Group Activity: Watermelons F04A DISNEY LAND CASE QUESTION 1: DIFFERENT TYPES OF RISK According to BPP (2010), there

e are 3 main types of risk: operational risk, financial risk and compliance risks. Operational risk is defined as the chances of errors or mistakes being made within the operations of a business. In Disney Land, it also has to face with operational risks, the rain -fall for example. As the park is opened outdoor, its operations of entertainment will be strongly impacted. Specifically, the rain fall will lead to a dramatic fall in the number of customers; about 50% of the customers may not go to the park for bad weather. Operational activities of Disney Land especially will be interrupted if the rain happens in seasonal time. Responding to this risk, Disneyland cannot avoid it, the solution might be accepting and trying to reducing its impact. Financial risk may occur within the business. They are incorrect payments being made within the operations of Disneyland. For example, cash from the customers may not be collected in full by the two security guards or the clerks record it improperly. Or in other cases, there are troubles or mistakes happening in the transactions of paying commissions to credit card companies, etc. Disneyland has to avoid this risk as much as possible. Lastly, compliance risk is also troublesome if Disneyland does not comply with the statutory requirements of Company Act 2006. The accountants cannot explain the transactions or the financial position of Disneyland at that time, or recording is not on the daily basis and with the total sum of money.

QUESTION 2: EXPLANATION OF THE FEATURES OF ACCOUNTING AND CONTROL SYSTEM Internal accounting control is a series of procedures designed to promote and protect sound management practices, both general and financial. Following internal accounting control procedures will significantly increase the likelihood that: Financial information is reliable, so that managers and the board can depend on accurate information to make programmatic and other decisions Assets and records of the organization are not stolen, misused, or accidentally destroyed

The organization s policies are followed Government regulations are met.

(Alliance, n.d.) According to the ISA, there are five elements of an internal control system, as follows: 1. The control environment factors that set the tone of an organization and influences the consciousness of its people. There are seven factors (ICHAMO): I Integrity and ethical values: In a business, managers and staff have to follow a system of ethics, stating that it is right or wrong to conduct an act. Employees need to aware that it is ethically correct to follow control systems, otherwise the system cannot be effective. C Commitment to competence: In order to run the system effectively, employees need necessary skills and knowledges. The company have to make sure that their staff have the ability to carry out the jobs. H Human resource policies and practices: Other independent staff need to participate in the control system e.g. external auditors. A Assignment of authority and responsibility: Managers need to assign appropriately authority and responsibility to employees so that they know exactly when and how they follow controls. M Managements philosophy and operating style: Managers need to be responsive to the controls system, express their concerns and attentions for employees to follow. O Organizational structure: Finally, the organizational structure will provide framework of how the control systems will work. How and who the staff can communicate and report control to appropriate managers 2. Risk Assessment risks that may affect an entitys ability to properly record, process, summarize and report financial data due to: Changes environment competition) New personnel New Information systems Rapid growth in the (e.g. operating increased New technology New lines, products, or activities Corporate restructuring Foreign operations Accounting pronouncements

Managers need to identify all the factors above and set an appropriate control system in order to minimize the impact of these risks. Furthermore, by doing this process, it will help the company 3. Control Activities various policies and procedures that help ensure that necessary actions are taken to address risks affecting the achievement of an entitys objectives. (PIPS): P Performance reviews (reviews of actual against budgets, forecasts) I Information processing (checks for accuracy, completeness, authorization) P Physical controls (physical security) S Segregation of duties 4. Information and Communication methods and records established to record, process, summarize, and report transactions and to maintain accountability of related assets and liabilities. Must accomplish the following objectives: Identify and record all valid transactions Describe on a timely basis Measure the value properly Record in the proper time period Properly present and disclose Communicate responsibilities to employees

5. Monitoring assessment of the quality of internal control performance over time

QUESTION 3 & 4: FRAUD, ITS TYPES AND PREVENTION OF FRAUD Fraud definition: Fraud is a type of criminal activity, defined as: 'abuse of position, or false representation, or prejudicing someone's rights for personal gain'. (sfo.gov.uk, 2013) Fraud is defined as intentional dishonesty or a planned or conceived deception that is committed with the goal of damaging another individual or personal gain (lawontheweb.co.uk, 1998) Fraud Act 2006: A person is guilty of fraud if he is in breach of any of these: false representation, failing to disclose information and abuse of position (legislation.gov.uk, 2006)

Reasons of fraud: Fraud is formed mostly based on human greed. However, there are three aspects which contribute to fraud existence: Dishonesty due to personality and cultural traits Motivation from unsatisfied needs Opportunity loose security and internal control system

Types of fraud and prevention: a. False presentation Fraud Ghost employees Explanation Put workers Causation Prevention

imaginary - Intensive reliance - Continuous supervision in wages on casual workers of all employees

lists. So frauders can Poor time - Comparisons receive those wages recording system - Personnel procedures (BPP, 2010, p.28)

