Australian Based Question:

AC Ltd is a construction company that has been suffering a fall in revenue due to the poor conditions in the Australian residential construction market. It has been struggling to meet profit forecasts over the last three years and has only just avoided breaching debt covenants (based on Return on Equity) over the last year. The CEO, John Smith owns 15% of the company, which represents the vast majority of his wealth. John Smith and his family dominate the board of directors, with six of the ten seats, including his sister, Sally Smith, who is the Chairman. ABC Ltd has recently borrowed a substantial sum of money from Sally Smiths private investment company Salmit Investments Pty Ltd at an above market interest rate. During your previous audit, you found significant control weaknesses, particularly in the areas of accounts payable/cash disbursements and loans/interest expense recording. Preliminary investigations suggest that these problems have not been fixed. When you have questioned management about these problems, they have failed to provide adequate responses. Evidence collection has been hampered by the non-cooperative attitude of accounting staff. In particular, they have failed to provide a copy of the contract between ABC Ltd and Salmit Investments Pty Ltd or any accounts payable reconciliation. Required: A) Which factors would heighten your concern that the management and directors of ABC Ltd might be engaging in fraudulent financial reporting? (5 marks) B) An auditor may have to perform extended audit procedures if the auditor identifies fraud risk as high. Identify some key extended audit procedures that might be performed if the auditor suspects there may be fraud in the revenue account.