June 2012 Q3a i

You are a manager in Lark & Co, responsible for the audit of Heron Co, an owner-managed business which operates a chain of bars and restaurants.

This is your firm’s first year auditing the client and the audit for the year ended 31 March 2012 is underway. The audit senior sends a note for your attention:

‘When I was auditing revenue I noticed something strange. Heron Co’s revenue, which is almost entirely cash-based, is recognised at $5·5 million in the draft financial statements. However, the accounting system shows that till receipts for cash paid by customers amount to only $3·5 million.

This seemed odd, so I questioned Ava Gull, the financial controller about this. She said that Jack Heron, the company’s owner, deals with cash receipts and posts through journals dealing with cash and revenue. Ava asked Jack the reason for these journals but he refused to give an explanation.

‘While auditing cash, I noticed a payment of $2 million made by electronic transfer from the company’s bank account to an overseas financial institution. The bank statement showed that the transfer was authorised by Jack Heron, but no other documentation regarding the transfer was available.

‘Alarmed by the size of this transaction, and the lack of evidence to support it, I questioned Jack Heron, asking him about the source of cash receipts and the reason for electronic transfer. He would not give any answers and became quite aggressive.’

Required:

(i) Discuss the implications of the circumstances described in the audit senior’s note; and (6 marks)