Question 4 (14 marks)

Park's Health Food Ltd. (PHS), established in 2010, is a chain of health food stores that

sells products for a healthy lifestyle including herbs, protein powder, vitamins, and

supplements. Until last year, the PHS had positive net income and cash flow as it took

advantage of the health craze that has engulfed Vancouver over the last decade.

Mary Jane, the owner of PHS, has provided the following memo about the operations of

PHS:

"PHS has two main sources of revenue. The first is our five retail locations located

across Vancouver. The second is our commercial contracts, in which we have entered

into a number of contracts with various businesses and offices to deliver our goods

straight to our commercial clients' businesses."

"PHS's cash position has deteriorated significantly over the last year and I am not sure

why since our retail locations are still busy every time I visit any of our locations,

especially since we added the smoothie bar at the locations near yoga studios. PHS

was founded by Peter Parkland, my father, who died in a car accident last year. My

father was very hands on and was always in the stores, at the warehouse, and meeting

new clients. Since I just graduated university, my father's friend, Adrian Thain, a

naturopath, volunteered to become CEO and I quickly said yes. This was especially

helpful since just last month, our controller suddenly quit after having a very heated

argument with Anthony DiCastri, our general manager of our commercial contracts. I am

not sure what this argument was about, but according to the employees at the

warehouse, it had to do with the new shipping procedures Anthony implemented. While

Adrian has been very helpful, now I am not sure if he was the best choice since he does

not have any management experience and has given management free rein over PHS's

operations. Since my father passed away, PHS has struggled, and morale as been on

the decline, especially since we had to reduce our employee bonuses this year, for

obvious reasons."

"Our retail locations have state-of-the-art inventory management systems because

some of our products are perishable and we need to monitor and track what sells and

does not sell. Also, because of the high value of some of our other products such as the

protein powders, we installed security cameras to prevent theft. We noticed that people

were attempting to come into the retail locations to steal this type of inventory as they

can be resold easily as long as the seal was intact."

"My father was very well connected in the business world and established all of the

commercial contracts while Anthony ensured all of the products got out the door on

time. These contracts were usually signed on an annual basis and we had one shipping

company handle all of the deliveries. Deliveries consist of some of our more expensive

goods such as protein powders since the commercial clients often order them to make

fresh smoothies at their offices as a healthy perk."

"When Anthony took over the marketing of the commercial contracts, he also hired a

second independent delivery company, 691947 B.C. Ltd. to reduce the dependence on

one service provider. When my father was around, there were two shipments per day

the breakfast run at 8 a.m. and the lunch run at 11 a.m. When Anthony hired the second

delivery company, he added a third shipment at 5:30 a.m. This is inconvenient since our

loaders do not come in until 7 a.m. To accommodate this shipment, Anthony loads

these shipments himself. Anthony also enters all the pickups into the shipping logs for

these early pickups."

"I also prepare the cheque runs, including the payments to the delivery companies.

Anthony holds them back so he can hand them out personally to maintain good

relations. Since the controller left, Anthony has really stepped up and taken on all of

these additional responsibilities. There has been an increase in contracts, but our

contract revenue has not increased at the same rate, even though the contract prices

have remained consistent throughout all of the contracts."

Required:

a) Identify four possible fraud risk factors. (8 marks)

b) Provide two audit procedures to determine if fraud is occurring at PHS, noting the

objective for each procedure. (6 marks)