- 30 Marks
Question
You are a manager in Obuns & Co, a firm of Chartered Accountants, responsible for the audit of Akudre Plc, a listed entity, for the year ended 31 May 2020. The company operates in the textile industry and manufactures a range of goods, including clothing, linen, and soft furnishings. Akudre Plc employs approximately 750 sales staff across the country who sell the company’s products to both households and small to medium-sized businesses. Around 75% of Akudre Plc’s sales transactions are cash-based, and each sales staff member prepares a monthly cash sales report.
According to Akudre Plc’s CEO, Adu Oke, each staff member (including senior management) is encouraged to make cash sales on a commission basis to friends and family. Mr. Oke recently sold products worth N4,000,000 to business associates, depositing these funds into an offshore bank account under his sole control.
Review of Audit Working Papers:
A review of the audit working papers and an initial meeting with Mr. Oke revealed these issues:
- Obuns & Co performed tax computations for Akudre Plc and completed tax returns for the company and Mr. Oke, invoiced as part of the total fee for audit and professional services. Mr. Oke’s personal tax return reflects numerous property transactions across international locations, which are detailed in off-shore accounts.
Financing Issue:
The audit committee has requested the audit engagement partner attend a post-audit meeting with the company’s bank officials, including the CFO and a representative from the audit committee, to renegotiate Akudre Plc’s lending facility. The audit partner is expected to confirm the company’s financial stability and verify that going concern procedures, including cash flow forecasts, were audited.
Required:
a. Discuss the policies and procedures which Obuns & Co. should have in place in relation to an anti-money laundering programme. (5 Marks)
b. Evaluate whether there are any indicators of money laundering activities by Akudre Plc or its staff. (4 Marks)
c. Describe the requirements of ISA 250: Consideration of Laws and Regulations in an Audit of Financial Statements. (5 Marks)
d. Discuss the actions required when an auditor identifies or suspects material instances of non-compliance by a client under ISA 250. (5 Marks)
e. Identify and evaluate any ethical threats and professional issues arising from the audit committee’s request for the audit engagement partner to attend the financing meeting. (3 Marks)
f. If loan finance is essential for the company’s survival and uncertainty exists regarding agreement finalization, evaluate additional audit procedures to ascertain if a material uncertainty exists. (10 Marks)
g. Evaluate the impact on the audit report in these scenarios:
- i. Going concern assumption is appropriate, but material uncertainty exists.
- ii. Going concern assumption is appropriate, material uncertainty exists, and disclosures are adequate.
- iii. Going concern assumption is appropriate, material uncertainty exists, but disclosures are inadequate.
- iv. Going concern assumption is inappropriate. (8 Marks)
Answer
1a. The policies and procedures which Obuns & Co. should have in place in relation to an anti-money laundering programme include the following:
- Implement systems, controls, and procedures to prevent money laundering.
- Appoint a Money Laundering Reporting Officer (MLRO) responsible for receiving reports on suspicious activities.
- Maintain records of all transactions for a minimum of five years.
- Establish processes for verifying client identity (e.g., passport for individuals, incorporation certificate for companies).
- Set up procedures to report suspicions of money laundering.
- Train and educate staff on money laundering detection and reporting processes.
1b. Indicators of possible money laundering activities by Akudre Plc and its staff:
- Cash sales by numerous staff, posing challenges for accurate reporting.
- Offshore bank accounts in Mr. Oke’s name for property transactions.
- Commission-based cash sales by all staff, encouraging external transactions with friends and family.
1c. Requirements of ISA 250:
- The auditor should remain aware of possible non-compliance with laws and regulations.
- Obtain an understanding of the entity’s legal framework relevant to the audit.
- Respond appropriately if non-compliance is suspected, documenting any incidents and decisions related to laws and regulations.
1d. Auditor actions under ISA 250 for suspected non-compliance:
- Communicate with management and request a response.
- Assess the effect on the financial statements.
- Consider the need to inform those charged with governance.
- Determine whether to report to external authorities based on regulatory requirements.
1e. Ethical threats and issues related to the financing request:
- Risk of compromising audit independence if the partner supports the company’s going concern.
- Conflict of interest if involved in financing decisions beyond audit scope.
- Potential misrepresentation if the audit team overstates financial stability.
1f. Additional audit procedures for going concern uncertainty:
- Review cash flow forecasts and evaluate their basis.
- Discuss plans for alternative funding sources.
- Assess management’s plan to mitigate liquidity risks.
- Conduct sensitivity analysis on key assumptions in forecasts.
1g. Impact on the audit report under various scenarios:
- i. Issue a modified report with an emphasis of matter if adequate disclosure of material uncertainty exists.
- ii. Issue an unmodified opinion if disclosures are sufficient and appropriate.
- iii. Issue a qualified or adverse opinion if disclosures are inadequate.
- iv. Issue an adverse opinion if the going concern assumption is deemed inappropriate.
- Tags: Anti-Money Laundering, Audit Procedures, Compliance, Ethical Threats, Going Concern, ISA 250
- Level: Level 3
- Uploader: Kofi