Issue

false Issue credit notes to -

Poor

monthly - Comparisons - Internal control system

credit notes

customers who paid itemizing statement already but not sent the notes to them

b. Failing to disclose information Fraud Explanation Causation Prevention

Miscasting of the Adjust payroll (add up - Poor management - Comparisons payroll wages) to receive in manual payroll procedures Personnel

extra money from the system total amount of wages

Failing to record all Invoice customers but - Poor control over - Comparisons sales not record the invoices sales and minimal - Internal for taking customer segregation of duties system payments control

c. Abuse of position Fraud Stealing unclaimed wages Explanation Take wages of Causation Prevention

those - Poor management in - Comparisons - Internal control system

workers who left without manual payroll system notice to

Collusion with Collusion external parties purchase

overstate - Poor control over sales - Continuous supervision of and and minimal segregation all employees - Personnel procedures

invoices

understate sales invoices of duties for sharing the difference of money Teeming

and Borrow company cash - Sole control of the - Surprise visits by internal

lading

for personal usage and sales return later when there is recording audit visit

ledger

and auditors

trade - Independent checking of receivables cheques cash balances Poor control and - Comparisons - Internal control system

Stealing assets

Using company assets for personal use/gain

management over assets

QUESTION 5: MANAGEMENT OF FRAUD AND THE RESPONSIBILITY FOR REPORTING FRAUD TO THE MANAGEMENT As discussed in question 3 and 4, there are many types of fraud happen in Disneyland, some preventions are also suggested, however, the question is that why business face with these fraud. When it comes to management of fraud, problems lie in the internal control of business operation. Employees do cheating to gain financial benefits while managers one close their eyes or make fault for well-dressing financial performance as well. Their frauds are only brought to light when auditing takes place and the results are bad-damaged reputations or legal actions. For those reasons, reporting fraud to management is essential and everyone has to take responsibilities for this. External auditors have to be responsible for detecting fraud and reporting it to the management or public authorities in case that is management fraud. Management in Disneyland is also in need for being reported materiality in the company systems of accounting and internal control. On the other hand, internal auditors also play a vital role in fraud reporting to executives management, communicating to audit committee. Then a prompt action will be taken from them to solve the problems.

QUESTION 6: CONTROL PROCEDURES FOR REDUCING FRAUD RISK AND THE ISA 240 ON FRAUD I. The control procedure for reducing fraud risk of Disney land. According to BPP Learning Media, 2010, it can be seen that Controls over cash are absolutely important, it is a key to reduce fraud risk as well as increase the risk of detection. In the paragraph below we will see more clearly how Disney Land applies control procedure to reduce the fraud risk. 6

Cash receipts: We all know that a number of customers of Disney Land are very huge. The tickets are sold to a huge amount of each day, they are purchased using cash or credit. To avoid as well as reduce the fraud risk, Disney Land used the methods: Segregation of duties it means that more than one person should have responsibilities within each particular area. For example, cash is collected regularly from each ticket office by 2 security guards or the cash is counted by 2 accounts clerks and banked on daily basis. Moreover, total cash received is given and recorded carefully in cash book and general ledger. II. The ISA 240 on Fraud ISA 240 distinguishes between fraud and error. ISA 240 on fraud refers to an intentional act by one or more individuals involving the use of deception to obtain an unjust or illegal advantage. There are 2 types of fraud that are relevant to external auditors in their audit of a companys financial statement: Fraudulent financial reporting Misappropriation of assets (BPP Learning Media, 2010) The example will be applied to Disney Land. We all know that the cash that Disney Land receipts is counted by 2 accounts clerks. The fraud will be appeared if these two accounts clerks combine together. In count process, they dont count amount of money and they falsify the record in order to taking this amount of money. Or total cash received is recorded in cash book and general ledger they can record not in a complete and time manner. QUESTION 7: THE CORPORATE GOVERNANCE Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others. (Thomson, 2009)

In Disneyland, their corporate governance was committed and practices that promote the thoughtful and independent representation of shareholder interests. They have the corporate governance guidelines such as: The board: Each Director shall at all times represent the interests of the shareholders of the Company. Each Director shall at all times exhibit high standards of integrity, commitment and independence of thought and judgment. Each Director shall dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including by attending shareholder meetings and meetings of the Board and Committees of which he or she is a member, and by reviewing in advance all meeting materials. Remuneration: The compensation of Directors who are not employees of the Company shall be determined annually by the Board of Directors acting upon recommendation of the Governance and Nominating Committee, which may obtain the advice of such experts as the Committee deems appropriate. Compensation may be paid in the form of cash or equity interests in the Company or such other forms as the Board deems appropriate and shall be at levels that are consistent with those in effect for directors of similarly situated businesses. Separate compensation may be provided to members of Committees of the Board and additional compensation may be provided to the chairs of Committees, to any non-executive Chairman of the Board and to any independent Lead Director. Directors who are also employees of the Company shall not receive any additional compensation for their service as Directors.