Tag (SQ): Fraud Detection
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- 15 Marks
Respond to directors about undetected petty cash theft and audit report reissuance. Explain why auditors consider compliance with laws and regulations and actions for material non-compliance.
Question
The directors of your client, Solace Medical Research Labs, have telephoned to tell you that one of their junior employees has been caught stealing petty cash and has admitted to several previous thefts. The total amount of lost cash has been estimated by the directors to be $300. The thefts took place in the year in respect of which you have just completed the audit. The materiality level on the audit was set at $100,000.
The directors are demanding to know why this was not picked up during the audit work, and when the auditor’s report will be reissued as the auditor’s report and financial statements have now been signed.
Required:
(a) Set out the points you would include in a response to the directors of Solace Medical Research Labs.
(b) Explain why the auditor, when planning and performing his audit, should consider whether his client has complied with law and regulations. Set out the actions which may be appropriate if the auditor identifies material instances of noncompliance (NOCLAR).
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- 20 Marks
Discuss current audit regulations and reasons for criticism regarding standards, fraud, non-audit services, and auditor tenure. Discuss reasons for criticism of current audit regulations on standards, fraud, non-audit services, and tenure.
Question
The auditing profession has been criticised recently for its role in monitoring potential corporate failure. Radical reforms have been called for in the way the audit is regulated. For example, there has been a call for a change of legislation in the following ways:
- Auditing standards: Auditing standards should be set and enforced independently from the accounting profession.
- Fraud: Auditing firms should have a duty to detect and report fraud.
- Non-audit services: Non-audit services supplied to an audit client should be stopped.
- The duration of the appointment of auditors: The appointment of auditors should be for a maximum period of seven years.
Required:
(a) Describe the current regulatory and professional requirements relating to each of the headings listed above.
(b) Discuss the reasons why you feel the audit profession has been criticised over the current regulations in the above areas.
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