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The fraudulent financial reporting can be identified as the practice of intentional misrepresentation of an organization’s financial statements in order to provide a false picture and impression of the organization’s profitability and operating performance. The fraudulent financial reporting generally takes place with respect to the earnings of the management. In this, the management makes suitable changes in the accounting policies of the company along with the estimates with the intention to show relevant improvement in the organization’s financial results (Dalnial, et. al., 2014). The major causes due to which fraudulent financial reporting occurs is personal incentives, absence of ethics, fraudulent attempt for impacting the stock price, pressure from the outside market and the deliberate compliance in relation to projections of financial analysis within the organization.
In case of Newcastle Airline limited, the revenue from passengers account within the income statement can be considered to be at significant risk of fraudulent financial reporting by the management. This is mainly due to the fact that the income statement that is prepared by the organization provides a complete financial overview of the company in relation to the accounting period. The income statement of Newcastle Airline limited can be classified into the operating non-operating section. The information related to revenue from passengers account and other expenses that are the direct result of the operations of the business are disclosed in the operating section of the income statement (Razali and Arshad, 2014). Thus, there are a lot more chances that the fraudulent financial reporting can take place with respect to the revenue from passenger accounts because there are multiple expenses and incomes that can be manipulated in a wrong manner which provides unfair and fraudulent information about the existing operations and financial position of the company.
Internal control is identified as the procedure and the policy that is provided by the top management of the organization in order to increase efficiency, safeguard company’s assets and resources, promotion of suitable accountability and the restricting the fraudulent behavior within the organization. Thus, the internal control can be considered as the procedure and the framework that is put in place for preventing the employees of the company from committing fraud and stealing of assets (Biegelman and Bartow, 2012). This further helps in creation of relevant organizational values and the minimization of risk within the organization.
In order to address the fraud risk associated with the revenue from passenger accounts, the practical internal control measure can be established such as standardization of the financial documents. In this type of internal control measure, the standardization of documents is made that are used for financial transactions, for example, travel expense report, invoice bills, inventory receipts along with the internal material requests can be used for maintaining the consistency with respect to the record keeping over time (Shanmugam, et. al., 2012). The use of the standard financial documents and formats can make it comparatively easier for the management of Newcastle Airlines limited to effectively review the previous records at the time for searching for the causes and reasons for discrepancy within the current system. Furthermore, the practical internal control measure is also relevant as the absence of the mechanism could lead to misrepresentation of the information.
Internal control can help in minimizing the risk of fraud with the help of measures such as segregation of work responsibilities to multiple individuals in a single task so that one person can review the fraud related practices of other and can report the management. The budgets are also considered to be an effective internal control measure as they allow comparison of budgeted and actual results along with relevant variances and thus, fraud and other discrepancies could be detected. The other measure in this can include the reviewing of the bank and credit card statement along with the financial statement by the owner or top management of the company on regular basis to detect any kind of fraud that is currently going on in the company.
The risk of material misstatement is the risk associated with the financial statements of the company and the degree to which these have been misstated. The auditors assesses the risk at the two levels, i.e. the financial level in which there are more chances of fraud and at the assertion level in which the control risk and inherent risk are mainly focused upon.
According to the Item 1, the previous year’s financial statement of the Newcastle Airlines limited showcase 80% of the total revenue as the revenue from passengers while the current financial reports represent a reduction in revenue from passengers as 6% and a rise of 11% in revenue from passengers in advance. The risk related to material misstatement that includes the recognition of revenue in the incorrect period might cause potential risk for the business in relation to problems associated with the organization control system along with the risk of fraud by intentionally representing premature revenue recognition (Budescu, et. al., 2012). Thus both these risk leads to improper revenue recognition and acts as a significant risk of material misstatement.
With respect to the Item 2, the depreciation costs may prove to be a significant risk of material misstatement due to improper review and assessment of the necessary control over the fixed assets and the depreciation. The risk may be caused to absence of control regarding the purchase of fixed assets and the calculation of depreciation according to method suitable for the company. As per the aircraft maintenance costs policy, the standard cost of the core engine and aircrafts is depreciated and capitalized according to lesser of the next major inspect or the scheduled usage period or the total remaining life of the aircraft (Dalnial, et. al., 2014). The chances of material misstatement have arisen in case of Newcastle Airline Limited because the current year financial statement reflect the cost of the aircraft to be at the same level as per the previous year but the there is an decrease of 5% in the depreciation cost of the company. Thus, there are high chances that the directors and the senior management of the company might have done this in order to remain ahead in the competitive environment.
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