A contract entered into between Social Konnections inc and their advertisers to market their product using their application is an incomplete contract. It is because the contracted advertiser may be unwilling to disclose all the transaction carried out using the SKI platform. Also, the advertiser may work together with their client to defraud the SKI company. For example, they may forge multiyear figures to hence presenting the false amount of revenue generated. And though the proceeding may be shared using the agreed percentage the Social Konnections Inc Company will operate at a loss. It is a management gap which should be closed to reduce chances of any fraud.
The Social Konnections Inc is a social media advertising agency. As it is an advertising company, use of another advertising agency lowers the amount of revenue it is supposed to generate annually. The advertiser pay depends on the number of views the advertisement receives or the number of active users clicks. To make maximum revenue, the Social Konnections Inc should directly involve their clients.
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Use of advertising agents lowers the number of clients the company should have. The third party involved charges the client at a marked up price. It discourages many clients purchasing the product from the Social Konnections Inc Company, whereas if it sells directly to their active clients, they will do so using the standard rate. The standard rate would attract clients and in return leads to expansion of the Social Konnections Inc Company.
The company earns revenue from its new customers through the payment of social Konnections Inc up-front fee. The new customer up-front fee discourages customers from joining the social media network. If the entry to the social service is free, it may have a positive impact towards the company. Without the Social Konnections Inc up-front fee the company will attract many clients who will even meet the up-front expense in the long run.
Fraud Risk Factors
The company management is responsible for designing and implementing control to detect and prevent any fraud. In an organization fraud commonly occurs when circumstance exists that give an opportunity for fraud. In the social Konnections Inc company, Mr. Drew should consider discussing the fraudulent financial reporting risk factor. The company contracted partners, may alter their annual financial reporting to present false yearly proceeds, to be shared between the contracting organizations. Also, the nature of the company operation provides opportunities to engage in fraudulent financial reporting.
Nature of control environment is also another major fraud risk factor (Brazel et al., 2009). Mr. Drew should discuss documentation risk factors. The direct sales person and agencies may be involved in fraud if the company lacks proper physical or electronic record of transaction or contract signed with the company clients. Also, fraud is likely to happen where there is documentation, but the record can be easily modified.
When there are many related transactions between parties, it is likely that contract entered into may differ considerably from the market rate. When the nature of a company operation involves complex transactions, it is easier for the employee to change the result of the deal. Also, Mr. Drew should discuss the importance of internal auditor; this is because when a company does not have a functional internal audit department, it is likely to witness incorrect and inappropriate transaction.
Audit Procedures
Any audit procedure focus on the key revenue management risk. Audit procedure can be redesigned during the examination period to encounter the unforeseen difficulties. There are several commonly followed audit procedure in an audit process. These procedures involve; inspection, observation, external confirmation, recalculation, and reperformance.
The audit inspection involves inspection of documents and company records. The inspection provides a varying degree of reliability to the organization depending on the source of the documents. In an audit, asset inspection gives a highly reliable evidence of its existence and also an indication of value. In auditing observation of a company policy or procedure gives an assurance of the procedure at a given time, though not necessarily the company performance of the year (Hoffman & Zimbelma, 2009). Another activity is an external confirmation; this is where the management or the auditing team send out the document for evidence of the said transaction. For example, if the auditor doubts a specific transaction he/she can send an invoice to the supplier for him to confirm the transaction with the company. Recalculation procedure is done to ensure arithmetical accuracy. Reperformance involves redoing some of the procedure carried out by the audit team to minimize chances of errors. Reperformance technique is carried out manually or through the use of computer-assisted audit technique.
References
Brazel, J. F., Jones, K. L., & Zimbelman, M. F. (2009). Using nonfinancial measures to assess fraud risk. Journal of Accounting Research , 47 (5), 1135-1166.
Hoffman, V. B., & Zimbelman, M. F. (2009). Do strategic reasoning and brainstorming help auditors change their standard audit procedures in response to fraud risk?. The Accounting Review , 84 (3), 811-837.
