Explains the nature of forensic accounting

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Reference no: EM131340850 , Length: word count:3000

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Question 1: Forensic accounting is a specialised field of accounting and auditing that is on the rise both in Australia and globally. In 2012, Ken Tysiac, an editor of the US Journal of Accountancy, wrote in the 'CPA Insider':

Demand for forensic accounting services will remain strong over the next five years in the United States as a result of increased financial regulations and continued demand for investigative services in the wake of the recession, according to a new market research report.

Source: Tysiac, K. (2012). Demand strong for forensic accountants in wake of financial crisis. Retrieved from the American Institute of CPAs (AICPA) Store website.

Required: Research forensic accounting and the growth in this field, then complete a brief report of approximately 750 words that:

(a) Explains the nature of forensic accounting, including the range of activities forensic accountants undertake.

(b) Appraises and discusses the growth in forensic accounting over the last 10 to 15 years.

Question 2: Grant and Grant, Public Accountants, had been the auditors of Reliable Finance Company Limited for seven years. In September 2015, due to cash flow problems, the company successfully applied for a $2 million line of credit from an overseas bank, Landers and Spencers International Bankers (L&S). The audited financial statements for the year ended 30 June 2015 were used to support the company's application.

Within two months of advancing the loan, it was found that Reliable Finance could not continue repayments and it was placed into liquidation. It was subsequently discovered that the company's original cash flow problems had arisen because the Chief Executive Officer (CEO) had been making fraudulent payments, totalling $3.5 million, to fund a gambling habit. The audit in 2015 had not detected the fraud.

The liquidators, on behalf of Reliable Finance, have commenced a tort of negligence suit against Grant and Grant to recover the $3.5 million. Landers and Spencers International Bankers has also commenced a similar action to recover their $2 million loan.

Required: In a report for Roger Grant, the audit partner of Grant and Grant, of approximately 1,000 words:

(a) Assess if Grant and Grant will be liable to repay the lost money to the Reliable Finance? In your assessment make appropriate references to a tort of negligence and relevant case law.

(b) Assess whether Lander and Spencers International Bankers will be successful in their action against Grant & Grant? Justify your answer using the appropriate reference to a tort of negligence and relevant case law.

(c) Would your answer to (b) be different if Grant and Grant had worked with Reliable Finance to prepare their loan application and then discussed the details of the loan with Lander and Spencers International Bankers? Justify your answer.

Question 3: Taste Sensations Pty Ltd retails quality gourmet cooking ingredients to the home kitchen and small restaurant markets, which are sourced both locally and from overseas. Recently the company has extended its product range to include 'ready-to-cook' meals suitable for dinner parties, with customers ordering from a set menu.

The company currently has 250 store outlets of varying sizes Australia wide and has undertaken a focused marketing and promotion strategy and the acquisition of several smaller competitors over the past couple of years to expand its business. The number of cafés stocking Taste Sensations products has increased to 600. However, only 5 new cafés have been signed-up in the last year. Products are sold on consignment through these cafés. The company also owns five warehouses to service the stores and café clients.

The company's management team is experienced, all managers having been with the company more than five years. The new finance director, who joined the company last month, is the only exception.

The company installed a new computer system in August 2015. The system was installed by a professional computer company, and the old and new systems were run parallel for three months. The new system allows each outlet to process its own stocktake results, accounts payable invoices and payments. Management has experienced no major problems with the new system to date.

Your firm, Spencer and Applebee, has acted as the auditor of Taste Sensations Pty Ltd for some years, and you are currently carrying out the planning for the 30 June 2016 audit. Taste Sensations Pty Ltd has an internal audit group that may be able to assist you with this year's audit for the first time. You have also obtained the industry average ratios for 2016 and 2015.

Industry Averages


2016

2015

Gross Profit

0.52

0.52

Net Profit

0.18

0.20

Return on Assets

0.15

0.11

Current Ratio

0.40

0.40

Days in inventory

100 days

98 days

Days in Receivable

35 days

30 days

Days in Payables

136 days

150 days

Debt to Equity Ratio

1.83

1.65

Debt to Asset Ratio

0.65

0.62

The client has provided you with their draft financial information in respect of the year ended 30 June 2016.

