Reference no: EM132944875

You are the audit senior at Spark and Associates and in the process of planning the 30 June 2021 audit of Chugg Ltd, a large soft drink manufacturer. The following issues have been uncovered at Chugg Ltd:

• The accounting function of Chugg Ltd consisted of the CFO, Ken Girlee, and one part time and two full time employees. Due to the small staff it is not possible to have segregation of duties. You have learned that the part-time employee is currently incurring very high medical costs.
• The sales staff have been with the business since its incorporation. They are paid a relatively low base salary with generous bonuses if sales targets are met.
• Chugg Ltd's external borrowings are related to the construction of a new bottling plant. These borrowings contained net asset and interest coverage loan covenants. To obtain the funding, the lender required that the CEO provide a personal guarantee that the loan would be repaid.

Required:

Problem 1: For each of the issues detailed above, identify any potential fraud risk factor(s) (i.e. incentives/pressures, opportunity, attitudes/rationalisation) that indicates fraud could be an issue at Chugg Ltd, and explain whether these factors may lead to fraudulent financial reporting or misappropriation of assets.