Fraud Risk Memorandum
This memo is to determine potential fraud risks that may exist within our client, Apollo shoes. There are reasons to believe that potential fraud risks do exist, however these risks are only hypothetical, but will be tested to assure users that Apollo’s financial statements are fairly stated. First, the client’s prohibition of contacting the predecessor auditor is considered a red-flag. The importance of the predecessor’s working papers and comparative work would make completing this audit much more efficient and effective. The prohibition is stated to be caused by litigation between the client and the auditor, due to withdrawal from engagement with little notice.
Next, the potential risk of material misstatements arising from fraudulent financial reporting to depict company’s unusual growth in trying economic times, are supported by the following fraud risk factors from SAS 99. The factors that apply are: (1) high degree of competition, accompanied by declining margins, (2) High vulnerability to rapid changes, such as changes in technology, or product obsolescence, (3) Significant declines in customer demand and increasing business failures in the industry or overall economy, (4) Rapid growth and unusual profitability, (5) overly optimistic press release issued to shareholders, and (6) Need to obtain additional debt to stay competitive. The pressure to remain on top of the industry, from the CEO and expected forecasts, may result in fraudulent activities. Also claims against the entity for patent infringement, and strained relationship between management and the predecessor auditor, are fraud factors which reflect Apollo’s attitude. The significance of this risk is very high, but the likelihood of this risk is low, due to the complexity needed to perform such a deception of department cooperation. If fraud does exist, it would have to be committed by multiple departments. For example, the Finance departments, treasury and...
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