(a) Appropriate Internal Controls to Manage Each of the Applicable Risks

(i) Risk: Poor condition of paintings and museum items, inadequate investment in restoration

• Internal Control:
  • Regular Monitoring and Planning: KAGM should establish a robust system for monitoring the condition of artworks and museum items. This could include regular inspections and reports by external experts.
  • Budget Allocation: Set aside a specific budget for restoration and maintenance work to ensure adequate funding is available.
  • Hiring Additional Restorers: To handle the volume of restoration, KAGM should consider employing additional specialist restorers or outsourcing some of the work.
  • Capital Investment Strategy: Develop a strategic plan to attract funding or sponsorship for restoration and new acquisitions.

(ii) Risk: Failure to invoice corporate sponsorship agreements due to poor communication

• Internal Control:
  • Clear Communication Channels: Establish clear and formal communication channels between the sponsorship managers, accounts department, and external sponsors.
  • Sponsorship Agreement Tracker: Implement a sponsorship agreement tracker to monitor the status of all agreements, ensuring invoices are issued on time.
  • Responsibility Matrix: Assign specific responsibilities for invoicing and follow-ups to designated personnel within the accounts and sponsorship teams.

(iii) Risk: Incorrect invoicing of sponsorship agreements due to set-off arrangements not communicated

• Internal Control:
  • Clear Documentation of Set-Offs: Maintain a detailed record of any set-off arrangements for sponsors, including clear terms of agreements.
  • Sponsorship Review Process: Create a system where the accounts department reviews the sponsorship agreements, including the details of any deductions, to ensure the invoicing is accurate.
  • Approval Process: Develop an approval process for invoicing where management or a senior financial officer reviews the sponsorship invoices and ensures all deductions are properly accounted for.

(iv) Risk: Theft or loss of cash from day visitors at the door

• Internal Control:
  • Cash Handling Procedures: Implement strict cash handling procedures, including a dual control system where two staff members are involved in collecting, counting, and depositing cash.
  • Regular Reconciliation: Conduct daily reconciliation of cash receipts against ticket sales records to identify discrepancies quickly.
  • Secure Cash Storage: Ensure cash is stored securely in a locked safe until it is deposited in the bank.
  • Surprise Audits: Conduct regular surprise cash counts and audits to deter potential theft.

(v) Risk: The online booking system for tickets is not always available

• Internal Control:
  • Website Monitoring and Maintenance: Implement a monitoring system to track the uptime of the online booking system. Schedule regular maintenance and updates to prevent system failures.
  • Backup Systems: Ensure that there is a backup system in place for ticket sales when the online system is down, such as a phone booking system or temporary alternative online platform.
  • Contractual Agreements with Service Providers: If the online booking system is managed by a third-party service provider, ensure that service level agreements (SLAs) include penalties for downtime and guarantee system reliability.

(b) Financial Statement Risks Arising from Each of These Applicable Risks

(i) Poor condition of paintings and museum items, inadequate investment in restoration

• Financial Statement Risk:
  • Asset Impairment: Failure to restore and maintain paintings or other assets may lead to their impairment, which could impact the valuation of assets in the financial statements.
  • Depreciation: If assets are not adequately maintained, they may depreciate faster than anticipated, requiring adjustments to depreciation expense.

(ii) Failure to invoice corporate sponsorship agreements

• Financial Statement Risk:
  • Revenue Recognition: Missing or delayed invoicing could result in unrecognized revenue, leading to an understatement of the sponsorship income in the financial statements.
  • Receivables: If sponsorship agreements are not invoiced, the accounts receivable may be misstated, affecting the balance sheet and cash flow statement.

(iii) Incorrect invoicing of sponsorship agreements

• Financial Statement Risk:
  • Revenue and Receivables: Incorrect invoicing due to unreported deductions could lead to overstated revenue and accounts receivable, misrepresenting the financial performance and position of KAGM.
  • Expense Recognition: Improper deductions could also affect the accuracy of expense recognition, especially in relation to advertising costs.

(iv) Theft or loss of cash from day visitors

• Financial Statement Risk:
  • Cash Flow and Receivables: If cash is stolen or misappropriated, the cash flow reported in the financial statements could be understated. Additionally, any discrepancies between cash receipts and sales records may result in misstated receivables.
  • Fraudulent Financial Reporting: If theft occurs over a prolonged period, it could lead to significant errors in the financial reporting of KAGM’s cash position.

(v) The online booking system for tickets being down

• Financial Statement Risk:
  • Revenue Recognition: If the online booking system is unavailable, it could result in lost ticket sales or delays in recognizing revenue from ticket sales. This may lead to understated revenue in the financial statements.
  • Cash Flow Impact: Any interruptions in ticket sales could also affect cash flows, making it harder to manage cash flow projections and liquidity.