The more perceptive and diligent among you will have noticed this is very similar to earlier questions … by comparison you will note that you now know a lot more about auditing, and hence have quite a different range of standards and knowledge about Lakeside (obtained from a variety of sources) that you were not aware of earlier. So the point of this “repetition” is to illustrate how your initial views may have evolved as you progress with your evidence gathering.
Maybe now, you have accepted explanations of some of the issues and matters that initially bothered you because you have more (sufficient and appropriate) evidence on which to base your judgement?
The profit-sharing bonus scheme means that the larger the profit, the larger the year-end bonus. This gives employees an added incentive to seek increases in Lakeside’s profit for the current year. For e.g., this might be achieved artificially by creating false sales or deferring the recording of expenses. You will need to be alert for situations that promote the possibility of such irregularities (ASA 240.6). It must also be said that such a scheme may also have positive effects on Lakeside staff. However, you need to be sceptical (i.e., exercise professional scepticism in the context of fraud ASA 240.13-15, A8-A10) enough to recognise that some individuals may take advantage of such schemes by manipulating the financial records (for example, review concerns raised about figures for Store 3 by the analytic review exercise conducted during Review Activity 5.1?).
This problem may be especially significant in Lakeside because the stores are geographically located at a distance from the head office. This separation always increases potential control concerns. In addition, Rogers has already flagged that some internal control systems are no longer adequate. Thus the potential for manipulation of income figures is an even greater possibility. You should see if these factors serve as examples of any of the examples of fraud risk factors identified in ASA 240.A26 and Appendix 1. These are sometimes called “red flags” and you will use them further, or should have done, for the next activity.
You might notice how this suggested solution uses material from the analytical review completed earlier this Module and the knowledge of the business covered in Modules 1 & 2. It also refers to the initial discussions with Rogers (confirmed by King & Co in Case 2) about issues of concern. I hope this is beginning to show you how the information you accumulate as the audit progresses corroborates (improves the reliability of evidence) or contradicts (reduces the reliability of evidence) your expectations until, ultimately, you are satisfied that you have sufficient and appropriate audit evidence on which to base your opinion!
This next activity shows how the information you have can be useful for other stages of the audit process. So the facts of the scenario in your text also feature a “bonus plan”, but here you are seeing how that might be a significant impact on what you need to consider for sampling decisions … it is all inter-related!