ACC3510 Auditing Report: Oroton Ltd. Fraud and Accounting Issues

This report provides a detailed analysis of the auditing of Oroton Ltd., a luxury fashion company based in Australia. It investigates fraudulent activities, including a questionable agreement with a major shareholder and limitations in the preparation of management accounts, along with aggressive accounting policies such as revenue recognition, low estimation of reserves, manipulation of liabilities, and the use of gross revenue reporting. The report also highlights instances of asset misappropriation and fraudulent financial reporting. The findings reveal the implications of these issues on the company's financial health, emphasizing the potential for financial loss, negative impacts on stakeholders, and the emergence of sustainability concerns. The report concludes with recommendations aimed at mitigating these risks and ensuring more transparent and accurate financial reporting, including the need for improved asset management and adherence to GAAP principles.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s note

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Executive Summary
The report centres around the company Oroton Ltd. of Australia focussing on the
main financials of the company that have significantly occurred in its course of
operations. Taking into account these financials, the company has been reported to
have certain significant fraud cases which are reflected in the financial statements of
the company. Along with the fraud cases, the company also has many aggressive
accounting policies. These policies show manipulations or overstating of some of the
important financial elements of the company. Some of these elements are revenue
recognition, reserves, gross revenue reporting and liabilities. In the next section of
the report, the other misappropriations leading to fraud cases have been highlighted.
In this context, it has been seen that these misappropriations have occurred in the
company due to its improper asset management. This has resulted in the loss of
important assets of the company. The implications of these findings are stated along
with the suitable recommendations. A concluding statement is provided at the end of
the report.

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Table of Contents
Introduction...................................................................................................................2
Brief Overview of the organisation................................................................................2
Methodology.................................................................................................................2
Findings........................................................................................................................3
Fraudulent activities of the company............................................................................3
Aggressive accounting policies....................................................................................3
Other misappropriations...............................................................................................5
Implications of findings.................................................................................................6
Fraudulent activities......................................................................................................6
Aggressive accounting policies....................................................................................6
Other misappropriations...............................................................................................7
Conclusions and recommendations.............................................................................7
References.................................................................................................................10

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Introduction
The main purpose of this report is to bring about an assessment of risk of a
company of Australia. The company chosen for this paper is Oroton Ltd. of Australia.
The main topics that are to be focussed in this paper are fraudulent activities of the
company. Another topic is concerned with the aggressive accounting policies of the
company that marked the beginning of these fraudulent activities. At the end section,
different kinds of misappropriations are stated which are also revealed through the
study of the different documents of the company. The auditing standards and
concepts along with the different case laws of the company are studied and research
in order to come out with the explanations of these topics.
Brief Overview of the organisation
Oroton Ltd. is considered to be the oldest company of Australia in the
department of luxury fashion. The company was founded in the 1938 (Oroton.com,
2019). The primary products to be manufactured by the company include leather
bags for both men and women (Oroton.com, 2019) The company is headquartered
in Sydney and the number of stores of the company across Australia and Malaysia
counts up to 50. The main revolution in the era of luxury fashion is brought about by
Oroton through the replacement of traditional materials of bags with utilitarian
materials.
Methodology
The methodology that would be adopted for this research is data collection
through the secondary sources. These secondary sources primarily include data and
information collected from the important documents of the company. These
documents include the documents stating the auditing standards of the company.
Other documents include the different case laws relating to the company (Knechel &
Salterio, 2016). The different approaches of audit such as risk-based approaches are
also taken into account for determining the findings of the research (Knechel &
Salterio, 2016). Through the proper use of these resources, the fraudulent activities,
aggressive accounting policies and other misappropriations of the company are
suitably found out and constructed.

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Findings
Fraudulent activities of the company
The voluntary administrators of Oroton Group Ltd. belonging to Deloitte
Restructuring Services said that there has been a binding implementation deed of
Oroton with an entity that is controlled by Will Vicars. The company, Will Vicars has
been one of the major shareholders of Oroton Ltd (Henry, 2016).The first move
came after the market closed in December. According to the statement published by
Oroton Ltd., it has been observed that this contract includes a purchase proposal
that would allow Oroton to continue its trading activities and prevent a breaking up of
the business. This can be considered to be one of the fraudulent activities of the
company (Henry, 2016). This is because the company did not highlight any financial
figure in its statements about the purchase agreement it had with its major
shareholder. However, one of Oroton’s voluntary administrators claimed that they
made this agreement for providing a superior outcome to the business as well as the
employees.
Another major fraud has been detected in the audit report of the company.
According to the report, there has been few limitations of the accounting information
as proposed by the audit team (Travaillé & Naro, 2017). The audit team has noted
that the management accounts of the financial year 2018 has not been prepared
according to the regulations proposed in the Act. It has also been noted that the
management accounts are not subjected to an audit by the company’s external
auditors (Travaillé & Naro, 2017). These can be considered to be small fraudulent
activities that might lead to increase of risks for the company.
Another limitation stated in the audit report talks about its limitations in the
basis of preparation of the report. Some of the basis of these information have been
solely collected from opinions and the judgements of the management of Orton
Group (Downey & Bedard, 2018). Many risks and challenges in the operating
business of the company have been discussed thoroughly with the management
team for the preparation of such a report.
Aggressive accounting policies
The different accounting policies of Oroton Ltd. Company that can be considered
to be aggressive are stated as follows.

