You are a financial auditor and work on the ABC Building Ltd account. The Audit Partner is suspecting that the CEO (Peter Ran) have used financial statement fraud techniques to inflate net income and get higher bonuses.
The Partner is suspecting the following fraud schemes having been applied to inflatenet income:
- Concealed Cost of Goods Sold
- Fictitious Revenue
- Improper Asset Valuation
The General Journal
You are provided with two years of general journal data. The data file “ APE 2 Dataset” can be downloaded . The total balance of the two years of data is around$44.6million.The financial year start date is 1June. Download the data file to your computer. Please note that the materiality for the engagement is $100,000 (reduce the weightings for the material value control point to 5% in the Mind Bridge tool). It is also important to note that bookkeeping is regularly done on weekends.
Your task Analyse
the general journal using the Mind Bridge Ai Auditor tool specifically addressing the above mentioned fraud schemes. Identify no more than 25 transactions using the various investigative features in MindBridge’s Ai Auditor (risk-buckets, risk by months, risk-burst, filter builder). Create ‘tasks’ for these transactions and export them from the Audit Plan section.
REQUIREMENT DETAILS NOTES
- Create an engagement Check for completeness and correctness of setup of the engagement such as engagement name, industry, period frequency, fiscal start month, fiscal start day.
- Upload data Check the correctness of data upload such as column mapping.
- Setup control points for engagement Check for the correctness of control point settings such as materiality value, suspicious key words, weekend entries.
- Analyse the journals Check for the use of tools such as risk buckets, risk breakdown by month, risk graph, smart search, filter builder to analyse the journals and identify fraudulent transactions.
- Identify fraudulent transactions/journals Check for correctness of journals and transactions identified for each fraud category and the validity of the explanations provided.
The Correct Answer and Explanation is :
To address the task effectively, here’s a structured approach to performing the audit on the general journal data provided by ABC Building Ltd. using the MindBridge AI Auditor tool. The goal is to identify fraudulent transactions and evaluate them against the three suspected fraud schemes: Concealed Cost of Goods Sold (COGS), Fictitious Revenue, and Improper Asset Valuation.
Step 1: Create an Engagement
- Action: Set up the engagement with the appropriate details. This involves specifying the engagement name (e.g., “ABC Building Ltd. Financial Audit 2025”), the industry (construction or real estate), and the period frequency (annual, starting from June 1).
- Check: Ensure that the fiscal year start date aligns with the provided data (June 1), and confirm the proper start month and day are set to avoid discrepancies in the timeline.
Step 2: Upload Data
- Action: Import the “APE 2 Dataset” file into the MindBridge AI Auditor.
- Check: Ensure the column mapping is correct, meaning each field (e.g., account number, transaction date, amount, description) is correctly aligned to the tool’s expected format.
Step 3: Set Up Control Points for Engagement
- Action: Configure control points that align with the audit parameters. Set the materiality threshold at $100,000, which will help in identifying transactions that exceed this threshold as potentially significant.
- Check: Enable the detection of suspicious keywords (e.g., “adjustment”, “bonus”, “sale”, “write-off”) and flag transactions booked on weekends, as this could point to irregular activities. Reduce the weightings for control points (5%) to emphasize minor, yet suspicious, transactions.
Step 4: Analyze the Journals
- Action: Utilize MindBridge’s investigative tools:
- Risk Buckets: Segment transactions by risk level (low, medium, high) based on patterns and anomalies in the journal data.
- Risk Breakdown by Month: Identify any unusual spikes in activity in specific months, especially when reviewing transactions relating to bonuses or adjustments that could indicate manipulation of results for bonus maximization.
- Risk Graph: Use this tool to visualize trends over time, highlighting potential outliers or abrupt changes in transaction volumes or amounts.
- Smart Search: Search for keywords associated with fraud schemes (e.g., “write-off”, “bonus”, “discount”).
- Filter Builder: Create filters that help narrow down transactions based on risk levels, transaction dates, and amounts.
Step 5: Identify Fraudulent Transactions
- Action: Based on the analysis from the tools:
- Concealed COGS: Identify any journal entries where costs may have been hidden or understated (e.g., purchase or production costs), especially where there are large or unusual adjustments with little supporting documentation.
- Fictitious Revenue: Look for journal entries that inflate revenue without corresponding sales transactions, or revenue entries that appear at irregular times (such as weekend bookings).
- Improper Asset Valuation: Identify transactions involving asset adjustments that seem inconsistent with typical depreciation or valuation practices.
- Check: Examine the journals for correctness, ensuring that any identified transactions are explained in accordance with accounting standards. Validate the explanations provided for the anomalies and assess their legitimacy.
Outcome
The final step is to generate a list of no more than 25 high-risk transactions that align with the fraud schemes identified. These transactions should be flagged with detailed explanations in the audit plan, ready for further investigation or reporting.
In summary, the audit process involves setting up the engagement correctly, analyzing the journals with the right tools, and identifying the transactions that could point to potential fraudulent activities, especially related to concealed costs, fictitious revenue, and improper asset valuation. The MindBridge AI Auditor tools should help in identifying suspicious patterns and anomalies effectively for further review.