Title of the Paper Goes Here
Urgent Medical Device Inc is a health trading company that operates its business through distributers(customers) all over the world. The company has been hit by significant inconsistencies in their financial statements in the recent financial years. This paper presents possible risk factors and inherent assessments that will help company management in their planning especially on revenue and receivables cycle. The research questions guiding this paper are whether financial misstatement associated with revenue recognition reporting fraud significant? The aim of constructing this question was to assess the need of application of SAS and specifically SAS 99 Consideration of Fraud in a Financial Statement Audit. External indicators, internal fraud indicators and misapplication of SAS were identified as high-risk factors that would affect revenue recognition and account receivable cycle of Urgent company.
Revenue recognition as seen as a simple abstraction but in reality, it is a zigzag as evidenced by many guidelines outlined in GAAP. Many scholars and researchers have found that misapplication of ISAS on revenue recognition and account receivable cycle has led to increased claims on financial fraud reporting. This truncates the effect of financial misstatement to violation of both accounts and audit assertions: Accuracy, completeness, cut-off, valuation, existence/ occurrence, among others. This paper will assess fraud related to revenue recognition and account receivables cycle of Urgent Medical Device Inc. The company and its management need to lay down proper controls and procedures to manage their sales for them to increase productivity. The researcher will walk through Urgent financial 2017 data as presented and perform risk assessment on revenue and receivables cycle. This process will be guided by SAS 99 Consideration of Fraud in a Financial Statement Audit together with other standards such as SAS 2110, Identifying and Assessing Risks of Material Misstatement, among others. The objectives of this paper are to evaluate possible loopholes within the management and customers(distributers) of Urgent company, identify the risks associated to revenue and receivables account, and finally not limited to suggesting sound recommendation to mitigate the risks and help Urgent company sales to project high devoid of fraud.
Auditors are entrusted to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes independent opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of Urgent medical device Inc. taken based on these financial statements. Statement on Auditing Standards no. 99, Consideration of Fraud in a Financial Statement Audit states that the auditor should ordinarily presume that there is a risk of material statement due to fraud related to revenue recognition. As part of an audit in accordance with ISAs, auditors will have the responsibility to exercise professional judgement and maintain professional skepticism throughout the audit. Additionally, they will Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and suggest recommendation on how to mitigate the risks. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Also, In accordance with ISA 315, the auditor shall identify and assess the risks of material misstatement due to fraud at the financial statement level, and at the assertion level for classes of transactions, account balances and disclosures.
|Fraud Risk Factor||Accounts Affected||Audit Assertions
(AU Section 326)
|Possible issue based on the risk factor identified|
|1.External Risk Indicators||Revenue and Receivables accounts||This will affect Accuracy and existence Revenue assertions.
Valuation assertion for AR will be affected.
|High expectation on Revenue reporting to satisfy investors may lead to high risk financial reporting fraud|
|2. Internal Risk indicators||Revenue
|Existence, accuracy revenue assertions will be affected.
AR valuation and existence assertions will be affected
|Pressure for having high incentives and promotions among sales agents may cause revenue fraud reporting.
Not segregating duties within the company can also result in revenue and receivables fraud
|3. Exaggerated Financial results||Revenue
|All the assertion maybe affected.
||Misapplications of ISAs may lead to revenue/receivables reporting fraud|
Requirement 2-Test of Controls
Requirement 3-Areas of Risk
Visualizations above provides a quick insight on how Urgent company transact its entire business in terms of sales and demands from its third-party distributers. From the visualization chart on sales per territories we clearly see that territory 2 makes the highest sales followed by 1 and 3 at close range while territory 4 and 5 lags. Urgent company management should lay more stringent measures to control revenue and receivables fraud as the huge sales volumes call for high fraud risk. Additionally, on Distributors visualization urgent company needs to lay out controls and procedures to manage possibility of fraud risk especially in revenue reporting among high trading distributors. This will solve accuracy, cut-off and existence assertions as the company will have a proper and clean record of its sales orders, verify all the shipping documents and at a larger extent ensures approval of the sales order are done exhaustively.
Further tests that the company need to perform includes extensive analytical examination to check and ensure all delivery notes bears signatories of all parties involved i.e. sales agent, distributer, and the transporter. Sales orders unique IDs should be sequential with the dates they were initiated. This translates to the invoices and delivery notes. This will aim at minimizing possible loopholes for manipulating the documents.
Requirement 4-Areas of Risk
Urgent Medical Device Inc is at a moderate risk to encounter fraud relating to revenue recognition and account receivable cycle. This was evident in three-way match control analysis which showed that some of the customers traded more than their credit limit. The company seems to have left the trading period open as seen in the test for transactions beyond 31/12/2017.This affect cut-off assertion hence translation the effect to revenue reporting misstatement. Urgent Company also is trading with distributers who is outstanding are beyond 90 days. This exposes the company to financial misstatement and doubtful debts risk may arise.
Ethical Issues Related to Professional Standards
Revenue recognition is a vital aspect in transparency of financial statements presentation. Application of ISAS among other established GAAP helps to manage revenue recognition of corporate & trading companies. Fraud assessment relating to revenue recognition and account receivable cycle of Urgent Device Inc. was at higher risk as misapplication of these standards were partly or fully ignored. This translated to violation of accounting and audit assertions hence increasing fraud risk. As revenue recognition principle states that revenue or sales should be recognized in the period it is earned, in line with three-way match analysis we saw that this principle was violated by the management of Urgent company. As outlined in IFAC management of every company are bestowed with the responsibility to ensure that financial information reported by the company, Urgent management has still the gap in place and needs to mitigate them in order to avoid future fraud possibilities.
Urgent Medical Device Inc. Needs to ensure that ISAs are applied fully especially on revenue and receivables cycle.