Section A

Scenario

CWP is an audit firm located in Muscat. The Audit firm is well-reputed and recognized across many industries in Oman. The audit firm has appointed a team to conduct the audit for Fashion Bug, a well-known clothing store located across Oman. Before conducting the audit, the team of CWP had a meeting with the finance manager of Fashion Bug. Based on the discussion they had at the meeting below are some notes taken by Rihab, a senior auditor at CWP.

A new management structure has been implemented in the organization. There are new divisional managers appointed and they have been given challenging financial targets, with substantial incentives linked to these targets in order to increase the level of sales during the off-peak periods. In the previous board meeting, it has been decided to cut the bonus amount paid to the shop staff for the festive season.

During the meeting and with discussion with some of the divisional managers it was understood that there have been instances of non-adherence to management policies. The divisional managers are unhappy with the large number of policies in place as it is time-consuming to keep up. It was also understood that they are reluctant to have controls in place as they feel it is cumbersome and involves a lot of paperwork.

The organization has recently introduced a new inventory management system to have accuracy on the levels of stocks available as they faced many issues in the last 2 quarters due to a lack of inventory. Hence, the new system should provide accurate details on the level of stocks and indicates when it reaches its minimum level to place the next order. In the initial months after implementation, there were difficulties in the operation of the system as many changes were taking place and the organization was unable to identify who has been making the changes as many people were given access to the system. Despite having the system, the organization made a loss worth RO 7300 due to the loss of stock in the warehouse.

Hisbullah, the chief accountant, confirmed that the issues were fixed and now the system is producing reliable information for Fashion Bugs use. The CEO commended Hisbullah for taking the initiative to sort out the issues with the system, especially working long hours including weekends, and refusing to take leave until the system was functioning well.

The company has also sold several of the shops it owned under the sale and leaseback arrangements.

Mr. Hassan is solely responsible for selecting vendors and purchasing supplies based on seasonal requirements for all divisions. He is responsible for ensuring the collection of payment from the finance department and settling the suppliers depending on the given credit period once the supplier sends the invoice.

During the conduct of the audit, Rihab was investigating why a major project is currently incurring high costs and overrunning its planned deadlines for completion. Rihabs sister is the project manager, although no one else in the company knows about their relationship.

The project is critical to moving customers from a slow and old computer system to a new customer relationship management (CRM) system where all data held by customers can be integrated, and more easily accessed and analyzed.

If the project looks likely to incur further significant cost overruns, it is likely to be canceled by the board, as it will not represent value for money. However, if the project is not completed, many members of staff, including Rihabs sister, are likely to lose their jobs. Rihab is under pressure to report to the audit committee on his teams evaluation of the project. Should he conclude and report that the project is no longer viable, it will be immediately terminated.

Rihabs sister is very aware of his predicament and is putting immense pressure on her to misrepresent the true status of the CRM project. She expects her sister to write a favorable report to the audit committee and recommend that the project should be allowed to complete as planned.

Requirement.

Based on the above case scenario analyze the fraud risk factors that could be identified from the notes taken by the audit team.

(12 Marks)

Auditors need to always maintain professional skepticism when conducting an audit and they need to take appropriate (safeguard) measures to mitigate threats to independence when conducting the audit.

Define professional skepticism. Analyze and justify the threats to independence and possible safeguards that could be used by the auditors to maintain an independent relationship with the client (13 Marks)

Note: the relevant answer/ literature is to be supported by relevant citations from academically accepted research sources (research articles, and conference papers)

Word Limit. of 2500 words (10% + or -) (Total 25 Marks)