Assessing Fraud Risk and Professional Judgment Framework in

School: Nanyang Technological University - Course: ACC 2101 - Subject: Accounting

Seminar 7 Notes: Fraud If the questionasks u to assess fraud risk → usually medium-high Motive+opp+rationalisation → for fraud to happen Step 1: Say fraud risk is high Step 2: Response Fraud risk high at FS level→ macro factor inside make it prone to fraud eg under a lot of pressure, mgt no integrity but not targeting any particular account (for acceptance of job → Integrity, CE) → so mgt integrity no good, control weak, fraud risk high, if u accept this job, you may face a lawsuit by accepting this job (very mafan for you)→ don't need to conclude whether you will take or not take the job, but show that we need to consider the above factors when deciding whether to accept the job. Question1 PART A Briefly summarise the Professional Judgment Framework developed by the Financial Reporting Council, UK Component 1: Mindset An auditor should have the appropriate mindset to exercise professional judgement -Understanding the purpose of audit and public interest -Professional Scepticism -Biases -Sensitivity to uncertainty -Commitment to quality Component 2: Professional Judgement Trigger and Process A non- linear process a)Identify situation b)Relevant person c)Appropriately frame the issue d)Gather information and conduct analysis e)Revise the proccess Component 3: Consultation -Having regular disscussions and consultations within the engagement can significantly enhance the quality of an auditor's professional judgement -Promote a healthy culture of debate -Helps to mitigate biases -More growth opportunities for junior members of the team Component 4: Environmental Factors -Audit firm's culture, resources, training and processes such as implementing appropriate training and resources for staff and establishing a good audit firm culture -Quantity and quality of relevant information available because insufficient and low quality information can affect quality of judgement -Time and resources available as sufficient time and high quality resources translate to better quality of judgement -Audited entity's management includes culture of audited entity and that audited entity fulfils their role PART B Easy Chair Ltd (EC) was established in 2014 and primarily designs and manufactures gaming chairs with ergonomic features. In 2019, the company was listed on the Singapore Exchange. EC's chairs are reputed in the market to be of very high quality and are sold at a premium. The company has a factory and a research and development facility in Tuas, Singapore, as well as a factory in a manufacturing hub in Xi'an, China. EC is both a wholesaler and retailer of gaming chairs. The company has its financial year- end on 31 December. In early December 2021, your firm was appointed as the auditor of EC to replace the previous auditor. You have been assigned as the Audit Manager for the audit engagement. EC has been growing rapidly over the years. The work-from-home arrangements during the Covid-19 pandemic resulted in increased demand by non- gamers for these ergonomic chairs which further accelerated EC's growth. To meet the increased demand, the company increased its production capacity from September 2021.The company intends to secure additional bank loans to fund its expansion using the audited set of financial statements for the financial year ended 31 December 2021. EC has offered to pay your firm 20% more of the proposed audit fee if they are successful in securing an attractive bank loan. As a token of appreciation, EC has also offered to sell its chairs at a 30% discount to any staff and family members of the audit engagement team, similar to the policy it has for its staff. You are reviewing the audit working papers prepared by the audit senior on the engagement. Below are extracts of the audit working papers.