Session 4 Questions

Corporate Governance Questions

1 Suggest the criteria that should be met to ensure that an audit committee is effective
2 Evaluate why auditors have been reluctant to report on the directors review of the
effectiveness of internal controls.
3 Discuss what are likely to be the main limitations a company faces in establishing an
effective audit committee.

Fraud Questions
1. You are a manager at Forest & Co, a firm of accountants and registered auditors. At
a recent meeting of partners and managers the following matters where discussed in
relation to two audit clients:
a) Leyton Ltd
An unmodified audit report on the financial statements of Leyton Ltd, for the year ended 31
December 2013, was issued in March 2014. Leyton Ltd is a long-standing audit client of
Forest & Co. In May 2014, Leyton Ltds audit committee contacted the audit engagement
partner to discuss a fraud that had been discovered. The companys internal auditors have
identified a payroll fraud which has been operating since April 2013. They estimate that
3.75 million has been stolen in the fraud.
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 Leyton Ltds financial statements at 31 December 2013 were 67
million. Leyton Ltd is considering suing Forest & Co for the total amount of cash stolen from
the company, claiming that the audit firm was negligent in conducting the audit.

Required:
Evaluate the matters that should be considered in ascertaining whether Forest & Co is liable
to Leyton Ltd in respect of the fraud.
(12 arks)

b) Twilight Ltd
The audit of a new client Twilight & Co, an owner-managed business, is in progress. The
business operates a chain of bars across the region and revenue is almost entirely cash
based. The audit senior has raised the following for consideration:
When I was auditing revenue I noticed something unusual. The draft financial statements
show a total for revenue of 4.5 million whereas the accounting system shows till receipts for
cash paid by customers of 325 million. This seemed strange, so I queried it with the
financial controller. She said that the companys owner deals with cash receipts and, posts
through journals for cash and revenue. The financial controller asked the owner the reason
for these journals but he refused to give an explanation.
While auditing cash, I noticed a payment of 1.25 million made by electronic transfer from
the companys bank account to an overseas financial institution. The bank statement
showed that the transfer was authorised by the owner, 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 the owner, asking him about the source of cash receipts and the
reason for the electronic transfer. He would not give any answers and became quite
aggressive.

Required:
Analyse the implications of the circumstances described by the audit senior and suggest the
nature of any reporting that should take place by the audit senior.
(8 marks)
(Total 20 marks)