Auditing Case Study: Financial Fraud at Framed Ltd. - Analysis

This case study examines the auditing failures at Framed Ltd., a wholesaler of office supplies, which ultimately led to its liquidation due to financial fraud and poor cash flow management. The audit firm, Oscar Edward Vance (OEV), issued an unmodified opinion despite significant cash flow issues and fraudulent activities, including revenue overstatement. The case explores the ethical issues, including negligence, and the consequences of failing to identify material misstatements. The analysis highlights the auditor's responsibility to safeguard shareholder interests and the importance of corporate governance. The study follows the American Accounting Association model for decision-making, outlining facts, ethical issues, principles, alternatives, and consequences, culminating in a decision to request a change in auditors to ensure authentic and truthful financial reporting. The liquidator identified fraud carried out by sales representatives and a junior auditor, leading to accusations against OEV for failing to recognize the misstatements and passing an unmodified opinion. The case emphasizes the liability of the auditor, the absence of corporate governance, and the need for vigilant auditing practices to prevent such failures.

Running head: AUDITING – CASE STUDY
AUDITING – CASE STUDY
Name of Student
Name of University
Author’s Note

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Table of Contents
QUESTION 1:.....................................................................................................................2
Cash Flow Issue:..............................................................................................................2
Sales:................................................................................................................................2
QUESTION 2:.....................................................................................................................4
REFRENCES:......................................................................................................................9

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QUESTION 1:
As per the case study, Framed Ltd. is the wholesaler of the office supply. Oscar Edward
Vance is an auditing firm who are responsible for looking after the audit of Framed Ltd. Jack,
who is an employee of Oscar Edward Vance, shared many insights regarding the financial report
of Framed Ltd. These insights regarding the financial report of Framed Ltd. can be termed as the
tort of negligence. Jack basically indicated two fraudulences. They are as follows:
Cash Flow Issue:
Jack of Oscar Edward Vance, stated that Framed Ltd. who is one of the client of Oscar
Edward Vance, facing several issues with their cash flow for last two years. Actually Framed
Ltd. failed to manage the cash flow issue properly. Oscar Edward Vance, on the other hand,
stated that there is no problem with the financial statements and they provided unmodified
opinion. Thus, it can be clearly identified that Framed Ltd. must have mould their financial
statement according to their needs or Oscar Edward Vance, intentionally omitted the mistake.
Sales:
As per the case study it can be clearly stated that two employees of Framed Ltd. and a
junior auditor of Oscar Edward Vance changed the sales data of Framed Ltd. The changed in
sales data resulted in overstating the revenue of the company and showcasing that the company
is a profit making company.
The change in the financial statement or overstating the value of cash flow and sales data
of Framed Ltd. are identified by the liquidator of the company (Beisland, Mersland & Strøm,
2015). After identifying the fraudulency act the liquidator of the company field a case against

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Oscar Edward Vance, who is the auditor of Framed Ltd. The liquidator also identified about the
fraudulent act that carried out by the sales personnel of Framed Ltd. and the junior auditor of
Oscar Edward Vance. The liquidator of Framed Ltd. also accused Oscar Edward Vance, the
auditor of Framed Ltd. for not identifying the cash flow changes that was made by the
management of the company. The liquidator also accused Oscar Edward Vance for passing of
unmodified opinion. The accusations that were placed by the liquidator on Oscar Edward Vance
is true to its nature, as they failed to recognize the material misstatement made by Framed Ltd.
As per the information passed by Jack it can be clearly seen that Oscar Edward Vance is
the only one who should be blamed for not identifying the fraudulency that were conducted by
Framed Ltd. The passing of unmodified opinion by Oscar Edward Vance curved the road for
downfall of the company. If the auditor would have been more vigilant then they could have
identified problems in the accounting statements of Framed Ltd. This will assist the auditor to
maintain the shareholder’s interest.
The absence of corporate governance in the auditing company Framed Ltd. led to the
downfall of the Framed Ltd. The auditing company failed to identify the employee who was
responsible for overstating the revenue of the company. This became one of the major reasons
behind the downfall of the company (Mihret & Grant, 2017). Due to this failure the
shareholder’s interests were also compromised.
Thus, the liability that imposed by the liquidator of Framed Ltd. on Oscar Edward Vance,
the auditor of Framed Ltd. is true to its nature. Oscar Edward Vance will not able to reduce this
liability that placed by the liquidator of Framed Ltd.

