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Tatenda Albert Chimsoro

The audit firm has been appointed as the new auditors of Armtronics Ltd, which markets electronic and arms equipment. The previous auditors lost the audit due to conflicts with the managing director, Bart Stone, over accounting policies. Several red flags were discovered about Stone and Armtronics Ltd that increase the risk of fraudulent financial reporting, including Stone's aggressive nature and prioritizing of profits over accurate accounting. The company also has questionable dealings in the arms industry and related parties that could motivate fraudulent reporting to hide improper activities or meet financial targets.

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QUESTION 1 Your firm has recently been appointed as auditors of Armtronics Ltd, a large company which marketssophisticated electronic equipment for heavy industry as well as the arms industry. The previousaudit firm lost the audit as a direct result of a conflict with Bart Stone, the managing director ofArmtronics Ltd, over the adoption of various accounting policies by Armtronics Ltd. The conflict hadbecome very heated, due mainly to Bart Stones aggressive nature, and had led to a qualified auditreport. Whilst familiarizing with the company and its environment you discover that: 1. Bart Stone had risen up through the ranks of Armtronics Ltd with ruthlessness and determination. On the way, he had built his personal wealth on a foundation of shares in Armtronics Ltd. 2. He has surrounded himself with an aggressive team of loyal managers. You consider that theirloyalty is partially due to the fact that management are not paid a salary but are given amonthly retainer, superior fringe benefits and a percentage of reported profits. 3. Much of the sophisticated electronic equipment is imported from the United States, Japan andTaiwan whilst exports, particularly arms, are made to the governments of Middle Eastern andAfrican countries. 4. You also discover that one of the divisions of the company namely the Foreign DevelopmentDivision sells arms exclusively to companies who in turn sell to mercenary and guerrillaorganisations. Bart Stone commented that the world arms market is cut- throat and secretive,provided that our government customers dont find out who we supply no problem! We coverour tracks pretty well. 5. Bart Stone places little emphasis on historical accounting figures despite the reasonablysophisticated computer facilities available. The vast majority of computer time is used for forecastingand analysis of worldwide economic trends within the electronics industry. As BartStone says accountants and bankers deal with history youve got to be a prophet to make aprofit!.
6. Armtronics Ltd has an audit committee which consists of three non-executive directors, all of whom are experts in the armament manufacture industry, and Ben du Rand, Bart Stones brother-in-law, who is the chairman. 7. Over the years Armtronics Ltd has reported figures better than its competitors but for the last two years profits have receded. Although there appears to be no real threat of going concern difficulties, liquidity has tightened significantly. The company is heavily committed to long-term borrowings and the companys bankers have indicated that their continued financial support will be reviewed in the light of the audited financial statements for the year under audit. 8. Bart Stone appears unconcerned about the drop in profits. He has responded to your enquiries by saying the company is in good shape, the Heavy Industry Division is solid. The Arms Division is thriving with the wars in the Middle East. Last year Armtronics Ltd concluded the first of many contracts with Stone Arms Inc, which is based in Vienna, for the supply of arms to various worldwide governments. The Foreign Development Division we wont talk too much about that! REQUIRED Evaluate the risk that the annual financial statements of Armtronics Ltd contain materialmisstatements as a result of fraudulent financial reporting. Your answer shouldconsider the following: the incentives/pressures on the company to engage in fraudulent financialreporting; situations or conditions which provide the opportunity; and the attitudes of management which may suggest fraudulent financial reporting.

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Assignment question

  • 1. QUESTION 1 Your firm has recently been appointed as auditors of Armtronics Ltd, a large company which marketssophisticated electronic equipment for heavy industry as well as the arms industry. The previousaudit firm lost the audit as a direct result of a conflict with Bart Stone, the managing director ofArmtronics Ltd, over the adoption of various accounting policies by Armtronics Ltd. The conflict hadbecome very heated, due mainly to Bart Stones aggressive nature, and had led to a qualified auditreport. Whilst familiarizing with the company and its environment you discover that: 1. Bart Stone had risen up through the ranks of Armtronics Ltd with ruthlessness and determination. On the way, he had built his personal wealth on a foundation of shares in Armtronics Ltd. 2. He has surrounded himself with an aggressive team of loyal managers. You consider that theirloyalty is partially due to the fact that management are not paid a salary but are given amonthly retainer, superior fringe benefits and a percentage of reported profits. 3. Much of the sophisticated electronic equipment is imported from the United States, Japan andTaiwan whilst exports, particularly arms, are made to the governments of Middle Eastern andAfrican countries. 4. You also discover that one of the divisions of the company namely the Foreign DevelopmentDivision sells arms exclusively to companies who in turn sell to mercenary and guerrillaorganisations. Bart Stone commented that the world arms market is cut- throat and secretive,provided that our government customers dont find out who we supply no problem! We coverour tracks pretty well. 5. Bart Stone places little emphasis on historical accounting figures despite the reasonablysophisticated computer facilities available. The vast majority of computer time is used for forecastingand analysis of worldwide economic trends within the electronics industry. As BartStone says accountants and bankers deal with history youve got to be a prophet to make aprofit!.
  • 2. 6. Armtronics Ltd has an audit committee which consists of three non-executive directors, all of whom are experts in the armament manufacture industry, and Ben du Rand, Bart Stones brother-in-law, who is the chairman. 7. Over the years Armtronics Ltd has reported figures better than its competitors but for the last two years profits have receded. Although there appears to be no real threat of going concern difficulties, liquidity has tightened significantly. The company is heavily committed to long-term borrowings and the companys bankers have indicated that their continued financial support will be reviewed in the light of the audited financial statements for the year under audit. 8. Bart Stone appears unconcerned about the drop in profits. He has responded to your enquiries by saying the company is in good shape, the Heavy Industry Division is solid. The Arms Division is thriving with the wars in the Middle East. Last year Armtronics Ltd concluded the first of many contracts with Stone Arms Inc, which is based in Vienna, for the supply of arms to various worldwide governments. The Foreign Development Division we wont talk too much about that! REQUIRED Evaluate the risk that the annual financial statements of Armtronics Ltd contain materialmisstatements as a result of fraudulent financial reporting. Your answer shouldconsider the following: the incentives/pressures on the company to engage in fraudulent financialreporting; situations or conditions which provide the opportunity; and the attitudes of management which may suggest fraudulent financial reporting.