Fraud Detection and Analysis in Hot Line

This assignment involves a critical analysis of a financial report related to 'Hot Line,' a company suspected of fraudulent activities. The task requires students to examine the report for evidence of financial misconduct perpetrated by various stakeholders, including personnel, directors, and shareholders. The focus is on identifying specific instances of fraud within the provided information and evaluating the effectiveness of existing internal controls in mitigating such risks.

Auditing
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Table of Contents
INTRODUCTION................................................................................................................................3
1. Identify and explain fraud risk factor in relation to the audit of Hot line....................................3
2. Incentives, pressures and opportunities to commit financial report fraud and attitude and
rationalisation to justify a fraud.......................................................................................................5
3. Recommend internal control mechanism to mitigate risk of fraud company's financial
statement..........................................................................................................................................6
CONCLUSION ...................................................................................................................................7
REFERENCES.....................................................................................................................................8
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INTRODUCTION
Auditing is the process of systematic examination of company' books, invoices, vouchers,
accounts and documents so as to verify company's financial statement whether they represent true
or fair business position or not. Such process mainly aims to test the accuracy and reliability of the
financial accounts so that all the internal or external users can obtain prominent information for
their decision-making purpose. For the present assignment, fraud auditing will be conducted for Hot
line limited, It is a national surf wear retail chain situated through out Australia. It is also specialize
in expensive swimwear and summer resort wear. The report will explain fraud risk associated with
different matters given in the assignment. Moreover, the report will demonstrate that how internal
control mechanism can prevent Hot Line from such risky factors.
1. Identify and explain fraud risk factor in relation to the audit of Hot line
Matter Fraud risk Explanation
1  Breach of covenant
 Jeopardy of bonus
 No-refinancing document
Hot line's CFO breached his KPI of maintaining
covenants. Thus, it is a kind of fraud risk created
by CFO. It will ultimately results in loss of his
bonus because of non satisfying KPIs. Further, in
the re-financing process, none of the document
has been provided by Big Bank and also Hot line
did not attempted to secure financing from other
financial institutions (Kuhn and Sutton, 2010).
Thus, it will results in arising financial problems
in the business.
2  Making fictitious invoices for
purchase of goods and
services.
 Over invoices by making
invoices by some extent
amount up to the maximum
limit of 50000.
 Creating invoices payable to
himself
Jamie Potts can involve in various purchase fraud
schemes which results in loss to the Hot Line. He
can create fictitious invoices that do not represent
by any legitimate purchase. He also can charge
inflated prices which increase Hot Line's
expenditures in turn, it can not meet their
forecasted profits. Along with this, payable clerk
can also create invoices for payment to himself.
Further, duplicate invoices can be created to
provide benefit to himself by conducting
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fraudulent activities (DeFond and Zhang, 2014).
3  Ineffective quality of material
 Loss of customers
 Less turnover
 Reduce competitive strength
 Less profitability
In such matter, although overseas supplier is
providing material at cheaper rates which helps to
save cost but still, fabric quality is not good. It
ultimately results in ineffective quality of
produced goods of Hot line. Thus, fraud due to
serving worst quality of fabric increased customer
complaints. This in turn, Hot line will face
difficulties due to loss of customers, competitive
strength, turnover and profitability as well. It will
create an adverse impact on Hot Line's brand
image.
4  Decline profitability of Hot
line
 Decline senior employee’s
bonus by 5%
 Reduce tax obligation.
In the given matter, Logan's wife, is designing the
clothing products in Hot Line's Chinese plant at
reduced rate. In order to support his wife, Logan
charge incurred manufacturing cost as bad debts
without awareness of Yi. This false information
will increase Hot Line's expenditures and results
in less profitability (Yang and Jia, 2013). So that,
profit and loss statement does not represent true
amount of profitability. Furthermore, not meeting
the target profits will results in jeopardy of
employee’s bonus. In addition, it will result in
declining tax obligations of Hot line by
presenting incorrect information about profit.
5  Fraud due to conceal of
information
Hiding the renegotiation terms by purchasing
department may bring Hot line in the trouble
situation to make payment to GF on delivery. It is
because finance department will believe that GF
will be paid after 45 days whereas supplier will
demand for payment of their supplies.
Henceforth, it will create an adverse impact on
cash management in turn, Hot line will not be
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able to keep good supplier relationship (Carcello,
Hermanson and Ye, 2011). Furthermore, it will
impact their bonus due to not accomplishment of
designed KPIs.
2. Incentives, pressures and opportunities to commit financial report fraud and attitude and
rationalisation to justify a fraud
Fraudulent financial reporting refers to the intentional misstatement, wrongful acts and
omission of amounts or disclosures (Carcello, Hermanson and Ye, 2011). There are three conditions
of fraudulent activities that are described below:
Matter Incentives/Pressure Opportunities Attitude/
Rationalization
1 Hot lien is under pressure to
meet its debt covenants and
obtain additional funds by the
means of re-financing (Fraud
Auditing, n.d.).
Lack of proper
documentation on time is an
opportunity available. CFO
is responsible to handle all
the financial activities of Hot
line, Therefore, he has
opportunity to provide
benefits to himself by breach
of debt covenant.
Overly aggressive
forecasts by the
management is an
indication of their
attitude and
rationalization.
