- 10 Marks
Question
Automech Ltd is a manufacturer of automotive parts based in Ghana. The company’s accountant has been manipulating the accounts payable balance by teeming and lading to misrepresent the financial position of the company. The accountant has been recording fictitious invoices and payments to suppliers to increase the accounts payable balance and misrepresent the company’s expenses.
The external auditor, who was engaged to audit the financial statements of the company, performed substantive testing for transaction cycles and verification procedures for assets, liabilities, and equity items. However, the auditor failed to identify the risk of teeming and lading in the accounts payable balance.
During the audit, the auditor reviewed the accounts payable balance and performed confirmation procedures to verify the balance with the suppliers. However, the accountant had provided the auditor with fake confirmation responses, and the auditor failed to detect the fraud.
Although the financial statements of Automech Ltd were misstated, the Auditor issued an unqualified opinion, stating that the financial statements were presented fairly, in all material respects, in accordance with the applicable financial reporting framework. After the audit, the fraud was discovered by a whistle-blower, and the accountant was fired. The company’s reputation was damaged, and the external auditor faced legal action for failing to detect the fraud.
Required:
State and explain the procedures that should be followed for verification of assets, liabilities, and equity items in Automech Ltd.
(10 marks)
Answer
Verification procedures for assets, liabilities, and equity items are essential to ensure that these items are properly stated in the financial statements. In the case of teeming and lading fraud, verification procedures can help auditors to detect misstatements in assets, liabilities, and equity items resulting from fictitious transactions.
- Accounts Receivable (Assets): Auditors can select a sample of accounts receivable balances and perform confirmations with customers to verify the existence and accuracy of the balances.
- Inventory (Assets): Auditors can perform a physical inventory count and compare the results to the inventory records in the company’s accounting system. Any discrepancies can be investigated to determine the cause of the difference.
- Property, Plant, and Equipment (PPE) (Assets): Auditors can perform a physical inspection of the PPE and compare the results to the PPE records in the company’s accounting system. Any discrepancies can be investigated to determine the cause of the difference.
- Accounts Payable (Liabilities): Auditors can select a sample of accounts payable balances and perform confirmations with suppliers to verify the existence and accuracy of the balances.
- Accrued Expenses (Liabilities): Auditors can review the company’s documentation and agreements to verify the accuracy of accrued expenses.
- Share Capital (Equity): Auditors can review the company’s documentation and agreements to verify the accuracy of share capital.
- Retained Earnings (Equity): Auditors can review the company’s documentation and agreements to verify the accuracy of retained earnings.
In the case of teeming and lading fraud, auditors must exercise professional skepticism and perform due diligence to detect any fraudulent activity in the financial statements. Auditors must also ensure that they have obtained sufficient and appropriate audit evidence to support their conclusions regarding the accuracy of assets, liabilities, and equity items.
- Tags: Assets, Audit evidence, Equity, Liabilities, Verification procedures
- Level: Level 2
- Topic: Audit and Assurance Evidence
- Series: NOV 2023
- Uploader: Dotse