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1) Accounting policy at revenue recognition
It is stated that revenue recognition at sale can be considered to be an
aggressive accounting policy (Backof, Bamber, & Carpenter, 2016).This is
because there is always a chance of having risk in the process.
Considering the accounting policy of Oroton Ltd., it has been stated that the
revenue is measured at the fair value of the received consideration or
receivable (Backof, Bamber, & Carpenter, 2016).The entity operates both
retail stores as well as a wholesale business. Therefore, the revenue that is
generated from the sale of goods is actually realised at the time of sale. The
revenue is recognised when the entity actually sells the product to the
customer.
2) Reserves
According to the policy of aggressive accounting, low estimation of reserves
and allowances are considered to be a part of aggressive accounting policy
(Yadav, Kumar & Bhatia, 2014). According to the accounting policy of Oroton
Ltd., the reserves have very low estimation considering only foreign currency
reserve, share-based payments reserve and hedging reserve. Therefore, this
can be considered to be another aggressive accounting policy of the
company.
3) Liabilities
The liability of the company shows a credit balance. Hence, the figure of
liability has been used by the accountants of the company as instruments for
enhancing the future generated profits (Chi & Weng, 2014). This is done for
the period of time when the company has to report higher profits. In such
conditions, the credit balance of liability moves from the liability entry of the
balance sheet to the income statement. In the income statement the liability is
shown as an expense. This way the company shows higher earnings due to
the movement of liability figure. This can be considered to be another
aggressive policy of the company.
4) Depreciation method
Generally, the method of calculating depreciation is considered to be
aggressive when it is accelerated (Mora & Walker, 2015). In the company,
the depreciation is calculated through the straight line method. This might not
be considered to be an aggressive accounting policy.

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5) Gross revenue reporting
Aggressive accounting policy may also be highlighted through gross revenue
reporting (Mora & Walker, 2015). In this company this method is significant.
The company has completely ignored the fact that certain factors must be
subtracted from gross revenue to come to a net revenue figure. Therefore,
this can be considered to be another accounting policy of the company.
Other misappropriations
Certain other misappropriations have also been reported by the company.
One of them is misappropriation of assets. The company in a statement revealed
that it had found one of its assets missing (Ab Majid et al., 2014). It might be due to
stealing from one of the employees or might be due to mismanagement in the
handling of the assets. Such assets may have different forms such as cash, cash
equivalents, company data or any intellectual property belonging to the company.
Another misappropriation might occur due to fraudulent financial reporting of
the company (Rahman et al., 2016). This fraud is also referred to as the earnings
management fraud. In this process, the company by intention, manipulates the
accounting policies or accounting estimates in order to highlight a manipulated figure
of its financials in front of the shareholders. This misappropriation has been
significantly reflected in the financial documents of the company.
Similar to the fraudulent activities stated above, there could be many more
fraud cases occurring due to other activities. These activities are improper revenue
recognition, stuffing at the end of the financial period, entries that are closed as a
result of manipulations, improper valuation of assets (Rahman et al., 2016). Other
activities which are also included under this case could be financial measures and
estimates which do not follow Generally Accepted Accounting Principles (GAAP).
Therefore, in order to minimise such fraudulent activities, the Securities and
Exchange Commission has taken several measures (Johnston & Petacchi, 2017).
The commission has brought enforcement actions against all the corporations which
are involved in these activities.

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Implications of findings
Fraudulent activities
Taking into account the fraudulent activities of the company, it can be stated
that the company would be vigorously affected by them. This is because the
company has made an agreement with one of its major shareholders (Gurun,
Stoffman & Yonker, 2017). Through the agreement the company would be
purchased by this shareholding company. This binding agreement has not been
reflected in the financial statement of the company. Therefore, this deed can have
devastating effect on the company and also on its major shareholders (Gurun,
Stoffman & Yonker, 2017). In this case, the financial information that has been
disclosed by the company has not been accurate. It has been misleading and
therefore such deeds can cause financial loss of the company.
Considering the other major fraud, it has been noted that the major
accounting balances of the financial year 2018 has not been prepared according to
the regulations of the act. This limitation has been detected by the audit team (Boyle,
DeZoort & Hermanson, 2015). This can have negatively and majorly impact the
running of the business. Due to the leakage of such information to the important
stakeholders of the company, many credits of the company may not be granted by
the creditors (Boyle, DeZoort & Hermanson, 2015). The general assembly may
refuse to accept such financial statements and as a result the company might be
unable to disburse the dividends to the shareholders. The company also might not
be allowed to increase or decrease its net capital or net fund. Due to all these
reasons, the shareholders might also be disinterested to invest in the company’s
shares.
Aggressive accounting policies
Aggressive accounting policies lead to the overstating of the financial
statements in order to promote a healthy financial picture of the company in front of
the shareholders. However, in the long term, these policies can have detrimental
effects on the operations of the company (Cheng, Ge & Wang, 2017). In later days,
the use of aggressive accounting policies might lead to a decrease in the financial
performance of the company and in turn the financial position of the company might

