NAME MISHAL NAZ

PROGRAM B.COM

STUDENT ID : Bc160402178

Semester Spring 2019 Fundamentals of Auditing (ACC311) Assignment

Due Date: 29th May,2019 Total Marks: 20

Topics To Be Tested:

Fraud Investigation

Auditors Liability for Negligence

Learning Outcome:

After going through this activity, the students would be able to understand:

What is fraud audit

Difference between normal and fraud audit

How to investigate fraud

What is the liability of auditors for negligence

How liability for negligence can be minimized by the auditors

How an in-depth examination of books of accounts is conducted

Case:

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.

Required:

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

purchase manager.

ANS 1:

The five relevant steps through which auditors could minimize their liabililty for negligence are as
follows.

Not being negligent

Following the ISAs
Agreeing the engagement letters
Defining in report the undertaken
Defining the purpose for the report
By Limiting Liabilities for the report
By defining the scope of professional competence

ANS 2:
The five relevant step which could be followed to detect the fraud of receiving commission
by purchase manager.
Cash received and expended by company
Sales and purchase of goods by the company
All assets and liabilities of the company
In case of a company engaged is production , processing ,purchasing and mining
Activites a production record as may be required by the commission through a general
Or special orders.
Books of record should give true and fair view of the state of the fairs of the company
And should contain explanation of transaction.