The City of Bradford has undertaken the construction of a new airport. The airport is projected to be completed in 2018. When completed, the airport will be the fifth largest in the world and will serve the entire greater Dallas Metroplex. The total cost of the airport is budgeted to be in excess of $487 million.
When the real property for the airport was acquired, the cost of the real estate was substantially over-budget. The majority of the land was purchased from Krandall Development Ltd., which began to acquire property in the area when the airport was under consideration by the city council. Once the real estate was acquired, an airport manager was hired and he in turn hired his staff.
You are Terry Scott, CFE, an internal auditor with the City of Bradford. During a routine examination of contracts for the acquisition of the airport land, you discovered that all of the appraisals for the real estate were prepared by the same appraiser. When you reviewed the appraisals, you noticed that the comparables were all interrelated. That is, the comparable for one parcel of ground was acquired by the airport authority in another transaction. There were no “outside” comparables. Land prices paid to Krandall Development Ltd. for the acquisition of some of the parcels appeared to be higher than other acquired parcels.
1. Do any of the facts presented represent adequate predication on which a fraud examination may commence?
a. If so, what are they?
b. If not, why not?
2. Are there enough facts as presented above to formulate a fraud theory? If so, what is your fraud theory?
3. How would you increase your audit scope?
4. What documents would you examine?
5. Who would you interview?
You have examined the closing documents (e.g. deed of trust, purchase contract, disbursement instructions, etc.) for the land acquisition and noticed that some of the documents were notarized by the airport manager’s secretary, who was also employed by him prior to her employment with the airport authority. Additionally, you noticed that Krandall Development Ltd. had only recently acquired the land at a price substantially below what the airport authority paid.
6. Do these additional facts substantiate your fraud theory above? Why or why not? Explain in detail.
7. Would you amend your fraud theory? If so, how?
You continue your audit by examining all of the documents with respect to the acquisition of the airport land. You notice that one of the files contain an abstract of the limited partnership agreement for Krandall Development Ltd. The partnership agreement lists one of the limited partners as Robert Greer, who is a former business associate of J. Thomas Martinez, airport manager.
8. Do these additional facts substantiate your fraud theory above? Why or why not? Explain in detail.
9. Would you amend your fraud theory? If so, how?
10. Do you suspect a conflict of interest scheme? Why or why not? Explain in detail.
11. If so, who is involved in the conflict of interest?
Summary: This question is related to a case study on the City of Bradford newly constructing airport’s budget. Explains examination of contracts for the acquisition of the airport land.
Total word count: 1090
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