the seeds division of Rhapsody Co, prepare a report to be sent to the
audit committee of Rhapsody Co which:
i. Identifies and explains four weaknesses in that sales system.
ii. Explains the possible effect of each weakness.
iii. Provides a recommendation to alleviate each weakness.
Date posted:
April 12, 2019
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Answers (1)
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List down internal control procedures for raw material purchasing system of a large manufacturing firm
(Solved)
List down internal control procedures for raw material purchasing system of a large manufacturing firm
Date posted:
April 12, 2019
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Answers (1)
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You are an audit senior responsible for understanding the entity and its environment and assessing
the risk of material misstatements for the audit of Rock for...
(Solved)
You are an audit senior responsible for understanding the entity and its environment and assessing
the risk of material misstatements for the audit of Rock for the year ending 31 December 2004.
Rock is a company listed on a stock exchange. Rock is engaged in the wholesale import,
manufacture and distribution of basic cosmetics and toiletries for sale to a wide range of stores,
under a variety of different brand names. You have worked on the audit of this client for several
years as an audit junior.
Required:
Describe the information you will seek, and procedures you will perform in order to understand the entity and its environment and assess risk for the audit of Rock for the year ending 31 December 2004.
Date posted:
April 12, 2019
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Answers (1)
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Discuss on features of audit working papers
(Solved)
Discuss on features of audit working papers
Date posted:
April 12, 2019
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Answers (1)
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Explain the following controlling procedures in a well planned audit:
• Direction and supervision of work
• Review and co-coordination of work
• Quality controls
(Solved)
Explain the following controlling procedures in a well planned audit:
• Direction and supervision of work
• Review and co-coordination of work
• Quality controls
Date posted:
April 12, 2019
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Answers (1)
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You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants. You are preparing the engagement letter for the audit of...
(Solved)
You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants. You are preparing the engagement letter for the audit of Ancients; a public limited liability company, for the year ending 30 June 2006.Ancients has grown rapidly over the past few years, and is now one of your firm’s most important clients. Ancients has been an audit client for eight years and McKay & Co has provided audit, taxation and management consultancy advice during this time. The client has been satisfied with the services provided, although the taxation fee for the period to 31 December 2005 remains unpaid. Audit personnel available for this year’s audit are most of the staff from last year, including Mr. Grace, an audit partner and Mr. Jones, an audit senior. Mr. Grace has been the audit partner since Ancients became an audit client. You are aware that Allyson Grace, the daughter of Mr. Grace, has recently been appointed the financial director at Ancients. To celebrate her new appointment, Allyson has suggested taking all of the audit staff out to an expensive restaurant prior to the start of the audit work for this year.
Required:
Identify and explain the risks to independence arising in carrying out your audit of Ancients for the
year ending 30 June 2006, and suggest ways of mitigating each of the risks you identify.
Date posted:
April 12, 2019
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Answers (1)
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Explain the situations where an auditor may disclose confidential information about a client.
(Solved)
Explain the situations where an auditor may disclose confidential information about a client.
Date posted:
April 12, 2019
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Answers (1)
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a) Describe the matters to consider within your firm and the other procedures that must be
undertaken before accepting the appointment as auditor to a new...
(Solved)
a) Describe the matters to consider within your firm and the other procedures that must be
undertaken before accepting the appointment as auditor to a new client.
b) Explain why it would be inappropriate to commence the audit before consideration of
the matters and the procedures referred to in (a) above have been completed.
Date posted:
April 12, 2019
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Answers (1)
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The objectivity of the external auditor may be threatened or appear to be threatened where:
(Solved)
The objectivity of the external auditor may be threatened or appear to be threatened where:
i. There is undue dependence on any audit client or group of clients.
ii. The firm, its partners or staff have any financial interest in an audit client.
iii. There are family or other close personal or business relationships between the firm, its
partners or staff and the audit client.
iv. The firm provides other services to audit clients.
Required:
a) For each of the four examples given above, explain why the objectivity of the external
auditor may be threatened, or appear to be threatened, and why the threat is important.
b) Describe requirements that reduce the threats to auditor objectivity for each of the four examples given above.
Date posted:
April 12, 2019
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Answers (1)
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The purpose of an external audit and its role are not well understood. You have been asked to
write some material for inclusion in your firm’s...
(Solved)
The purpose of an external audit and its role are not well understood. You have been asked to
write some material for inclusion in your firm’s training materials dealing with these issues in the
audit of large companies.
Draft explanation dealing with the purpose of an external audit and its role in the audit of large
companies, for inclusion in your firm’s training materials.
Date posted:
April 12, 2019
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Answers (1)
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Restmount Kenya Ltd. was formed on 1 October 2006 in order to export tea and coffee to
European markets. The Directors are unsure as to their...
(Solved)
Restmount Kenya Ltd. was formed on 1 October 2006 in order to export tea and coffee to
European markets. The Directors are unsure as to their responsibilities and the nature of their
relationship with the external auditors. The audit partner has asked you to visit the client and
explain to the directors, the fundamental aspects of the accountability of the directors and their
relationship with the auditor.
Required:
Explain to the directors of Restmount Kenya Ltd.
a. The need for an audit
b. Procedures for the appointment of an auditor of a public company under the Companies Act.
c. Directors responsibilities in relation to the accounting function of the Company.
d. Auditors’ statutory responsibilities in relation to the audit of the company’s financial statements.
Date posted:
April 12, 2019
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Answers (1)
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What is Debtors’ circularization and what are it's purposes?
(Solved)
What is Debtors’ circularization and what are it's purposes?
Date posted:
April 12, 2019
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Answers (1)
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Discuss on the types of circularization during auditing
(Solved)
Discuss on the types of circularization during auditing
Date posted:
April 12, 2019
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Answers (1)
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What is the problem encountered in the verification of stock during auditing?
(Solved)
What is the problem encountered in the verification of stock during auditing?
Date posted:
April 12, 2019
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Answers (1)
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Which are the qualities of a good audit sample?
(Solved)
Which are the qualities of a good audit sample?
Date posted:
April 11, 2019
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Answers (1)
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Which are the factors considered before adopting statistical sampling?
(Solved)
Which are the factors considered before adopting statistical sampling?
Date posted:
April 11, 2019
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Answers (1)