Financial System and Auditing

Financial System and Auditing

TASK 1

Inherent Risk Factor for MEM Business

Mechanical Engineering Midlands Limited (MEM) is a very old family business producing sophisticated mechanical devices for domestic and commercial purposes. The inherent risk factor for MEM business is that its machinery is too old and the two former employees have started their own business. So, MEM is facing competition from its former employees who have latest machinery and equipment for producing the same product.

Inherent Risk Factor for Sales Process

The sales process of MEM Limited is very complicated and time consuming. It takes too long to process and order for disbursement to the production department. Due to this reason, many of the existing customers can switch to industry competitors resulting in decrease in the market share.

Inherent Risk Factor for Purchase

MEM Limited's major supplier is Germany based which is producing 30% of the raw material to MEM. This is a very risky factor as the major supplier should be based in home country.

TASK 2

Fraud

Fraud can be defined as an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury... A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.

Fraud At MEM

In some situations, it may be necessary for MEM to look beyond the independent audit team for expertise in the fraud area. In such cases, accounting consultants can provide additional assurance or advanced expertise, since they have special training and experience in fraud prevention, deterrence, investigation, and detection. Accounting consultants may also provide fresh insights into the organizations operations, control systems, and risks. The work of accounting consultants may also provide comfort for the MEMs' executive director and chief financial officer. Accounting consultants, however, cannot act as an insurer to prevent or detect fraud.

At MEM, fraud can be discovered through many sources, namely, internal or external auditors, accounting consultants, employees, vendors, and others. Establishing a confidential hotline can also be an important source of information leading to fraud discovery, as part of an organization's overall ethics, compliance, and fraud prevention program. Although a confidential hotline is something that could be accomplished internally, there are a variety of outside service providers that can be engaged to provide this service for the organization.

If fraud or improprieties are asserted or discovered, the audit committee through the external auditors, internal auditors, or accounting consultants, as appropriate should investigate, and, if necessary, retain legal counsel to assert claims on ...