ACCA AAA ^INT Syllabus B. Professional and Ethical Considerations - Reporting Fraud and Error - Past Papers ^{4 / 5}

You are a manager in Groom & Co, a firm of Chartered Certified Accountants. You have just attended a monthly meeting of audit partners and managers at which client-related matters were discussed. Information in relation to a client, which was discussed at the meeting, is given below:

Spaniel Co

The audit report on the financial statements of Spaniel Co, a long-standing audit client, for the year ended  31 December 2012 was issued in April 2013, and was unmodified. In May 2013, Spaniel Co’s audit committee contacted the audit engagement partner to discuss a fraud that had been discovered. The company’s internal auditors estimate that $4•5 million has been stolen in a payroll fraud, which has been operating since May 2012.

The audit engagement partner commented that neither tests of controls nor substantive audit procedures were conducted on payroll in the audit of the latest financial statements as in previous years’ audits there were no deficiencies found in controls over payroll.

The total assets recognised in Spaniel Co’s financial statements at  31 December 2012 were $80 million. Spaniel Co is considering suing Groom & Co for the total amount of cash stolen from the company, claiming that the audit firm was negligent in conducting the audit.

Required:

Explain the matters that should be considered in determining whether Groom & Co is liable to Spaniel Co in respect of the fraud. (12 marks)

You are an audit manager in Cedar & Co, responsible for the audit of Chestnut Co, a large company which provides information technology services to business customers. The finance director of Chestnut Co, Jack Privet, contacted you this morning, saying:

‘I was alerted yesterday to a fraud being conducted by members of our sales team. It appears that several sales representatives have been claiming reimbursement for fictitious travel and client entertaining expenses and inflating actual expenses incurred.

Specifically, it has been alleged that the sales representatives have claimed on expenses for items such as gifts for clients and office supplies which were never actually purchased, claimed for business-class airline tickets but in reality had purchased economy tickets, claimed for non-existent business mileage and used the company credit card to purchase items for personal use.

I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses. All of the alleged fraudsters have been suspended pending an investigation, which I would like your firm to conduct.

We will prosecute these employees to attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your firm would need to provide an expert witness in the event of a court case. Can we meet tomorrow to discuss this potential assignment?’

Chestnut Co has a small internal audit department and in previous years the evidence obtained by Cedar & Co as part of the external audit has indicated that the control environment of the company is generally good. The audit opinion on the financial statements for the year ended 31 March 2011 was unmodified.

Required:

Assess the ethical and professional issues raised by the request for your firm to investigate the alleged fraudulent activity. (6 marks)