Taste Sensations Pty Ltd

Draft Income Statement

for the year ended 30 June 2016


2016 2015

$'000 $'000



Revenue

Café

Food 75,445 76,520
Beverages 23,603 21,420
Other 9,000

108,048 97,940
Stores

Food & beverages 203,368 189,610
Ready-to-cook range 8,560 12,932

211,928 202,542
Total Revenue 319,976 300,482
COS 188,264 178,188
Gross profit

Café

Food 34,770 40,270
Beverages 23,610 21,420
Other 8,730



Stores 67,110 61,690
Food & beverages 56,312 54,528
Ready-to-cook range 4,730 5,978

61,042 60,506
Total Gross Profit 128,152 122,196
Other revenue 6,560 3,098

134,712 125,294
Indirect expenses

Advertising 266 370



Bad debt expense 120 110
Cleaning 2,748 2,560
Depreciation 4,210 4,196
Fees & permits 586 578
Wages 24,899 29,750
Interest 16,538 10,422
Payroll on costs 9,170 8,925
Repairs & maintenance 4,960 5,304
Security contractors 1,092 986
Total expenses 64,589 65,956
Operating profit before tax 70,123 59,338
Security contractors 1,092 986
Total expenses 64,589 65,956
Operating profit before tax 70,123 59,338

Taste Sensations Pty Ltd

Draft Statement of Financial Position as

at 30 June 2016


Notes 2016 2015
Current Assets
$'000 $'000
Cash
110 64
Receivables (a) 34,858 24,690
Inventories
69,231 44,640
Total current assets
104,199 69,394
Non-current assets


Receivables (a) 52 90
Property, Plant & (b) 439,772 442,314
Equipment


Other (c) 93,221 70,296
Total non-current
533,045 512,700
assets


Total assets
637,244 582,094
Current liabilities


Trade and other payables (d) 310,167 300,008
Provisions
52,000 56,000
Total current liabilities
362,167 356,008
Non-current liabilities


Borrowings (d) 44,000 44,000
Provisions
19,654 40,786
Total non-current liabilities
63,654 84,786
Total liabilities
425,821 440,794
Net Assets
211,423 141,300
Share Capital
100,000 100,000
Reserves
1200,00 120,000
Accumulated losses
-8,577 -78,700
Total Equity
211,423 141,300




Notes to the draft financial report




2016 2015


$'000 $'000
(a) Trade and other Receivables - current


Trade receivables
36,588 26,510
Provision for doubtful debts
-2,000 -1,820


34,588 24,690
Trade and other receivables - non-current


Amounts owing from related


parties
52 90
(a four year loan to the financial director)






(b) Property Plant and equipment


Freehold land at cost
280,082 280,082
Buildings at cost
148,380 148,380
less accumulated depreciation
-8,210 -7,560
Carrying amount of buildings
140,170 140,820
Plant and equipment at cost
27,280 25,612
less accumulated depreciation
-7,760 -4,200
Carrying amount of plant and equipment
19,520 21,412
Total property, plant and equipment
439,772 442,314




c) Other non-current 


Investment project


Capital works in progress at cost
24,448
Site lease, liquor and entertainment licence
6200
Development expenditure at cost
13314


43,962
Deferred tax asset
9,259 30,296
Goodwill at cost
40,000 40,000


93,221 70,296

On the 15 January 2016, the company entered into a number of agreements for the construction and development of a restaurant and entertainment complex, and it's leasing upon completion. This is Taste Sensations Pty Ltd's first venture into the hospitality industry.

(d) Trade and other payables and borrowings -

current

Bank overdraft - secured        258,487         252,768

Trade payables                      51,680           47,240

                                            310,167          300,008

Borrowings - non-current

Secured loan                         44,000            44,000

The loans and other bank accommodations are secured against the remaining property, plant and equipment. These loans are subject to a covenant agreement which specifies that the company maintain the following ratios:

  • net tangible asset ratio which is positive
  • a positive current ratio
  • debt to equity ratio of 2:1

e) capital expenditure commitments

Aggregate capital expenditure contracted for 30 June 2016 for the construction and development of the restaurant and entertainment complex not provided for in the financial statements.

Payable no later than one year - 57,728

Payable later than one year, not later than two years - 33,432

Required

(a) Based on the draft financial information provided, use Excel to:

a. Complete basic comparative analysis.

b. Calculate the ratios you think are necessary to undertake preliminary analytical procedures.

(b) Using the back ground information and your findings in (a) to complete a brief report (of approximately 750 words) for Andrew Chadwick, the audit partner of your firm, that:

a. Comments on ratio results and other comparative analysis of the 2016/2015 financials.

b. Identifies, and justifies, three (3) account areas that are at the greater risk of misstatement, and whether those accounts are likely to be over or understated.

c. identifies, and justifies, one (1) assertion most at risk for each of the accounts identified in b.

