AUDIT RISK

SEMINAR QUESTIONS – HOMEWORK

QUESTION 1

Explain using relevant examples the differences between an assurance

engagement and a statutory audit. (10 marks)

QUESTION 2

You are an audit manager working for Abacus LLP Chartered Certified Accountants
and you have recently finalised the audit of Magnum Electronics Plc providing them
with an unmodified audit opinion. The financial statements of Magnum Electronics
Plc have been formally adopted by the shareholders at the AGM that occurred some
9 months ago.

The managing director of Magnum Electronics Plc, Stephen Hill has just telephoned
you to inform you that he had just found out that several members of staff in the
purchasing and sales departments had been involved in fraudulent activity some of
which involved outright theft of inventory from the company and others were involved
in defrauding the company through ‘teeming & lading’. The investigations were on
going but so far the company had identified that the theft ran into thousands of
pounds.

Stephen Hill was particularly furious with your firm because he could not understand
how this fraudulent activity was not identified during the recent statutory audit that
your firm performed.

Stephen Hill further stated that in his view your firm performed a “substandard audit”
and that your audit “was a complete waste of time and money!!”.

He further demanded a full explanation from you as a matter of urgency before he

might be forced to “take matters further”.

REQUIRED

Write a letter to Mr Hill concerning his comments. (2 marks for presentation +

up to 18 marks for relevant content = 20 marks)
Note: teeming and lading. Definition. noun. an attempt to hide missing funds by
delaying the recording of cash receipts in a business's books.

Teeming and lading is a bookkeeping fraud also known as short banking , delayed
accounting and lapping. It involves the allocation of one customer's payment to
another in order to make the books balance and often in order to hide a shortfall or
theft.