Question 5

(20 marks)

The following conditions or events exist at various of your firm's audit clients.

1.The company adheres to the principles of sound corporate governance. (1)

2. The company has converted itself from a complex corporate structure to a simpler structure by unbundling itself. (1)

3. The directors' remuneration is largely dependent on the company's financial results. (1)

4. Management decisions are strongly influenced by the managing director, a clever but forceful autocratic man. (1)

5. The company's motto is no question - we will be number one and employees are encouraged to be aggressive and competitive as progress and promotion depends upon results. (1)

6. The financial director has little regard for the auditors, describing the annual audit as an irritation. (1)

7. Recommendations made by the auditors to the company at the conclusion of the audit are implemented timeously. (1)

8. The IT department of a large company is generally inexperienced and has a number of vacancies. (1)

9. The company has two major customers, which are both experiencing a serious decline in the demand for their products. (1)

10. The financial director is proposing changes in accounting policies which will improve the financial position of the company in appearance, but not necessarily in fact. (2)

11. A number of complex year-end adjustments have been made. (1)

12. A large number of consultants have been engaged during the year to render advice or services, but no tangible benefits or services seem to have accrued to the company. (2)

13. Independent reviews of financial reconciliations e.g. cash book, creditors, inventory, are carried out by internal audit on a surprise basis. (2)

14. Systems development controls are sound but subsequent program changes are not always documented, approved and tested properly. (1)

15. There are numerous transactions with related parties but authority is obtained from the Board for such transactions. (2)

16. The company has a well-defined formal risk assessment process in place. (1)

YOU ARE REQUIRED TO indicate whether each of the above conditions or events will increase, decrease or have no noticeable effect on the risk of fraud/theft occurring at these companies. Provide brief reasons for your answer. Consider each one separately. (20)