Ican 2024 Advanced Audit And Assurance Question 4

Demmy Global Limited was a growth-oriented company that had been controlled by its Managing Director, Mr. Longe. The company sells modern sophisticated mobile smartphones directly to the public. A large number of sales agents were employed on commission basis. The mobile phones were sent to these sales agents who then sold them directly to the public. The mobile phones were supplied to the sales agents on a sale or return basis and Demmy Global Limited recognised the sale of a mobile smart phones when it was received by the sales agents. Any returns of the mobile phones were treated as repurchases in the period concerned. The company enjoyed a tremendous growth record. The main reasons for this apparent expansion were: (i) Mr. Longe falsified the sales records. He created several fictitious sales agents who were responsible for 25% of the company's revenue; (ii) At the year end, Mr. Longe dispatched nearly all of his inventories of mobile phones to the sales agents and repurchased those that they wished to return after the year end; (iii) 20% of the cost of sales were capitalised. This was achieved by the falsification of purchase invoices with the co-operation of its suppliers. The suppliers furnished the company with invoices for non-current assets but supplied mobile smart phones; and (iv) The directors of the company enjoyed a bonus plan linked to reported profits. Executives could earn bonuses ranging from 50% to 75% of their basic salaries. The directors did not query the unusually rapid growth of the company, and were unaware of the fraud perpetrated by Mr. Longe. Mr. Longe spent large sums of money in creating false records and bribing accomplices in order to conceal the fraud from the internal audit department. He made efforts to cover up the illicit activities and precluded the auditor from corroborating sales with independent third parties, and from examining the service contracts of the directors or discussing the affairs of the company with the sales agents. The external auditor was sued by a bank that had granted loan to Demmy Global Limited on the basis of interim financial statements. These financial statements had been reviewed by the auditor and a review report issued.