Case Study Dato Meng

Assignment II

a. Describe the fraud risk factors that are indicated in the dialogue above

1. Incentive/ Pressure

• Pressure to meet expectation

Fraud risk factors could arise from the pressure of achieving high expectation created by management. Dato Meng told those investment analysts that Super Computer Services Sdn Bhd (SCS)’s earning would increase 30 % next year. Since he is the new CEO of SCS, he might be too eager or under pressure in showing a good performance of SCS with an impressive increase in earning under his management.

2. Attitude/ rationalisation

• Excessive interest by management

The dialogue indicates that Dato Meng, has almost no salary, mostly bonuses and share options. This could further increase possibility of committing

As mention in the dialogue, Dato Meng is in the position of being able to make the decisions that will influence a situation by having the full control over SCS and the board. As such, it is likely that opportunities for committing in fraudulent activities in SCS are relatively higher than firms that have no domination of management.

• Ineffective internal audit department

The conversion reveals that Mr Ban, the ex CEO used to have frequent disputes with Janet, CA, the predecessor auditor. Janet was discharged after informing the ineffective the internal audit department. It reflects that management not willing to accept suggestion given by the predecessor auditor. Fraudulent activities such as incorrect or inappropriate transactions could not be detected effectively with a weak internal audit department..

• Lack of segregation of duties

Fraud risk factors in term of nature of control environment, the conversation reveals that no appropriate control is implemented to separate duties in the cash disbursements department. It indicates a condition that opportunities to carry out fraud are high in SCS. For instance, if custody of the signed cheques is not properly managed or controlled, fraud could happen by alterations being made to the cheques. Risk of fraud can be reduced if several employees are taking part in separate phases of a

Describe Kent’s misconceptions regarding the consideration of fraud in the audit of SCS’s financial statements but are contained in the preceding dialogue, and explain why each is a misconception.

Kent has a misconception that auditors have no specific duties regarding fraud. Furthermore, Kent also mentions that auditor provides no assurances about fraud because that is management’s job. In fact, auditors do not have duty to detect fraud. However, it is an auditor responsibility to detect material misstatements in the financial statement. Auditors are required to identify and assess the risk of material misstatement due to fraud and design procedures to detect such misstatement.

Kent has no doubt or concern about the employment contract of Dato Meng that has almost no salary, mostly bonuses and share options. Sze is right to highlight this issue to Kent because it could be a possible reason for management to commit in fraudulent financial reporting.

Kent thought that the forecast for 2017 does not affect the audit of 2016 financial statements. Instead of assuming Dato Meng will probably amend that forecast every month, Kent should take into consideration that the ending balances in financial statement of 2016 might be purposely misstated in order to meet the forecast for