- 40 Marks
Question
Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing Nigeria Plc. There have been some regulatory and compliance issues for which the company was sanctioned and paid penalties to the Financial Reporting Council of Nigeria.
At the board of directors meeting to consider the last annual report audited by the firm, some of the previous problems caused by the auditors were raised and discussed. Following the reoccurrence of such issues, it was proposed that another audit firm be engaged in addition to the present firm.
To achieve their objective, a bigger firm that has international affiliation was considered to take a leading role in a joint audit arrangement and to ensure appropriate compliance. Your firm has been approached for the appointment. A meeting was scheduled between your firm, Chukwuemeka & Co., and the executive management of GED Manufacturing Nigeria Plc.
After the meeting, your firm was subsequently appointed, and the necessary formalities were properly followed. Your partner has directed that you liaise with Chukwuemeka & Co. to obtain the necessary materials for the preparation of the audit and that you review the prior year working papers to understand the issues. Your assessment of the documents obtained from the other auditor revealed the following, amongst others:
(i) The work done on the process of dispatch of goods and invoicing was not considered sufficient and appropriate.
(ii) The IT operations of the company had weak controls such that it was possible for some staff to override some of the existing controls.
Required:
a. Explain the risks inherent in the dispatch of goods and invoicing. (10 Marks)
b. Discuss the control objectives and principal controls that are relevant to the process of dispatch of goods and invoicing. (10 Marks)
c. Explain the limitations of a joint audit. (5 Marks)
d. Discuss the benefits of audit carried out by an internationally affiliated audit firm. (10 Marks)
e. Explain briefly the importance of audit working papers. (5 Marks)
Answer
a. Risks in Dispatch and Invoicing:
- Incomplete or incorrect dispatch and invoicing can lead to revenue losses and misstated financial reports.
- Lack of sufficient controls in the dispatch process can increase the risk of fraud or unauthorized sales.
- Errors in invoicing could result in loss of customer trust and potential penalties due to non-compliance with financial reporting standards.
b. Control Objectives and Principal Controls for Dispatch and Invoicing:
- Control Objectives: Ensure all goods dispatched are invoiced accurately and on time; prevent unauthorized dispatches; verify recorded transactions are complete and accurate.
- Principal Controls: Use sequentially numbered dispatch notes and invoices; implement approval for dispatches; periodic reconciliations between dispatch and invoicing records.
c. Limitations of Joint Audit:
- Coordination issues between audit teams may lead to inefficiencies.
- Potential conflicts in audit opinions and recommendations due to differences in audit methodologies.
- Higher administrative burden and potential for miscommunication regarding the division of audit responsibilities.
d. Benefits of an Internationally Affiliated Audit Firm:
- Access to global best practices and standardized methodologies.
- Enhanced credibility and assurance for international stakeholders.
- Capability to address complex, cross-border regulatory compliance requirements.
e. Importance of Audit Working Papers:
- Provide evidence for the audit opinion.
- Facilitate planning and performance review for future audits.
- Serve as documentation for quality control and enable continuity in case of personnel changes.
- Tags: Audit risks, Auditor Independence, Compliance, Internal Control, Joint Audit
- Level: Level 2
- Topic: Regulatory Framework for Auditing
- Series: MAY 2021
- Uploader: Kwame Aikins