Reference no: EM132546475

Question - Giles Naval Construction Ltd (GNC) is a ship building company that owns and operates a shipyard in Port Kembla. The company specialises in building ships of 300 to 2,000 tonnes displacement, such as car ferries, small cargo vessels, ships to service the offshore oil and gas industry and ships for coastal tourism. The company usually builds four to five ships a year and has an annual turnover of approximately $80 million and has a market capitalisation of $100 million. The CEO and founder of GNC is Julian Giles. He owns 25% of the shares in GNC Ltd. GNC's current major project is to build a large oil rig services vessel, the MV Antares, to operate in the Bass Strait oil fields for Southern Oil Development Ltd (SOL). The Antares will displace 1,800 tonnes and SOL is paying $32 m for the ship. Construction of the Antares commenced in September 2016 and is due for completion in September 2017. Due to high cost and long construction time of the Antares, a project financing model is being used to fund its construction. Under this model, GNC and SOL agreed on the ship design, price and construction schedule. The two parties then contracted with ANZ Bank to provide funding of 25% of the final prices when construction commenced plus three additional payments of 25% as soon as certain construction milestones are reached. Before ANZ will release the milestone payments to GNC, the achievement of the milestone must be checked by Angela Hecimovic, an independent naval engineer. After she has attended the shipyard and examined the construction status, she issues a report to ANZ and the money is transferred to GNC's account. You are the engagement partner on the audit of GNC's 31st May 2017 financial statements. During the meeting to discuss potential fraud at GNC, your audit team members raised the following issues. x GNC has a $100 m, three year corporate bond issue. An interest payment of $7 m was due on 26th May 2017 and bank records indicated that it was paid on time. x On 3rd May GNC received a letter of demand from Energy Australia for non-payment of their $254,000 electricity bill for the first quarter of 2017. The bill was paid on 8th May with a $5,000 late payment penalty. x On 12th May, GNC announced to the ASX that it expected annual profits to be 10% lower than expected, due to delays in construction caused by manufacturing defects in steel plates, which required some parts of ships' hulls to be rebuilt. x On 19th May Angela Hecimovic certified that construction of the Antares had reached the second construction milestone - including installation of the diesel engines - and ANZ released the milestone payment of $8 m to GNC on 24th May. x Discussions with GNCs chief engineer indicate that the diesel engines, which were due to be installed in the Antares in early May, have not been installed yet, due to the reworking of parts of the ship's hull as a result of the need to replace faulty steel plates. Installation is expected to be completed by the middle of June. x Discussions with Julian Giles' personal assistant indicate that Angela Hecimovic recently bought a four bedroom beach house in Port Hacking. The house had previously been owned by Julian Giles' brother Jason. x Information from property market databases indicate that the purchase price of the house was $200,000 below the price that Jason Giles paid for it in 2010.

Required -

i) What is the specific nature of the fraud that you suspect Julian Giles is conducting? Justify your answer.

ii) What is the key account and assertion that is most at risk of misstatement as a result of this fraud?

iii) What is Julian Giles' incentive to commit the fraud? Justify your answer.

iv) Which factors give Julian Giles the opportunity to commit the fraud? Justify your answer.

v) Which factors allow Julian Giles to rationalise the fraud? Justify your answer.