You are the audit senior for Mike's Bikes Ltd and you have performed some analytical review procedures as part of your planning for the year ended 30 June 2018. These include: Debt-to-equity ratio Accounts receivable turnover Return on sales 30 June 2018 1.2 70 days 5% 30 June 2017 | 0.8 56 days 12% In addition, you have noted that the bicycle industry, has recovered well over the past year as people have become more health conscious and are seeing bicycles as a way to save on transport costs. You are therefore surprised to see the deterioration in the return on sales ratio, especially as the industry average for this year has increased to 15% (2017: 11%). When you remarked on this to the company's new management staff who took over in March 2018, Fred Bath, the new CEO blamed it all on the incompetence of the previous management. You are surprised to hear this as, you were impressed by past management during your previous audits of the client. Fred Bath tells you that the new management was hired following promises to the company's owners that they would significantly improve the company's results and that they will do whatever is necessary to make sure they achieve just that. While you have no reason to suspect that theft of any kind is contributing to the company's deteriorating results, you are concerned that the new management team may be manipulating results to suit their own purposes. Required: a) Briefly explain the impact of the above information on your audit plan; (12 marks) b) Briefly explain what kind of fraud may be occurring and why. You should make reference to the three commonly used categories of fraud indicators (also known as the 'Fraud Triangle') in explaining why. (8 marks) You are the audit senior for Mike's Bikes Ltd and you have performed some analytical review procedures as part of your planning for the year ended 30 June 2018. These include: Debt-to-equity ratio Accounts receivable turnover Return on sales 30 June 2018 1.2 70 days 5% 30 June 2017 | 0.8 56 days 12% In addition, you have noted that the bicycle industry, has recovered well over the past year as people have become more health conscious and are seeing bicycles as a way to save on transport costs. You are therefore surprised to see the deterioration in the return on sales ratio, especially as the industry average for this year has increased to 15% (2017: 11%). When you remarked on this to the company's new management staff who took over in March 2018, Fred Bath, the new CEO blamed it all on the incompetence of the previous management. You are surprised to hear this as, you were impressed by past management during your previous audits of the client. Fred Bath tells you that the new management was hired following promises to the company's owners that they would significantly improve the company's results and that they will do whatever is necessary to make sure they achieve just that. While you have no reason to suspect that theft of any kind is contributing to the company's deteriorating results, you are concerned that the new management team may be manipulating results to suit their own purposes. Required: a) Briefly explain the impact of the above information on your audit plan; (12 marks) b) Briefly explain what kind of fraud may be occurring and why. You should make reference to the three commonly used categories of fraud indicators (also known as the 'Fraud Triangle') in explaining why. (8 marks)
