Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group, which controls Featherbed. Justin is the chairman of the board of directors of both Featherbed and the Morris Group, and Sarah is a director of both companies as well as the CFO of Featherbed.
In February 2012, Justin Morris approached your audit firm, KFP Partners, to carry out the featherbed audit for the year ending June 30, 2012. Featherbed has not been audited before but this year the audit has been requested by the company’s bank and a new private equity investor group that has just acquired a 20 percent share of Featherbed.
Featherbed employs 30 full-time staff. These workers are employed in administration, accounting, catering, cleaning, and hotel/restaurant duties. During peak periods, Featherbed also uses part-time and casual workers.
Justin and Sarah have a fairly laid back management style. They trust their workers to work hard for the company and reward them well. The accounting staff, in particular, are very loyal to the company. Justin tells you that some of the accounting staff enjoy their jobs so much that they have never taken any holidays, and hardly any workers ever take sick leave.
There are three people currently employed as accountants, the most senior of which is Peter Pinn. Peter heads the accounting department and reports directly to Sarah. He is in his fifties and plans to retire in two or three years. Peter prides himself on his ability to delegate most of his work to his two accounts staff, Kristen and Julie. He claims he has to do this because he is very busy developing a policy and procedures manual for the accounting department. This delegated work includes opening mail, processing payments and receipts, banking funds received, performing reconciliations, posting transactions, and performing the payroll function. Julie is a recently designated chartered accountant. Kristen works part-time-coming into the office on Mondays, Wednesdays, and Fridays. Kristen is responsible for posting all journal entries into the accounting system and the payroll function. Julie does the balance of the work, but they often help each other out in busy periods.
Required
(a) Identify and explain any significant fraud risk factors for Featherbed.
(b) For each fraud risk factor you identify, explain how the risk will affect your approach to the audit of Featherbed.
