JUNE 2012 QUESTION 5 a) What is fraud and how does it differs from error?

Fraud refers to an intentional act done by one or more individuals among management those charged with governance, employees or third party in use of illegal advantage. Ex, omission of amount or disclosures from an entitys accounting records or FS. Intentional misstatement resulting from fraudulent financial reporting and misstatement of assets involved theft on entitys asset by employees. The error refers to unintentional misstatement in the FS including the omission of an amount or a disclosure mistake in processing data, incorrect accounting estimate and misapplication of accounting principle.

b) It is said that the Fraud Diamond can predict the existence of fraud. Explain the elements of the Fraud Diamond and provide one (1) example to each element of the Fraud Diamond that exists in the above case. HOW FRAUD CAN OCCUR? 1. PRESSURE/INCENTIVE Excessive pressure exist on management to meet the financial target especially where high degree of competition, declining profit and negative cash flows Personal financial obligation in the company among the management create pressure to commit fraud on shares, stock option and bonus Excessive pressure to meet third parties expectation such as investment analyst, investors and bankers For example the students are paid the same rate even during weekends and public holidays. This lead to pressure when they demand for higher salary due to they face personal financial obligation difficulties.

2. OPPORTUNITY Nature of the industry provides opportunities to engage in fraudulent activities such as complex transaction, related party transaction and international business Ineffective monitoring of management as a result of domination of management by single person Lack of good internal control, high turnover rate of senior management and ineffective accounting systems For example owner did not check on student background e.g. theft history thus giving opportunity for them to steal the cash again due to weak hiring system

3. RATIONALIZATION/ATTITUDE Excessive interest by management to increase stock price of entity Promise made by management to achieve certain target to third parties No separate legal entity between the owner and the business Low morale value among the employees For example, with low salary being paid compared to local residents employees and no tipping culture, waiters would not bother to ensure that the customers pay for the food. Some customers may leave without paying when Adam Adha is busy elsewhere.

c) Identify and discuss the risks based on the observations made by Omar Hakim. Suggest ways to overcome these risks. 1) Waiters turnover introduce standards remuneration policy to every employees 2) Losing of loyal customers proper training to employees about best operation practices 3) Meals/order rejected introduce numbered order tickets systems

4) Underpriced/overpriced charged prepare price list for ready cooked meal in order to ensure customers being charged properly

d) Explain briefly the audit risks at Adam Zaim Coffee Shop? The audit risks at Adam Zaim Coffee Shop is the existence of inventory in the stock room. This is due to the owner is unaware of this fact as he never checks the inventory. Therefore, the food inventory might be overstated when the real amount (valuation) is less because of the employees serve special to their friends but charging only the basic price. e) As a friend of Adam Adha and as an auditor, briefly discuss the steps taken by Omar Hakim to assess the going concern of the coffee shop business and suggests ways to overcome the going concern problem. Auditors are required to issue a going concern opinion if they doubt the company's ability to continue its operations in the next accounting period. Auditors need to assess whether the entity can continue as a going concern. Issues to consider in making this assessment include: Assessing funding sources: this involves the review of banking arrangements, the availability of external finance and whether there are assets, which can be sold for cash Checking compliance with debt covenants. Any breaches must be rectified before the reporting date, otherwise the loan must be classified as current Confirming a guarantor can continue to provide the guarantee Checking key customers and suppliers will continue to operate and do not face any financial difficulties themselves The overall impact current economic conditions may potentially have on the industry in which the company operates this will include noting any decline in sales

 Ensuring forecasts and budgets are updated to reflect broader market conditions. This will enable the identification of any deficiencies and how they can be addressed Ensuring that forecasts and budgets are prepared so auditors are able to meet their obligations to consider going concern of the entity for at least the 12 months from the date of the audit report To overcome the going concern problem, the management must plan to sell the non-essential assets, borrow money or restructure existing debt, reduce or delay unnecessary expenditures and increase owner investment.