2 Misappropriation of assets by
payable clerk (Jim Potts)
provide him incentive by
issuing fictitious invoices,
over billing and pay to
himself.
Inadequate segregation of
work related to managing
accounts payable invoices
gives opportunity to Jamie
Pott to commit fraud.
Moreove, inadequate
authorization and approval
system of purchase invoices
is the reason of conducted
fraud (Lennox and Pittman,
2010).
Ineffective control and
monitoring of approved
payable invoices by
Jamie Potts.
3 Save cost is an incentive New supplier is the old Ineffective internal
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available to Hot line through
getting material at cheaper
rates.
friend of Lily Spear thus, he
has opportunity to take
advantages through
supplying worst fabric
material at less prices.
Ineffective quality control is
also an opportunity exists in
this case.
business control on
Fabric quality is the
reason for high customer
complaints.
4 Logan intend to take tax
incentive to Hot line by
charging high production cost
as bad debts.
Logan is the CEO of the Hot
line who has good position
in the firm. This position
allow Logan to charge all the
incurred cost by his wife as
bad debts so that he can
obtain high payments from
Hot line to support his wife's
clothing business (Bisgaier
and Rhodes, 2011.).
Low morale among
senior management
(CEO, Logan) is the
attitude of committed
fraud.
5 Excessive pressure exists to
purchase department of Hot
line to meet the expectation of
their suppliers, GF.
Purchasing department has
right to renegotiate with the
suppliers. Henceforth,
purchase in-charge is an
opportunity for Angela Spear
to commit such fraud.
Hot line management
practice to commit their
creditors (GF) so as to
accomplish their
aggressive or target
forecasts.
3. Recommend internal control mechanism to mitigate risk of fraud company's financial statement
Matter Fraud risk Recommend internal control
1 Breach of covenant of loan results in loss
of bonus due to not complying KPIs by
CFO.
Directors should check all the terms and
agreed conditions of debt. They must assure
that interest payment must be paid timely
and collateral security also has been
provided. So that, risk due to breach of debt
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covenant can be controlled.
2 Fictitious accounts payable invoices,
over-billing and creating invoices to
make payment of cash funds to himself
are fraud risk.
By segregating work between number of
employees, Hot line can assure that payable
clerk will not conduct an omission or false
invoices which results in enlarge payments
and less profitability.
3 Quality control mechanism is not good so
that Hot line faced fraud risk by getting
ineffective quality of fabric from the
creditors. It results in loss of consumers,
sales and profitability of Hot line.
Effective quality control team can be
recruited who will be responsible to verify
the quality of the fabric (Yang and Jia,
2012). So that, effective services can be
provided to the customers results in enlarge
customer base, turnover and profit as well.
4 By charging less production cost as bad
debts results in decline profitability and
thereby decline tax obligation as well.
Verifying all the transactions reported in the
financial statement is a way to reduce such
fraud risk. Debtor's register also can be
maintained for such purpose.
5 Improper communication in all the
departments is the reason for financial
trouble.
Effective communication will help to
communicate each and every information in
all the departments. So that, Hot line will be
aware about the negotiation agreements
made by purchase departments (Wang and
Li, 2015).
CONCLUSION
From the above reports, it can be concluded that personnel, directors and shareholders are
involved in the fraudulent activities to provide incentives to themselves. Such frauds has been
committed due to the opportunities available. All this conducted omissions represents untrue and
unfair position of Hot line by its financial statement. At the end, report concluded that internal
control mechanism in which management consistently check and monitor all the activities of the
Hot line will significantly helps to overcome fraud risk.
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REFERENCES
Books and Journals
Bisgaier, J. and Rhodes, K.V., 2011. Auditing access to specialty care for children with public
insurance. New England Journal of Medicine. 364(24). pp.2324-2333.
Carcello, J.V., Hermanson, D.R. and Ye, Z., 2011. Corporate governance research in accounting and
auditing: Insights, practice implications, and future research directions. Auditing: A Journal
of Practice & Theory. 30(3). pp.1-31.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and
Economics. 58(2). pp.275-326.
Kuhn Jr, J.R. and Sutton, S.G., 2010. Continuous auditing in ERP system environments: The current
state and future directions. Journal of Information Systems. 24(1). pp.91-112.
Lennox, C. and Pittman, J., 2010. Auditing the auditors: Evidence on the recent reforms to the
external monitoring of audit firms. Journal of Accounting and Economics. 49(1). pp.84-103.
Wang, B., Li, B. and Li, H., 2015. Panda: public auditing for shared data with efficient user
revocation in the cloud. Services Computing, IEEE Transactions on. 8(1). pp.92-106.
Yang, K. and Jia, X., 2012. Data storage auditing service in cloud computing: challenges, methods
and opportunities. World Wide Web. 15(4). pp.409-428.
Yang, K. and Jia, X., 2013. An efficient and secure dynamic auditing protocol for data storage in
cloud computing. Parallel and Distributed Systems, IEEE Transactions on. 24(9). pp.1717-
1726.
Online
Fraud Auditing, n.d. [Online]. Available through: <http://www4.semo.edu/gjohnson/AC437/chapter
%20notes/chapter_11__notes.htm>. [Accessed on 12th May, 2016].
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