- 20 Marks
Question
The management of Pony Bank Plc and its wholly owned subsidiary, Ponte Micro Finance Bank Limited, engaged in fraudulent activities involving the arrangement of bogus loans amounting to ₦5.5 billion in worthless assets, which were undetected by the previous auditors. The former auditors attributed the oversight to a well-organized group within Pony Bank that actively deceived and obstructed the audit process to conceal their actions.
Your firm, Vic Viv & Co, has recently taken on the audit of Pony Bank Plc.
Requirements:
a. Advise the engagement partner on the risks involved in taking up the audit.
(4 Marks)
b. Recommend appropriate actions for management and your firm to address financial statement risks.
(8 Marks)
c. Prepare a management letter with two matters suitable for submission to the directors.
(8 Marks)
Answer
a. Risks in Taking Up the Audit:
The engagement partner should be aware of the following risks in accepting this audit engagement:
i. The client’s environment is compromised due to staff lacking integrity, which led to the creation of bogus loans;
ii. Internal evidence is unreliable and lacks credibility;
iii. Opening balances are unreliable, as prior financial statements are misstated.
b. Actions to Reduce Risks:
Given the high business risks that result in financial statement risks, the partner should take the following actions to mitigate these risks in the financial statements:
i. Encourage the client to investigate the fictitious loans;
ii. Perform a 100% review of all loans and advances;
iii. Update or modify the accounting system, ensuring only authorized personnel have access;
iv. Conduct a full overhaul of the credit and marketing departments;
v. Cease inter-company loans between the bank and subsidiary temporarily, with no joint loan syndication;
vi. Gather additional information from implicated staff to close all potential loopholes.
c. Management Letter:
Date: April 15, 2017
From: Viv Vic & Co (Chartered Accountants)
To: The Directors, Pony Bank Plc.
MANAGEMENT LETTER
We have completed the audit of your Bank’s financial statements for the year ended December 31, 2016, and made several observations:
- Creation of Fictitious Assets
- Observation: Bank staff and subsidiary personnel colluded to create bogus loans totaling ₦5.5 billion over seven years.
- Implication: This has resulted in an overstatement of assets by ₦5.5 billion.
- Recommendation: Immediate write-off of this fictitious asset is necessary.
- Response: [Space for management’s response]
- Breakdown of Internal Controls
- Observation: Staff collusion led to fraud and significant misstatements, undermining the internal control system.
- Implication: The reliability of the control system for accurate financial statement preparation is compromised.
- Recommendation: An overhaul of the bank’s human resources is essential, along with a thorough investigation and the removal of culpable staff.
- Response: [Space for management’s response]
Conclusion:
Please provide an action plan for each issue identified in this letter, including any further explanation necessary for follow-up in future audits. Additional sheets may be attached if needed.
Thank you.
Truly yours,
Engagement Partner
- Topic: Risk Management in Audits
- Series: NOV 2017
- Uploader: Dotse