Kim Stevens, a qualified Chartered Accountant, is the engagement partner on the nancial statement audit of Christchurch-based company, Meat Processors Limited (MPL), for the year ended 30 June 2020. On 5 July 2020, Jan, the senior auditor assigned to the engagement, had the following conversation with Kim concerning the planning phase of the audit:

Kim: Have you updated all the audit work programmes yet for the MPL engagement?

Jan:Mostly.I still have work to do on the fraud risk assessment.

Kim:Why? Our "errors and irregularities" programme from last year should be fine to roll over to this year. Besides, we don't have specic duties regarding fraud. If we find it, we'll deal with it as it arises.

Jan: I'm not sure we should do that. That new CEO, Thompson, is receiving only a small salary, but most of his remuneration is from bonuses and stock options. Doesn't that concern you?

Kim: No. The board of directors approved Thompson's employment contract just three months ago. It was passed unanimously.

Jan:I guess so, but Thompson told those financial analysts that MPL's earnings would increase 30% next year. Can Thompson deliver numbers like that?

Kim: Who knows? We're auditing the 2020 nancial statements, not 2021. Thompson will probably amend that forecast every month between now and next June.

Jan: Sure, but all this may change our other audit work programmes.

Kim: No, it won't.The programmes are ne as is. If you nd fraud in any of your tests, just let me know. Maybe we'll have to extend the tests? Or maybe we'll just report it to the audit committee.

Jan: What would they do? Anderson is the audit committee's chair, and remember, Anderson hired Thompson. They've been best friends for years. Besides, Thompson is calling all the shots now. Also, Jane Austen, the old CEO, is still on the board, but she's never around.Austen's even been skipping the board meetings. Nobody in management or the board would stand up to Thompson.

Kim: That's nothing new. Austen was like that years ago. Austen caused frequent disputes with the predecessor auditors, Rice & Porthouse.Three years ago, Rice & Porthouse told Austen how ineffective the internal audit department was then. Next thing you know, Rice & Porthouse is out and we're in as auditors. Why bother? I'm just as happy that those understaffed internal auditors won't get in our way. Just remember, the bottom line is: are the nancial statements fairly presented? And they always have been. We don't provide any assurances about fraud. That's management's job.

REQUIRED:

1. Identify and briefly discuss four (4) fraud risk factors that are indicated in the dialogue.

(8 marks)

1. Identify Kim's misconceptions regarding the consideration of fraud in the forthcoming audit of MPL's nancial statements that are mentioned in the dialogue. Explain why each is a misconception.

(6 marks)

1. Identify how and where MPL's financial statements are most likely to be susceptible to material misstatement due to fraud, including how such fraud might occur.