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Chapter 20
Case Study
Discuss the implications of these discoveries for
1 The auditors
These discoveries have very serious implications for the auditors – potentially
serious enough for them to decide to resign from the audit
They have to consider the following
Specific issues are
a) they will need to ask for an explanation of the transactions involving
‘agricultural machinery’ and why these clients names do not appear in the
sales ledger – indeed if these transactions have been completed where they
are recorded in the records. If a satisfactory explanation is not forthcoming
the auditors should consider if they are going to mention this in their
auditors’ report. The danger is that if these items exported to areas of the
world where there is activity by proscribed organisations the company and its
officials might be liable to prosecution under anti terrorism legislation
b) this could potentially be money laundering. The transactions look
suspicious so the auditors may have no choice but to report them to the
authorities. They should take legal advice before doing so. They will have to
be careful not to ‘tip off’ their client. They should have a statutory defence to
any accusation of breach of confidentiality
c) Providing the ‘commissions’ are properly recorded in the books there
should be no problem from an audit point of view – there may be a taxation
issue
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(f) If the company has no licence and the effluent is untreated the auditors
may report this to the authorities and would be likely to have a public
interest defence. They should take legal advice. If the company are correct
they should be able to obtain a copy of the licence from the appropriate
authority. There should also be evidence of payment of licence fees.
The company
The effects of these points on the company are potentially serious
They can comprise
Potential prosecution of the company and individuals for
xSupporting terrorist activities (a)
xMoney laundering (b)
xBribery of government officials (c)
xBreaches of Health & Safety legislation (e)
xBreaches of environmental legislation (f)
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The financial statements
xApart from any criminal or legal aspects to these transactions they
must be properly disclosed in the accounts.
xThe auditors will have to ensure that full and complete disclosure is
made of all the payments mentioned.
Examination question
Binkle
This answer is in the form of key points –students should prepare the
memorandum in full
(a) Key points are
xThe directors are responsible for maintaining a system of internal
control to reduce the risk of errors or misrepresentations including
fraud
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(b)
xAuditors have no legal responsibility for the detection of fraud
xISA 240 requires that auditors consider the possibility of fraud when
carrying out their audit planning
xIt also requires them to approach their work with an attitude of
professional scepticism
xAuditors are entitled to accept representations from responsible
officials in the absence of evidence to the contrary
xAudit firms are often threatened with legal action because they carry
indemnity insurance which directors may feel gives them a chance of
recovering their losses