LCM is the wealth management division of Majestic Bank (Majestic) and provides investment, superannuation, insurance and private wealth solutions to corporate and institutional customers. The following is a list of the auditor’s planning file notes in relation to fraud detection for the audit of the LCM unit.
1. Ensure all material fraud instances are detected.
2. The auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.
3. Respond appropriately to fraud or suspected fraud identified during the audit.
4. A discussion among all of the audit firm’s staff on how and where the entity’s financial statements may be susceptible to material misstatements due to fraud, including how fraud might occur.
5. Make enquiries of management, and others within the entity as appropriate, to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.
6. Obtain sufficient appropriate audit evidence to confirm all potential fraud instances have been uncovered and their impacts considered.
7. Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements.
8. Determine whether management has sufficient skills to prevent and detect fraud (e.g. through proof of attendance at appropriate industry seminars and workshops, or past experience with fraud).
9. Obtain a copy of the client’s code of ethics document, and ensure employees have access to it.
10. Evaluate whether the accounting policies selected by the entity may be indicative of fraud.
REQUIRED:
Identify the activities that are part and the activities that are not part of the auditor’s responsibilities relating to fraud under ISA 240. (10 Marks)
CDU Business School Semester 2 2016 Page 6 of 8
Faculty of Law, Education, Business and Arts Higher Education
Part C (10 marks)
You are currently planning the audit of Food Plus Pty Ltd (FPPL), a large proprietary company that operates a small chain of convenience stores. You are in the process of developing an understanding of its objectives and strategies and the related business risks.
Competition in this sector is intense, with major supermarket chains aggressively purchasing smaller rivals and discounting products below cost in order to increase market share. In order to compete, FPPL has been forced to offer value-added services such as complimentary coffees based on a loyalty scheme.
While these strategies have helped to maintain its customer base, its gross margins have dropped by 10%. In an effort to increase profits, FPPL has recently focused on expanding the products available in each store. However, these items have achieved only limited acceptance to date among FPPL’s customers and stock obsolescence is high.
All of FPPL’s premises are leased. Two of the leases are due to expire prior to the end of the current financial year. In both cases, the land on which the premises are situated has been re-zoned as residential. Due to “prior use” legislation, this does not prevent the premises from being used as a supermarket in the future. However, it does mean the land’s value has increased and, on this basis, the lessor is demanding a 50% increase in rent.
FPPL is also experiencing difficulties with two of its major suppliers, who have withdrawn their volume rebates and reduced payment terms from 30 to 14 days. In addition, FPPL has recently initiated legal action against a major supermarket chain for anti-competitive behaviour and predatory pricing.
REQUIRED:
(a) Identify five (5) business risks, as per ISA 315, which may lead to the risk of material misstatement at the financial statement level for FPPL. (5 marks)
(b) For each business risk you identified in (a) above, describe how it may lead to the risk of material misstatement at the financial statement level. (5 marks)

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