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As per the events mentioned in the case study, VicBank is not liable to accuse Oscar
Edward Vance, the auditor of Framed Ltd. The main reason is that Framed Ltd. was successful in
paying almost all the overdraft amount to the bank. Another major reason is that the bank has
direct relationships with Framed Ltd. but they do not hold any kind of relationships with the
auditor. Thus, they have no obligations to accuse the auditor of Framed Ltd.
QUESTION 2:
AMERICAN ACCOUNTING
ASSOCIATION MODEL
DECISION-MAKING PROCESS
1. Determine the facts 1. While representing the value of material cut-
off, the business entity chooses to conduct
fraudulency. This increases the revenue of the
company by considerable means.
2. The business entity is not reluctant to make
any adjustments in their financial statements.
This compromises the shareholder’s interests
of the business entity.
3. The auditor who supposed to safeguard the
shareholder’s interest shifted their point of
interests from safeguarding to committing the
fraudulency act. The auditor omit the
fraudulency act that were made by the
management of the company in their financial
statements. Thus, altogether the interests of

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shareholder are compromised.
2. Define the ethical issues When a person or any entity adopts an
unethical way and conducts the unethical
practices then unethical issues rises. In auditing
field the auditor needs not to conduct auditing
with utmost truthfulness. There are several
issues that the auditor needs to maintain in
order to reduce the ethical issues are
responsibility, public relations, integrity,
objectivity and many more. In order to carry
out the audit of Swift Pty Ltd. Oscar Edward
Vance, intentionally uses unethical practices.
The auditor intentionally misses the material
misstatement that were present in the financial
statements of the company. They deliberately
compromises the shareholder’s interests for the
sake of losing the client.
3. Identify the major principles, rules, and
values
Some of the principles, rules and values are as
follows:
 It is mandatory for the auditor to avoid
using unethical practices while
performing audit of any company’s
financial statements. These will enable

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the auditor to safeguard the
shareholder’s interests (Miko &
Kamardin, 2015).
 In order to provide authentic report the
auditor needs to maintain the credibility
in their report.
 In order to perform better auditing, the
professionals must be a keen observer,
so that they can identify any kind of
material misstatement that may present
in the financial statements of the
company.
 The auditor needs not to favor or keep
any kind of favoritism with their client.
 It is mandatory for the ayuditor to
follow the standards that are mentioned
by the accounting and auditing board of
the nation.
 In order to provide better report the
auditor needs to follow integrity, so that
the report can be authentic and truthful
to its nature.
 The auditor also needs to avoid

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resolution of ethical conflicts.
4. Specify the alternatives As mentioned by the ICAEW Audit and
Assurance Faculty in 2006, the alternative of
auditing can be the limited assurance. It was
introduced by International Auditing and
Assurance Standards Board (IAASB). As per
this report the shareholders needs to analyses
the practical experience of furnishing the
ICAEW Assurance Service over the
subsequent two years. It also enables the user
to view the financial information that assists in
identifying the relevance of the service to their
needs.
5. Compare values and alternatives Alternatives of audit and values of audit holds
considerable amount of differences. In oeder to
perform the audit procedure the auditor needs
to follow the values. In case of alternatives the
auditor needs to access the last two year data
before producing any result (Waweru, 2014).
6. Assess the consequences The major consequences that can identify is
that the auditor needs to depends on the last
two years data. If the data was being fabricated
then the company cannot portray the authentic

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data, which will ultimately compromise the
interest of shareholders.
7. Make your decision After analysing the above data it can safely
state that for the sake of the authenticity of the
report all the shareholders of the company
needs to request for change in the auditor, so
that the report that generated by the company
gets authentic and truthful opinion.

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REFRENCES:
Bansal, N., & Sharma, A. K. (2016). Audit committee, corporate governance and firm
performance: Empirical evidence from India. International Journal of Economics and
Finance, 8(3), 103.
Beisland, L. A., Mersland, R., & Strøm, R. Ø. (2015). Audit quality and corporate governance:
evidence from the microfinance industry. International Journal of Auditing, 19(3), 218-
237.
Mihret, D. G., & Grant, B. (2017). The role of internal auditing in corporate governance: a
Foucauldian analysis. Accounting, Auditing & Accountability Journal.
Miko, N. U., & Kamardin, H. (2015). Impact of audit committee and audit quality on preventing
earnings management in the pre-and post-Nigerian corporate governance code
2011. Procedia-Social and Behavioral Sciences, 172, 651-657.
Waweru, N. (2014). Determinants of quality corporate governance in Sub-Saharan
Africa. Managerial Auditing Journal.

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