Errors, Frauds and Irregularities

​​Contrast the responsibilities of the external auditors and internal auditors in detection of fraud.

​​Describe FOUR characteristics of financial statement fraud.

​​Your client, ADL Ltd., deals in selling and distribution of office stationery. The company’s Director mentions to you the possibility of the occurrence of errors and frauds within the company. The company also recently introduced an internal audit unit in its organisation structure to enhance the company’s internal control framework. 

​​Antony and Associates (CPA) have been the auditors of Bidii Logistics Company for the last two years. This company deals with shipping and movement of cargo within the East Africa region. The lead auditor in his review of the financial statements suspected fraudulent financial reporting overriding controls and immediately convened a meeting with his engagement team.

Required:
(i) Explain the meaning of "fraudulent financial reporting".

(ii) Discuss six techniques that the management of Bidii Logistics Company might have deployed to achieve fraudulent financial reporting.

(iii) Evaluate the importance of the meeting convened by the lead auditor with the engagement team.

​​You are the training officer in Makau and Associates. You have been appointed to give an induction course to a group of new trainee audit staff regarding fraud and error.

A number of the trainees have indicated that they are aware that the issue of fraud and error is something they will likely face in the completion of their assignments, but are unsure as to what their responsibilities and those of the directors are in this area.

You have decided to provide them with explanatory notes with regard to audit matters pertaining to fraud and error.

Required:
Prepare notes for the trainee audit staff undertaking your induction course which:

(a) Differentiate the responsibilities of the auditor and those of the directors with respect to fraud.

(b) Discuss five steps which the auditor might take when fraud is suspected.

(c) Evaluate three limitations of audit procedures in detecting fraud and error.

​​Explain two ways in which fraudulent financial reporting might be carried out in an organisation.

​​ Describe five motives for fraudulent financial reporting by the management of an entity.

​​Explain five reasons why directors might decide not to correct a material misstatement in the financial statements.

​ ​​ Describe the procedures you would apply in detecting fraud where employees create non-existent suppliers and then divert payments to themselves.