Research forensic accounting and the growth in this field

Question

Assignment Tasks

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