Question 4: You are the auditor of Tiny Tot Toy Ltd (TTT). The company imports children's toys from China and sells to retail stores in Australia. Below is a description of the company's sales system, which you have recorded as part of the audit planning.

Sales System Procedures

Customer orders are usually received through the company's email/internet ordering system and are dealt with by the Accounts Receivable Clerk (Ms Andrews). After Ms Andrews emails a confirmation to the customer, she prepares a five-part sales invoice (one original and four copies) and enters a number on the invoice in strict numerical sequence to ensure no invoices are lost. The invoices are distributed as follows:

Copy 1: held by Ms Andrews until she receives notice that the order has been delivered to the customer (return of copy 4)

Copy 2: is sent to the accounts posting area.

Copy 3 to 5: sent to the warehouse/storeroom for the assembly (picking) and dispatch of the order.

When the order has been picked and loaded onto the delivery van, a second store-person is required to check the details of the toys being dispatch agree to invoices 3-5. They then sign all three copies as evidence of this check. The store-person then distributes the invoice copies as follows:

Copy 3: is sent with the goods.

Copy 4: is returned to the Accounts Receivable Clerk (Ms Andrews)

Copy 5: is retained as by warehouse as proof that the goods have been delivered.

When Ms Andrews receives invoice copy 4, she inserts the sale prices and calculates the extended value (price x quantity) of each invoice. Ms Andrews takes great care to check her calculations and ensures that the correct quantities have been billed. She initials each invoice to signify she has performed this check, then:

Copy 1: is sent to the customer.

Copy 4: is sent to the accounts posting area and stapled to copy 2 of the invoice.

The Assistant Accounts Receivable Clerk (Mr Anthony) takes copies 2 and 4 of the invoice and prepares a batch total (a sum of the invoice values of all dispatched orders) and enters the details into a batch register for later checking. The invoice batches are then forwarded to the Data Processing department where the sales are posted to the accounts receivable subsidiary ledgers and the general ledgers.

Mr Anthony receives hard copies of the sales reports (sales journal) from the Data Processing department and an aged receivables report, which he signs after he reconciles the totals with his batch register. He also prepares a monthly reconciliation to agree the movements in the Accounts Receivable subsidiary ledgers with the general ledger.

Then the Chief Accountant (Mr Fredericks) prepares and initials the monthly Accounts Receivable Reconciliation.

At the end of the month, the Accounts Receivable Clerk (Ms Andrews) receives the monthly statements from the Data Processing department which forwards to customers. She also follows up any overdue debts and processes any bad debt write-offs.

Required: Complete an internal memo, of approximately 500 words, to your audit partner, Mark Andrews, and:

(a) Identify and explain two (2) potentially reliable controls in TTT's system.

(b) Identify and explain three (3) control weaknesses evident in TTT's system.

(c) Briefly, explain and justify your overall assessment of control risk for the sales system.

(d) Identify two (2) key assertions relating to sales, accounts receivable and inventory that are impacted by the controls in the sales system. Justify your choice of assertions. (9 marks)

Rationale - Covering material from topics 1 to 5, this assessment has been designed to develop your abilities to:

  • appraise the expanding scope of auditing in the current international business environment;
  • explain the role of assurance services and providers;
  • identify and evaluate the influences on the audit processes, including Australian and international professional standards, professional bodies and public expectations within a global market.
  • appraise the client's business environment and apply the risk model;
  • explain, select and apply procedures involved in the audit process.

Word Count- 3000

Attachment:- Assignment.rar

Reference no: EM131340850

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Reviews

len1340850

1/4/2017 5:33:21 AM

Explanation and appraisal of the expanded role of auditors in the forensic accounting area-Forensic accounting and the range of forensic accounting activities comprehensively explained. The discussion on the growth of forensic accounting demonstrates an insightful understanding of the expanding role of the auditor. Research is evidenced by the inclusion of four or more appropriate references. Appraisal of the client's internal control environment and application to the audit risk model. Explanation for the selection of tests of control in the audit process. Well supported and coherent explanation for the choice of two strong internal controls. Well supported and coherent explanation for the choice of three control weaknesses that most significantly threaten the client's business to the sales and collection cycle of the business. Well supported and coherent explanation of the six assertions identified for sales, accounts receivable and inventory. Professional communication in accordance with APA 6th edition style. Appropriate report and memo format used. Excellent written expression with very clear articulation of ideas and concepts. Superior grammar and spelling skills.

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