The Study of Fraud Risk - Assignment Example

PART A Matter 1 The matter here is the breach of the bank loan covenant by Hotline since, the key performance indicators will be at risk. Fraud risk The fraud risk is the risk of some individual within the company who intend to misappropriate the refinancing for the company for their personal. Explanation The fraud risk is the breach of bank loan covenant that is intended to fund the company operation. The fraud is being perpetrated by some individual to benefit themselves from the refining intended for the company. Matter 2 There is weak internal control over cash since, Jamie ports are authorized to approve and pay involves which depicts some fraud risk within the cash department. Fraud risk There is a risk of cash embezzlement by the cash department due to weak internal control over cash. Explanation Jamie port is given an authority to approve and pay invoices which is extremely risky within the cash department since, Jamie will try to manipulate the books of account by paying for fictitious invoices that were never raised. In this regards, the internal control over cash need to improved in order to ensure that there is a different person who pays for the invoice and another to approve the involves raised. Matter 3 The matter is the change of supplier. It is apparent that the intent of changing the supplier is not to save on cost but to provide a friend (lily Spear) an opportunity to supply the product. Fraud risk The fraud risk is the possibility of misappropriation of company’s cash by allocating the tender to supply goods by your friend would amount to risk since; the two will collude to defraud the company Explanation Supplier of the product is a friend who will collude with the hotline staff to supply low quality product at an expensive price in order to corrode the company financially. The possibly of fraud between the supplier and the hotline staff evident since, since the change of supplier, there has been an increase the rate of defect as depicted by the rate of return outward which is a strong indication that the supplier is providing low quality product at the cost of the company (Singleton, 2006). Matter 4 The matter here is that Logan has asked for the manufacturing costs incurred by his wife to be written off as a bad debt which is a fraud to the company. Fraud risk The audit risk is that, the manufacturing cost incurred by Logan’s wife is intended to be set-off as bad debt to the company. Explanation Setting off the wife’s manufacturing cost as bad debt of the company is a fraud since; Logan and his wife are using the company to perpetrate the company cash. The cost incurred in manufacturing must be accounted for and consequently expense incurred by Logan wife shall not be incurred by the company since a company is a legal entity distinct from its shareholders. Matter 5 Angela Spear who is in charge of purchase as entered into a contract with the GF to pay for goods on delivery from the normal 45 creditor’s period. The renegotiation is made without the consent of other purchasing department. Fraud risk The fraud risk is the risk of converting the creditor’s payment period from 45 days to cash on delivery without informing other purchase department of the renegotiation deals. Explanation Angel spear is renegotiating cash on delivery for goods supplied. The contract entered with GF doesn’t involve other purchasing department which signals a sign of fraud in the company. Since Angela spear is the head of purchasing department, she has the control of purchases and thus the renegotiation would amount fraud by colluding with GF to ensure that goods supplied are paid on delivery. PART B The incentives, pressures and opportunities to commit financial report fraud, and attitudes and rationalizations to justify a fraud Fraudulent financial reporting is a global misstatement or omission of cash or disclosure with an intention of deceiving the users. Fraudulent financial reporting might exist where the timing of sales documentation in order to grow the reported sales and earnings as well as accounting for expense as fixed asset to grow the earnings. Misappropriations of assets are fraud that entails theft of a company's assets. For instance in the above case, where Jamie is given an authority to just make approval as well as paying for the invoice. There is possibility of jimmy committing fraud by pay fictitious companies by failing to record revenue and pocketing the cash receipts.  Conditions for Fraud The condition for fraud follows the three main conditions which are Incentives/Pressures, Opportunities and Attitudes/Rationalization. Incentives/Pressures are incentives of executives or other employees to perform fraud. Opportunities are situation that permit executives or workers to perform fraud, Attitudes/Rationalization are signs that an attitude, traits or set of moral values existing that permits executives or workers to exercise disloyal act or they are in an environment that inflict substantial pressure that leads to rationalization of act of disloyal (Moeller, 2009). Incentives/Pressures  The company is under serious situation in meeting the debt covenant or obtaining extra funding Opportunities Inefficient supervision of financial reporting by board of directors to permit management to practice prudence over reporting Rationalization Management is excessively antagonistic. Risk factors for misappropriation of assets for each of the three fraud circumstances:  Incentives/Pressure An individual is not in a position to comply with individual finance commitments.   