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come down at the bottom level. There can be emergence of sustainability issue due
to these accounting policies.
The aggressive accounting policies inflate the financial information that are
provided to the shareholders. The contracting parties of the company are prone to
more risks as more information is provided to them (Sharma & Kuang, 2014). The
possibility of the cost of litigation increases due to aggressive policies. The interests
of regulators and politicians may be hampered as they might be blamed for the
overstated earnings or assets. Aggressive accounting policies also increases the
present value of the tax payments (Sharma & Kuang, 2014). Sometimes these
accounting policies may cross the boundaries of accounting regulations and lead to
the occurrence of fraud. However, it is seen that managers mostly prefer these
aggressive accounting policies because an inflated financial performance increases
their compensation.
In this company Oroton Ltd., some of the financials have been overstated
while some are understated. The overstated financials might prove to be fatal for the
company and the understated financials might be beneficial for the investors (Libby,
Rennekamp & Seybert, 2015). This is because the investors also have the
preference towards the real value of the company.
Other misappropriations
Considering the misappropriations of the Oroton Ltd. company, it is evident
that most of these appropriations are related to the mismanagement of assets
(Joseph, Albert & Byaruhanga, 2015). Due to this activity, the internal control of the
business gets disrupted and in-turn misleads the information of the financial
statements. In this company, asset misappropriation has been reported through a
missing case filed by the company (Joseph, Albert & Byaruhanga, 2015). In this
case, it has been stated that one of the important assets of the company is missing.
Such incidents might lead to the occurrence of debt in the future days because these
events are uncertain and are not predicted in prior time.
Conclusions and recommendations
From the above research it can be concluded that these activities relating to
fraud might impact the company negatively. This might be fundamental to the
company as the financials of the company would be severely hampered. The

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activities chosen in this paper are fraudulent activities, aggressive accounting
policies and other misappropriations of assets. The company chosen for this
research, that is, Oroton Ltd. of Australia, has reported all these activities in its
financial documents such as auditor’s report and case laws. The activities are
described and detailed in this paper following the information provided in the
documents of the company. Considering the fraudulent activities, the company has
shown misleading information in its financial statements which are not formulated
according to the accounting regulations. Some of the aggressive policies are also
highlighted in the accounting policies of the company. These are reflected in the
portions of revenue recognition, depreciation, reserves and others. The negative
consequences of these accounting policies are explained in details.
Asset misappropriation is another significant activity that has been highlighted
in the statements of the company. There has been missing assets reported in the
company which have hampered the financial conditions of the company. The
negative effects that arise due to this activity are elaborated. From all the above
findings suitable recommendations are provided in the next section.
The above stated problems can be solved through suitable recommendations.
The misled financial statements can be corrected by taking appropriate measures
that would implement proper internal control within the business (Dijksterhuis, Van
Knippenberg & Holland, 2014). The company should hire experts who would look
into the matters of preparation of the financial statements. The company should
avoid malpractices and should prepare its financial report according to the
accounting standards.
Aggressive accounting policies can be minimised through proper segregation
of duties. The accounting functions can be segregated through experts of different
departments who would look into the matters of a single department (Ozili, 2015).
The internal control of the business could also be improved through proper
management of the business. These factors would lead to the increase of the key
financials of the company. As a result, the managers would not have to present a
profitable financial picture in front of the shareholders through inflation of its financial
statements.

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Asset misappropriation can be controlled through two types of controls, that
is, preventive controls and detective controls. Preventive controls are generally used
to fraud from occurring in the management of assets (Agung, 2015). Some of the
measures taken in preventive controls can be locking up of the unused cheques and
preparing a capital budget plan that would highlight the required number of fixed
assets to be purchased. Detective controls are designed for detecting loss of the
assets. One of the measures of detective control can be hiring of a person who
would look into the accounts within a certain period of time (Agung, 2015). In the
company, there has been a loss of important assets that has been detected.
Therefore, the detective controls would be applied in the case of Oroton Ltd.
company.

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References
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Information System. The Mulia Pratama, 1(1), 21-30.
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frameworks help in constraining aggressive reporting? Evidence under more
precise and less precise accounting standards. Accounting, Organizations
and Society, 51, 1-11.
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fraud model use on auditors’ fraud risk judgments. Journal of Accounting and
Public Policy, 34(6), 578-596.
Cheng, R., Ge, H., & Wang, J. (2017). An extended continuum model accounting for
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on investor behavior. The Review of Financial Studies, 31(4), 1341-1376.
Henry, L. (2016). Fraud prevention: An effective control environment can deter or
minimize the occurrence of fraudulent activities. Internal Auditor, 73(2), 17-19.