Errors, Frauds and Irregularities – Questions and Answers

Subject Title: Auditing and Assurance Revision Kit

Topic: Errors, Frauds and Irregularities

QUESTION 1
December 2022 Question One A
Distinguish between a “financial statement audit” and a “fraud examination”. (4 marks)

QUESTION 2
December 2022 Question Five A
Your firm has been appointed as the new auditors for Jazamatt Ltd., a small-scale supermarket. The company has recently unearthed fraudulent activities perpetrated by employees leading to loss of credibility with its current and potential customers. The fraud led to loss of company revenue which was brought about by a weak internal control system (ICS). The company has requested your firm to support it to improve its operations in order to avoid another fraud in future.

(i) Propose a five-step approach that you could adopt to identify deficiencies (ordinary and significant) including material weaknesses in the ICS of Jazamatt Ltd. (5 marks)

(ii) Explain to the management of Jazamatt Ltd. THREE responsibilities that they bear regarding evaluating risks of fraud in the company. (3 marks)

(iii) Highlight THREE types of revenue manipulations that the employees of Jazamatt Ltd. may have exploited in undertaking the fraud. (3 marks)

QUESTION 3
August 2022 Question Three A
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.

Required:
(i) Explain four ways in which the internal audit unit could assist the management in managing the risk of errors and frauds. (4 marks)
(ii) Using relevant examples, describe three components of the Fraud Triangle that the management of ADL Ltd. should be aware of. (6 marks)
(iii) Analyse six audit procedures that you would undertake in response to errors and fraud related to inventory quantities reported in the company’s financial statements.
(6 marks)
QUESTION 4
April 2022 Question Three B
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”. (2 marks)
(ii) Discuss six techniques that the management of Bidii Logistics Company might have deployed to achieve fraudulent financial reporting. (6 marks)
(iii) Evaluate the importance of the meeting convened by the lead auditor with the engagement team. (2 marks)

QUESTION 5
September 2021 Question Four
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. (4 marks)
(b) Discuss five steps which the auditor might take when fraud is suspected. (10 marks)
(c) Evaluate three limitations of audit procedures in detecting fraud and error. (6 marks)
(Total: 20 marks)
QUESTION 6
May 2021 Question Four B
Explain two ways in which fraudulent financial reporting might be carried out in an organisation. (4 marks)

QUESTION 7
November 2020 Question Two B
Describe five motives for fraudulent financial reporting by the management of an entity.
(5 marks)
QUESTION 8
May 2019 Question Four B
Citing two examples, explain the term “fraudulent financial reporting”. (3marks)

QUESTION 9
May 2018 Question One A
Describe the procedures you would apply in detecting fraud where employees create non-existent suppliers and then divert payments to themselves. (8 marks)