Question

You are the senior internal auditor of Tech Crunch. Tech Crunch is an engineering firm. Each member of the senior management team has an equal ownership interest in the firm. You are planning an audit of the fraud risks in Tech. Crunch. As part of your planning, you have held discussions with the senior management team and made the following notes to the file:

• Tech Crunch recently moved its offices to a prime real estate building that is in the centre of the city.
• The company has grown rapidly, and has several large contracts with new clients. The management team would like to continue growing the business through mergers and acquisitions.
• Deposits on contracts have increased, particularly near the end of each month. The management team noted that there were some reconciliation issues pertaining to these deposits.
• Debt levels have increased. The lender has a restrictive covenant that must be met or the loan will be recalled.
• Expenses have remained flat over the last few years. The main expense is salaries. A freeze on wages has been put in place, given the current economic environment.
• Cash flow has been an issue in the past, but management is confident that this issue has been resolved through improved planning and co-ordination of contracts.
• The firms engineering registration with the provincial engineering licensing body expired on August 31 of the current year under audit. It was renewed on October 15 of the same year. During the period between August 31 and October 14, the firm continued to engage in contracts.

You recognize that some of the notes you took during this meeting relate to fraud risk factors.

Required

a. Prepare for the Chief Audit Executive (CAE) a note to file containing a planning memorandum that summarizes the fraud risk indicators. The planning memorandum should only include those items from your notes made during the meeting that pertain to fraud, as the CAE only wants to address fraud issues that may impact the audit. You must include a minimum of four fraud risk indicators in the memorandum and, for each one of them, identify the relevant fraud risk condition within the fraud triangle. Use the format that appears below. (8 marks)

Note to file planning memorandum for the audit

Fraud risk indicator exists in Tech Crunch (using case facts to illustrate)	Fraud risk condition within the Fraud Triangle

b. Discuss how fraud will change the overall audit approach for Tech Crunch. Suport your answer with 2 points. (2 marks)