Fraud – Knowsia

BCL – L1 – Q66 – Governance and ethical issues relating to business

Explain governance issues and director disqualification factors in a case involving fraud at a company.

Question

In 2015, KWEKU LTD, which carries on the business of exporting cassava and mangoes from Ghana to Europe, opened an account with Zenith Bank at the Tema Branch. In 2016, the Finance Manager, who is the sole accounts officer of the company, forged the signature of the Managing Director (who was also the sole signatory to the bank account of the company) and made several withdrawals from the company to the tune of GH₵550,000. The bank in that same year requested that the Managing Director should, within two weeks of the letter, confirm the credit balance on the account, which at the time stood at GH₵2,200,000. The Managing Director, without any further checks, signed the document, thus confirming the credit balance presented by the bank. In 2017, the auditors raised queries on some of the fictitious withdrawals. The Chairman of the Board ordered the Human Resource Manager to dismiss both the Managing Director and the Finance Manager with immediate effect.

Required:

(a) Explain FOUR (4) issues in the case relating to governance and duties of directors. (10 marks)

(b) Explain THREE (3) factors that disqualify a person from being appointed as a director. (10 marks)

Answer

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Tags: Board authority, Corporate Governance, Directors duties, Disqualification, Fiduciary duty, Fraud, Termination
Level: Level 1

Topic: overnance and ethical issues relating to business

FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

Question

AX LTD
Below is the summarised draft statement of financial position of AX Ltd, a company listed on the West Africa Stock Exchange, as at 31 March, 20X9:

Non-current assets
Property at valuation (land GH₵20,000; buildings GH₵165,000) (note ii)	185,000
Plant (note ii)	180,500
Financial assets at fair value through profit or loss at 1 April 20X8 (note iii)	12,500
	378,000
Current assets
Inventory	84,000
Trade receivables (note iv)	52,200
Bank	3,800
	140,000
Total assets	518,000

Equity and Liabilities
Equity
Stated capital	290,000
Capital surplus	12,300
Income surplus
– At 1 April 20X8	96,700
– For the year ended 31 March 20X9	12,300
	109,000
	411,300
Non-current liabilities
Deferred tax – at 1 April 20X8 (note v)	19,200
Current liabilities	81,800
	101,000
Total equity and liabilities	518,000

The following information is relevant:
(i) AX Ltd’s statement of profit or loss includes GH₵8million of revenue for credit sales made on a “sale or return” basis. At 31 March 20X9, customers who had not paid for the goods, had the right to return GH₵2.6million of them. AX Ltd applied a mark-up on cost of 30% on all these sales. In the past, AX Ltd’s customers have sometimes returned goods under this type of agreement.
(ii) The non-current assets have not been depreciated for the year ended 31 March 20X9. AX Ltd has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position as at 1 April 20X8 when the building had a remaining life of 15 years. A qualified surveyor has valued the land and buildings at 31 March 20X9 at GH₵180million. Plant is depreciated at 20% on the reducing balance basis.
(iii) The financial assets at fair value through profit or loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 20X8 the relevant index was 1,200 and at 31 March 20X9 it was 1,296.
(iv) In late March 20X9 the directors of AX Ltd discovered a material fraud perpetrated by the company’s credit controller that had been continuing for some time. Investigations revealed that a total of GH₵4 million of the trade receivables as shown in the statement of financial position at 31 March 20X9 had in fact been paid and the money had been stolen by the credit controller. An analysis revealed that GH₵1.5 million had been stolen in the year to 31 March 20X8 with the rest being stolen in the current year. AX Ltd is not insured for this loss and it cannot be recovered from the credit controller, nor is it deductible for tax purpose.
(v) During the year, the company’s taxable temporary differences increased by GH₵10 million of which GH₵6 million related to the revaluation of the property. The deferred tax relating to the remainder of the increase in the income tax rate is 20%.
(vi) The above figures do not include the estimated provision for income tax on the profit for the year ended 31 March 20X9. After allowing for any adjustments required in terms (i) to (iv), the directors have estimated the provision of GH₵11.4 million (this is in addition to the deferred tax effects of item (v).
(vii) During the year, dividends of GH₵15.5 million were paid. These have been correctly accounted for in the above statement of financial position.

