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ACC311 Fundamentals of Auditing Assignment Spring 2019 Solution & Discussion Due Date: 29-05-2019
You are working as an audit internee at Zee & Co. – a local audit firm. It is one of the prominent
audit firms with multinational clientele. At present, you along with one of your senior, are on an
audit assignment of one of its audit client - ABX Ltd. which is a large manufacturing concern.
During the audit of its accounts, you are being revealed that ABX Ltd.’s purchase manager owns an
established firm and has a business contract to supply raw material to the company. While studying
the material supply contract between ABX and its purchase manager’s firm, it is revealed that the
contract allows ABX to pay the manager commission on the gross value of invoices received at
ABX’s godown. As the company policy, ABX’s GM has vested authority to ensure matching of
invoices with goods received notes. The company’s accountant enters invoices, bearing the GM’s
initials thereon, in the purchase book and stamped these all. Later, you come across certain amount
of factious vouchers and invoices were issued by the firm in the name of ABX Ltd. Upon further
investigation, it was found that all payments were made to the supplier without receiving supply of
the raw material. Investigation also revealed that ABX maintains its inventory records on periodic
system. Your senior advised you not to disclose this matter in the audit report and a clean audit
report was handed over to the company’s board of directors after signed the firm’s principal auditor.
ABX made this report public through the issuance of its annual financial statements after
completing all necessary legal formalities. Two months after making the report public, an employee
of ABX found this issue and ran a detailed investigation at his own. His investigation reported a
fraud to the tune of Rs. 120 million (excluding commission of Rs. 1.20 million thereon). He
presented his report to the company’s CEO who after official investigation with the purchase
manager, fired him from his job immediately and filed a suit against him in the local court of law.
The company also filed in the same court of law a suit against the audit firm for negligence of duty
Discuss five relevant steps through which auditors could minimize their liability for negligence.
Discuss five relevant steps which could be followed to detect the fraud of receiving commission by
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ACC311 Assignment Solution
The five relevant steps through which auditors could minimize their liability for negligence are as follows.
Not being negligent.
Following the ISAs.
Agreeing the engagement letter.
Defining in report the work underkill.
Defining the purpose for the report.
By limiting liabilities to third parties.
By defining the scope of professional competence.
The five relevant steps which could be followed to detect the fraud of receiving commission by purchase manager.
Cash received and expended by the company.
Sales and purchases of goods by the company.
All Assets and liabilities of the company and.
In case of a company engaged in production, processing, manufacturing, or mining activities, a production record as may be required by the Commission through a general or special order.
Books of account should give a true and fair view of the state of affairs of the company and should contain explanation of transactions.