Auditing Theory

Q3-FRAUD (3 marks)

Type of fraud

According to ASA 240.11 (ISA 240.11), fraud is defined as “an intentional act by one or mare individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage”. Hence, there are two main types of fraud associated with JBH Company which are fraudulent financial reporting and misappropriation of assets.

1st factor: fraudulent financial reporting

For auditors, it is their responsibilities to make sure the financial reporting must be free of any misstatement from fraud or error. However, as a retailer company, JBH sells kinds of technology products such iPhone and even such new technology devices. Retailers could personally have a side agreement with their customers that guaranteeing right return for any reason. In fact, these underlying transactions would not meet the criteria for revenue recognition by accounting policies and regulations. And unfortunately, this kind of side agreements is always not disclosed to the auditors. As a result, the auditors should mainly focus on the records and documents of these kinds of transactions and need to be carefully considered audit risks.

2nd factor: misappropriation of assets

As a big retailer company, theft of goods may not be avoided in some JBH stores. While in order to adjust to the actual quantity of goods on hand, theft may be reflected in the cost of goods sold, which will increase the total cost and decrease the profit. Similarly, this kind of recording may also not be notified to auditors. So for auditors, they should carefully consider the unusual transactions related to audit risks.

To be concluded, from the page 6 of the annual report, there have already an audit and risk management committee which helps to monitor and reduce the two types of fraud in JBH Company.

Q4-Assessment of control environment using corporate governance statement

A reliable control environment is one where management places reliance on controls to mitigate business and financial statement risk. This reliance in JBH is mostly based on periodic testing for effective design and operation of controls (Granth, 2009). Regarding to JBH’s corporate governance statement since page 5, the company has its board committees including audit and risk management committee which is responsible for monitoring the implementation of policies and procedures to ensure that the company under a managed risk environment to protect its ordinary operating and financing activities.  Meanwhile, the corporate governance and the audit and risk management committee promote an integrated internal control framework with real time overseeing by management with continuous improvements including enterprise wide risk management of the consolidated entity.