You have been asked to carry out an investigating by the management of Adepa Ltd. One of the companys subsidiaries, Papa Engineering Ltd, has been making losses for the past years. Adepas management is concerned about the accuracy of Papa Engineerings most recent quarters management accounts.

The summarized income statements for the last three quarters are as follows:

Quarter to 30/09/17 30/06/17 31/03/17 GHS000 GHS000 GHS000

Revenue 860 668 686

Opening inventory 360 326 331

Materials 636 468 475

Direct wages 124 142 148

1,120 936 954

Less: Closing Inventory (324) (360) (326)

Cost of goods sold 796 576 628

Gross profit 64 92 58

Less: overheads (126) (150) (164)

Net Loss (62) (58) (106)

Adepas management board believes that the high material consumption as a percentage of revenue for the quarter to September 2017 is due to one or more of the following:

1. Under-counting or under-valuation of closing inventory
2. Excessive consumption or wastage of materials
3. Materials being stolen by employees or other individuals.

Papa engineering has a small number of large customers and manufactures its products to each customers specification.

The selling price of the product is determined by:

1. Estimating the cost of material
2. Estimating the labour cost
3. Adding a mark-up to cover overheads and provide a normal profit.

The estimated costs are not compared with actual cost. Although it is possible to analyze purchase invoice for materials between customers orders, this analysis has not been done. A physical inventory count is carried out at the end of each quarter. Items of inventory are entered on stock sheets and valued manually. The company does not maintain perpetual inventory records and a full physical count is to be carried out at the financial year end, 31st December 2017.

The direct labour cost included in the inventory valuation is small and should be assumed to be constant at the end of each quarter. Historically, the cost of materials consumed has been about 70% of revenue.

The management accounts to 30 June 2017 are to be assumed to be correct.

Required

1. Define forensic auditing and describe its application to fraud investigations.
2. Identify and describe matters you should consider and procedures you should carry out in order to plan an investigation of Papa Engineering Companys losses.
3. i. explain the matters you should consider to determine whether closing inventory at 30/09/17 is undervalued.

1. Describe the tests you would perform to qualify the amount of any undervaluation.