- 30 Marks
Question
Anything Goes Microfinance Bank Limited was incorporated in 2018 to meet the financial needs of low-level customers. The Management Accounts of 2019 revealed that the bank has a shareholders’ fund of N2.1 billion, total assets of over N5 billion, and customer deposits of N2 billion. It is the largest microfinance bank in Kito. Today, the bank continues to be the core banker for small and medium-scale enterprises and accounts for over 70% of the business turnover in Kito. It is the only indigenous microfinance bank that is fully owned by Kito shareholders. The bank directors are elected by key shareholders and represent all shareholders in both the public and private sectors.
The bank currently has a total employee establishment of over 350. With the liberalization of the economy and globalization of businesses, the bank embraced new challenges by becoming a commercial bank in 2020 and changed its name to Anything Goes Bank Limited. The change of Chief Executive Officer and the management at Anything Goes Bank Limited in early 2020 ushered in a new era where new ideas are adopted and managers reclaimed managerial responsibilities. The main objective was to come up with innovative business strategies that would ensure the bank serves its core customers effectively.
However, to reposition, the bank embarked on reviewing its corporate strategic plan, building on existing strengths, specifically addressing growth and development, information technology and business management, enhanced service delivery, profitability, and capital growth. The strategic plan for the bank has been drawn up with the theme “Managing for Value.” The strategies are based on four perspectives: people, customers, financial performance, and risk and control. The goal of the plan is to ensure that the bank meets shareholders’ expectations, provides a common language, ensures satisfaction for chosen customer segments, and fosters motivated and prepared staff. A focus on these four perspectives would result in customer satisfaction, efficient processes, and enhanced employee motivation.
To remain relevant and meet customers’ needs, the bank believes it must revisit its operating structure and expand its business. The bank aims to become a globally recognized commercial bank in Africa. Management believes a dynamic and flexible approach to strategic change and performance is essential, particularly when facing turbulence in its operating environment. A review of operations shows an increasingly complex environment with an accelerating rate of change, putting performance pressure from the government, public, and other stakeholders.
The bank is interested in early reporting but lacks the software capacity to handle current transaction volumes. Many staff members are not proficient in International Financial Reporting Standards, especially concerning complex financial instruments. A recent tax audit resulted in back duty assessment and other unresolved queries. Additionally, the bank faces issues with inefficient service delivery, public distrust in the banking sector, weak corporate governance, and rising bad loans.
The bank’s management has prepared a master plan with grand strategies, such as product development, market expansion, turnaround, and joint venture strategies. To achieve these grand strategies, functional strategies, including marketing, operations, organizational management, and financial strategies, are detailed in the master plan. However, implementation faces obstacles, including government policies, poor leadership, limited IT capacity, lack of funds, staff capability, and an inadequate corporate culture.
The bank has an audit committee, but it has not been performing optimally due to a lack of structured operations. It is also behind on some reporting requirements and has been fined by regulatory authorities. Although the bank views itself as small, it still requires an auditor to examine its accounts and express an opinion. Management is considering changing its auditors due to the transition to a commercial bank and has decided to request proposals for a new auditor appointment. Delays in attestation and assurance reporting to regulators have led to fines.
A friend of yours, whose father is a management staff member of the company and a student of accountancy, has informed you of these developments and asked for explanations to enlighten management before they send out a proposal for audit services.
Required:
a. Discuss the key features needed in an audit report which should be included in the proposal for audit services of Anything Goes Bank Limited. (10 Marks)
b. Explain the type of assurance service that the auditor of the bank should provide. (6 Marks)
c. List the duties the audit committee of the bank ought to be performing. (8 Marks)
d. Distinguish amongst audit, assurance, and attestation engagements. (6 Marks)
Answer
a. The key features needed in an audit report which should be included in the proposal for audit services of the bank include:
(i) Independence of the Auditor:
- The auditors producing the report should be independent from the directors of the entity. The external auditor must be independent from the directors; otherwise, their report will have little value. If they are not independent, their opinion is likely to be influenced by the directors.
(ii) True and Fair View (Fair Presentation):
- The audit report should give an opinion on whether the financial statements “give a true and fair view” or “present fairly” the position and results of the entity. The auditor reports on whether (or not) the financial statements give a true and fair view or present fairly the position of the entity as at the end of the financial period and the performance of the entity during the period. The auditor does not certify or guarantee that the financial statements are correct. This implies that there is no undue bias in the financial statements or the way in which they have been presented. In preparing the financial statements, a large amount of judgment is exercised by the directors. Similarly, judgment is exercised by the auditor in reaching their opinion. The phrases “true and fair view” and “present fairly” indicate that a judgment is being given that the financial statements can be relied upon and have been properly prepared in accordance with an appropriate financial reporting framework.
(iii) Materiality Concept:
- The report should consider that the concept of materiality is applied in reaching an audit opinion. The auditor gives an opinion on whether the financial statements present fairly in all material respects the financial position and performance of the entity. Information is material if, on the basis of the financial statements, it could influence the economic decisions of users should it be omitted or misstated. For example, shareholders of a company will not be interested if petty cash is misstated by an insignificant amount of money. The concept of materiality means that the auditor will not focus on examining immaterial but rather concentrate on more significant items in the financial statements, either due to their high value or because there is a greater risk of incorrect statement.
(iv) Management Responsibilities:
- This is a description of management’s responsibility, which is to prepare the financial statements to present a true and fair view and to establish and maintain an adequate system of internal control.
(v) Auditor’s Responsibilities:
- This is a description of the role of the auditor, which is to express an opinion on the financial statements prepared by management and not to detect fraud in order to close the exception gap.
(vi) Key Audit Matters:
- A key audit matters section in compliance with ISA 701; indicating areas of higher assessed risk of material misstatement, significant auditor judgment, and the effect of significant events.
b. The type of assurance service that the auditor of the bank should provide:
- The degree of assurance that should be provided on the reliability of financial statements of a company depends on: i. The amount of work performed in carrying out the assurance process; and ii. The results of that work.
- The assurance could be:
i. Reasonable Assurance:
- An audit provides a high, but not absolute, level of assurance that the audited information is free from any material misstatement. The auditor’s conclusion in this case is expressed in a positive form. For example, “In our opinion, the financial statements give a true and fair view.” The objective of a statutory audit is to provide reasonable assurance. An external audit is performed by an appropriately qualified auditor, appointed by the shareholders and independent of the company. An external audit provides positive assurance that, in the opinion of the auditors, the financial statements do present fairly the financial position and performance of the company.
ii. Limited Assurance:
- This is a moderate level of assurance provided by the auditor’s conclusion expressed in a negative form, for example, “Based on our review, nothing has come to our attention that can make us to believe that the accompanying financial statements do not give a true and fair view.” The objective of a review engagement is often to provide limited assurance. This applies to a review in an investigation or report expected to be sent to a regulator. In contrast to the reasonable level of assurance provided by an audit, a review into an aspect of the financial statements provides only moderate assurance that the information under review is free of material misstatement. The resulting opinion is usually (although not always) expressed as negative assurance. Negative assurance is necessary in situations where the auditor cannot obtain sufficient evidence to provide positive assurance.
- Topic: Audit Reporting
- Series: MAY 2024
- Uploader: Dotse