Required:
Taking into account any adjustments required by items (i) to (vii) above:
(a) Prepare a statement showing the recalculation of AX Ltd’s profit for the year ended 31 March 20X9; and

(b) Redraft the statement of financial position of AX Ltd as at 31 March 20X9.

Answer

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Tags: Deferred Tax, Depreciation, Financial Position, Fraud, Inventory, Revaluation, Trade Receivables
Level: Level 2

Topic: Inventory Accounting

AA – L2 – Q36 – Internal Control Systems

Describe the impact of interim audit work on internal controls for the final audit. List factors to consider for additional work on internal controls at the final audit post-interim audit. Explain how an audit committee benefits external and internal auditors. Explain differences in internal and external auditors' responsibilities for fraud and error prevention, detection, and reporting. List criteria for external auditors to rely on internal audit work per ISA 610.

Question

An audit is often carried out in more than one sitting, especially when there are tight reporting deadlines. The auditors will carry out an interim audit during the period under review followed by a final audit shortly after the year end. Work at the interim audit will often include obtaining audit evidence about the operating effectiveness of controls.

(a)(i) Describe the impact on the final audit of performing work on internal controls at an interim audit.

(ii) Assuming an interim audit has taken place and work on internal controls was carried out, list the factors the auditor should consider when deciding how much more work is needed at the final audit in relation to internal controls.

Businesses may establish an audit committee to help improve corporate governance within a company. This can provide benefits to both internal and external auditors.

(b) Explain how an audit committee can benefit both the external auditors and the internal auditors of an entity.

There are similarities and differences between the responsibilities of internal and external auditors. Both internal and external auditors have responsibilities relating to the prevention, detection and reporting of fraud, for example, but their responsibilities are not the same.

(c) Explain the difference between the responsibilities of internal auditors and external auditors for the prevention, detection and reporting of fraud and error.

ISA 610 Using the Work of Internal Auditors provides guidance to external auditors on the use of internal audit work.
(d) List and explain the various criteria that should be considered by external auditors when assessing whether to take reliance from work performed by internal audit.

Answer

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Tags: Detection, Error, External Auditors, Fraud, Internal Auditors, ISA 240, Prevention, Reporting
Level: Level 2

Topic: Fraud and Error

AAA – L3 – Q13 – Fraud

Comment on the need for ethical guidance for accountants on money laundering.

Question

(a) Comment on the need for ethical guidance for accountants on money laundering. (b) Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error. (c) Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error.

Daniel’s Maritime and Harbor (DMH) have a marina in Lagos and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of DMH and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

30% of the yachts on sale by DMH are supplied through one of the major international boating companies with a special finance arrangement deal. However, DMH have also obtained separate finance on these yachts, which are therefore in effect being ‘double financed’.
Ten yachts shown as assets by DMH cannot be located, with no explanation other than that they have not been sold. These yachts together are worth approximately ₦50 million.
Long delays have occurred in performing reconciliations with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken.
Revenues have been overstated by ₦100 million in the current financial statements.
The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified.

(d) Describe what steps you would take to further investigate and then report on the matters referred to above.

Answer

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Tags: Auditor Responsibility, Ethics, Fraud, Money laundering
Level: Level 3

Topic: Fraud and Error

Tag (SQ): Fraud

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BCL – L1 – Q66 – Governance and ethical issues relating to business

Explain governance issues and director disqualification factors in a case involving fraud at a company.

FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

AA – L2 – Q36 – Internal Control Systems

AAA – L3 – Q13 – Fraud

Comment on the need for ethical guidance for accountants on money laundering.

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BCL – L1 – Q66 – Governance and ethical issues relating to business

Explain governance issues and director disqualification factors in a case involving fraud at a company.

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FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

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AA – L2 – Q36 – Internal Control Systems

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AAA – L3 – Q13 – Fraud

Comment on the need for ethical guidance for accountants on money laundering.

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