Home Safety, Inc.%u2019s management has been trying for months to acquire one of its largest competitors in the home security industry%u2014Lock-It-Up company. Home Safety%u2019s board of directors, before agreeing to the acquisition, wanted Lock-It-Up%u2019s books to be audited. They have come to your firm to perform the audit, and they have asked that you specifically examine the owner%u2019s family and their roles in the company.
LOCK-IT-UP COMPANY
Lock-It-Up is a large local home security business that has been in the area for a long time. They have had a large market share for several years and get many referrals from present users of their home security systems. They have five large locations in the area from which they perform business.
INTERNAL ENVIRONMENT
1. Management Style. The owner of the business, Jeff Lester, has taken a hands-off approach to managing his business. He is frequently taking extended vacations with his family and rarely examines the books of the business. He is happy with his level of income and is not concerned with the future, believing that his company will always be profitable.
2. Executives. Several of the owner%u2019s relatives hold high positions in the company. The owner%u2019s brother, Chucky %u201Cgambling man%u201D Lester, is the chief accountant and answers only to his brother, Jeff. He is majority owner of a local amateur sports team, which is struggling to sell tickets and is facing bankruptcy.
3. Employees. The majority of employees for the company are salespersons who are on the front lines trying to push their product. They receive a minimal salary, but are highly compensated through commissions for the sales they make. Some of the top sellers make over $250,000 a year.
4. Internal Controls. In order to facilitate quicker purchases and obtain deals from vendors, Jeff has left Chucky a stack of blank, pre-signed checks. Anyone in the purchasing department has access to these checks and can use them as needed.
Requirements
1. As auditor, list the concerns you have that may suggest fraud is occurring in the company.
2. What controls would you suggest the company could put in place to prevent potential fraud from occurring for each of the concerns you listed in question 1?
3. Would you feel comfortable signing off on Home Safety%u2019s financial statements if they were to acquire Lock-It-Up this year? Why or why not?
4. What are some factors in the auditor-client relationship that can make it more difficult for the auditor to detect fraud?