- 20 Marks
Question
During the audit of Kofo Plc in 2018, it was observed that there was an omission of liability to the tune of N2 billion. Upon investigation, it was discovered that the error was as a result of unrecorded liability relating to unremitted statutory taxes to the government in prior years. A compensating error was noticed in unsubstantiated investment and receivables balances schedule provided by the management.
The explanation provided by management for this error was that having noted this disparity, the internal audit team was commissioned to reconcile the ledger balances to establish the actual payment to be made to the government. The result of that exercise led to an initial adjustment of N500 million. However, upon further review by the Internal Audit and Risk Management team, the total disparity noted was N5 billion as opposed to the N2 billion initially noted. The reason being that the report with which the Internal Audit Team carried out the reconciliation was understated. Some liability balances were excluded from the report as a result of the approach used to set up the Information System (I.T) System. Therefore, the general command entered into the system to spool the report did not capture the entire transactions. To gain comfort, the audit team:
(i) Reviewed the reconciliation memo to have an understanding of management’s thought process;
(ii) Requested the updated spool of ledger balances from the I.T system;
(iii) Asked the Information Technology team to perform a walkthrough test of the transaction spool;
(iv) Requested the breakdown of the excluded balances and traced them to the supporting documents to which they relate; and
(v) Checked to see that there were no unusual remittances from the bank statements.
You are a member of the audit team which reviewed Kofo Plc’s compliance with International Standards on Auditing (ISA 250) on Non-Compliance with Laws and Regulations (NOCLAR).
Required:
a. Outline the audit procedures to be performed to help identify instances of non-compliance with laws and regulations. (5 Marks)
b. State what the auditor should do when they become aware of an issue of non-compliance with laws and regulations. (5 Marks)
c. State the types of policies and procedures the entity may implement to assist in the prevention and detection of non-compliance with laws and regulations. (4 Marks)
d. Discuss what the auditor should do under the following situations:
- i. Reporting non-compliance to those charged with governance (2 Marks)
- ii. Reporting non-compliance in the audit report (2 Marks)
- iii. Reporting non-compliance to the authorities (2 Marks)
(Total 20 Marks)
Answer
a. Audit Procedures to Identify Non-Compliance with Laws and Regulations:
- Understanding Entity’s Compliance Framework: Review the entity’s internal controls and policies designed to ensure compliance with laws and regulations.
- Examine Documentation: Verify contracts, government correspondences, and statutory documents for unrecorded or unfulfilled liabilities.
- Review Minutes and Management Reports: Examine board minutes and management reports for references to regulatory concerns or legal issues.
- Perform Analytical Procedures: Compare historical financial data to identify unusual trends in transactions that could indicate non-compliance.
- Inquire with Management and Legal Team: Ask management and the legal department for any ongoing or potential legal issues affecting compliance.
b. Auditor Actions upon Becoming Aware of Non-Compliance:
- Discuss with Management: Discuss the matter with management to understand the reason for non-compliance and assess their response.
- Gather Evidence: Collect sufficient evidence to determine the extent and impact of the non-compliance on financial statements.
- Evaluate Materiality: Assess whether the non-compliance is material to the financial statements and consider the impact on users.
- Document Findings: Record the identified issues and findings related to non-compliance in the audit working papers.
- Consult with Legal Experts if Necessary: If legal complexities arise, consult a legal expert to ensure a proper understanding of the regulations involved.
c. Policies and Procedures for Preventing Non-Compliance:
- Compliance Monitoring Systems: Establish systems to monitor compliance with applicable laws and regulations regularly.
- Training Programs: Implement periodic training sessions for employees on legal and regulatory requirements.
- Internal Audit Reviews: Conduct regular internal audits focusing on compliance areas to detect issues early.
- Whistleblowing Mechanism: Set up confidential reporting channels to encourage employees to report non-compliance without fear of retaliation.
d. Auditor Actions in Reporting Non-Compliance Situations:
i. Reporting Non-Compliance to Those Charged with Governance: – The auditor should report the identified non-compliance promptly to those charged with governance, detailing the nature, extent, and impact on financial reporting and compliance.
ii. Reporting Non-Compliance in the Audit Report: – If non-compliance materially affects the financial statements, the auditor should modify the audit opinion appropriately, potentially issuing a qualified or adverse opinion, based on the severity and impact.
iii. Reporting Non-Compliance to the Authorities: – The auditor may be required to report non-compliance to regulatory or legal authorities if mandated by law or if management and governance bodies fail to act on significant non-compliance issues impacting the public interest.
- Topic: Audit Reporting
- Series: NOV 2022
- Uploader: Dotse