Question 1
The financial position of an organization is determined by the correct entries in the books of account that are inspected and monitored by the internal control body of management. The internal audit is mandated to thoroughly examine, making reports, and evaluating the degree of adequacy of the organization internal control in accordance to the justified economic use of the available resources. In case of Regina the internal control was reluctant in taking the necessary measure to curb the fraudulent activity to their investor. Action of Sheelen clearly indicated the abnormalities in the book of account by instructing for the manipulation of the sale return rates.
At one time or another golden was requested to give an explanation of the ship-in- place sales that were recorded in the final quarter of the 1988 fiscal year. Though Golden assured them that such a transaction does exist in their record, the internal control system was obliged to carry a thorough inspection and examination to establish if the record were the exact reflection the current financial position of the organization. The alert on the low quality of the product should have triggered curiosity on how the organization was still breaking through the competitive market. The internal control body should have inspected the effect and progress of the new products and how the record reflects the effects. The internal control should have a regular check up facility that would ensure there is a constituency in the recording actual figures. Sheelen’s action to solve the low quality product problem by developing an accounting scheme was purposed to inflate the organization stock price. The manipulation of the reported is evident in 1988 fiscal year where the company posed a recommendable increase of its earnings and sales of the 1985 to 1987.
Question 2 (a)
The 1989 fiscal year contains the major assertions that show that there was a fraudulent activity taking place. Sheelen manipulated the Regina financial records by inflating the revenue. That is the sales orders and are due for shipment were recorded as actual revenue for the year. The specific audit substantive procedure that could have contributed to the discovery of the unethical act of Sheelen was by inspecting the actual revenue and determining the real truth behind the ship in place sales which were due. The fraudulent activity is based on the fact that Sheelen and golden used the accounting scheme to understate Regina’s cost of products by an approximate of $3million. This figure was released after a $6 million was recorded by Golden to stand for the ship in place sales. The $181 million net sale and $1.21 per share were not the true and fair reflection of Regina’s financial position.
This false statement convinces the investors that the company was in the best position to invest in. The only way to ascertain that fraudulent activities were being conducted was through the accounting department to conduct an inspection or thorough overview of the initial and previous year total inventory of $65,241. It would enable them to get the actual figure of net sales for the 1988 fiscal year. Paying attention to the entries record in the four quarterly record of the 1988 fiscal year could have revealed the fraudulent activities at Regina. The specific adjustment recorded in the four consecutive quarterly could have been seen if a close monitoring system was set in place to foresee the financial statement. A true and fair reflection of the company could have been stated if the CEO would have been keen on both the production strategy and also the stock price. The other sign that could have attracted attention to how the organization is doing exemplary well in the stock price while their claims in the market of low quality products.
Question 2 (b)
The Anglo-American board demands that the organization governance or powers are in the hand of those holds senior managerial position. It gives them the authorities and duties of decision making. The main characteristic of Anglo-America board is the management and supervisory board. The supervisory management would have prevented the emergence or the existence of the any fraudulent activities because of the regular check up on the books of account of the company would encourage consistency and transparency. The facts that there exist a management board would regulate the decision-making powers of the senior most managers (CEO) hence reduces chances of Sheelen dictating to the ordinary staff to manipulate the computer system or rather make any unethical entry in the financial statements. The suitable way of handling or prevent the emergence of any fraudulent activities is by adopting a system of appointing the new members.
The process of nominating new staff in the organization should be done by the CEO with the help of other board member this would give a chance for appointment of qualified condition. It thus implies that it shun any opportunity of nominating candidate that would engage in unethical activities due to the close relationship or confidentially among the staff. The other factor that is important and needs to be considered in an auditing of the organization in order to prevent fraud from taking place is the mode of communication and the flow of information. Regina should have an efficient and effective system of communication that’s the all individuals should be answerable or answers to a specific authority by confirming for any given task. The flow of information should be continues all through the management team to prevent any misunderstanding and misrepresentation of the organization.
Question 3:
ISA 500 collected enough evidence to ascertain the fraudulent activity took place in the Regina. The Securities and Exchange Commission highlight that the CEO (Sheelen) with the help of Golden recorded the ship in place of $6 million. They also manipulated the record of the second quarter of the 1988 fiscal year to show the investor that the company has been experiencing a steady and consistent increase in its sales and total earning. There is also evidence that the financial officer (Golden) understated the company’s total product returns in order to establish the targeted earnings and sales.
Securities and Exchange Commission investigations outline the company sales were understated by $13million in that particular fiscal year. The 180million net sales were not the actual amount recorded in the company and $1.20 million per share was also established to be as a result of the accounting scheme therefore serving as the best evidence to confirm that Sheelen was conducting unethical or fraudulent activities in Regina. The other evident provide are the 200 bogus invoices creating to respond to the bogus sale recorded in the fourth quarter of 1988. These invoices were very significant in facilitating the fraud by representing $5million and more of collective sales.