Opportunities There is no perfect division of duties that permits staffs to handle to cash receipts as well as related books of accounts (Loughran, 2010) Rationalization The management has ignored the insufficient division of responsibilities that permits the significant misappropriation of fraud of cash. Auditors need to investigate whether executives has expertise of fraud or suspected fraud within the organization. Auditors need to i9nvestigate the audit committee concerning the perception of risk of fraud as well as whether the audit committee has expertise of fraud or suspected fraud. Where a company has an internal control audit function, a practitioner must investigate the internal audit’s perception of fraud risk as well as if they have performed any process to recognize it detect fraud. The three responses from the practitioner to fraud are as follows; reconsideration for the whole conduct of audit to act in response to recognized fraud risk, design as well as execute audit process to address selected risk and undertake process to address the risk of executives overriding the controls. Practitioners are mandated to assume the three actions in addressing the significant executives overriding the controls by controlling the journal entities as well as other adjustment for proof of likely misstatement consequential from fraud, revision the accounting approximates for prejudice and appraising the business principle for significant rare transactions (Lonsdale, 2011). C. internal control that will mitigate the risks of fraud   Matter 1 The matter here is the breach of the bank loan covenant by Hotline since, the key performance indicators will be at risk. Fraud risk The fraud risk is the risk of some individual within the company who intend to misappropriate the refinancing for the company for their personal. Recommended Internal Control There need to be effect segregation of duties and effective communication between the company and the bank. Segregation of duties will encourage accountability of every department and thus the processing of loan will effective leading to a reduction in breach of loan with big bank. Matter 2 There is weak internal control over cash since, Jamie a port is authorized to approve and pay involves which depicts some fraud risk within the cash department. Fraud risk There is a risk of cash embezzlement by the cash department due to weak internal control over cash. Recommended Internal Control The internal control over cash need to strong. This is made possible by ensuring that their segregation of duties within the cash department as well as ensuring those workers in the cash department is experienced and who observe competence and integrity. Matter 3 The matter is the change of supplier. It is apparent that the intent of changing the supplier is not to save on cost but to provide a friend (lily Spear) an opportunity to supply the product. Fraud risk The fraud risk is the possibility of misappropriation of company’s cash by allocating the tender to supply goods by your friend would amount to risk since; the two will collude to defraud the company Recommended Internal Control There need be an effective approach of changing the supply. The company just embraces the bidding for tender in order to ensure that highest bidder is selected based on merits such as low cost, quality product and experience. Providing tenders and bidding will encourage transparency and accountability. Matter 4 The matter here is that Logan has asked for the manufacturing costs incurred by his wife to be written off as a bad debt which is a fraud to the company. Fraud risk The audit risk is that, the manufacturing cost incurred by Logan’s wife is intended to be set-off as bad debt to the company. Recommended Internal Control There must exist an effective internal control over cost. This can be achieved by ensuring that segregation of duties exists between the production manager and the manager of the company in order to minimize the manager’s direct influence on manufacturing manager. Matter 5 Angela Spear who is in charge of purchase as entered into a contract with the GF to pay for goods on delivery from the normal 45 creditor’s period. The renegotiation is made without the consent of other purchasing department. Fraud risk The fraud risk is the risk of converting the creditor’s payment period from 45 days to cash on delivery without informing other purchase department of the renegotiation deals. Recommended Internal Control The change of supplier agreement needs to be made with consideration of other purchase department in order to encourage for wide accountability and transparency. The terms of contract between the supply and the purchase department for hotline need to signed and approved by the company director (Singleton, 2006). Reference list Lonsdale, J. (2011) Performance Auditing: Contributing to Accountability . Loughran, M. (2010) Auditing For Dummies. Moeller, R.R. (2009) Brink's Modern Internal Auditing: A Common Body of Knowledge. Singleton, T. (2006) Fraud Auditing and Forensic Accounting. Read More