- 30 Marks
Question
Havana Bank Plc was listed on the Nigerian Stock Exchange in February 2015. There was an initial public offer in the same period with proceeds of N5 billion. Part of the proceeds was expected to be utilized to strengthen the bank’s internet banking facility.
In November of the same year, the Managing Director/Chief Executive Officer (MD/CEO) proceeded on a three-week vacation to the United Kingdom but did not return at the time of concluding the audit of the 2015 financial statements early in 2016. It was observed that the MD/CEO had absconded with documents relating to the public offer. It was also noted that he kept drawing cash whilst in the United Kingdom amounting to N922 million.
The Bank closed its Gambian operations in June 2015 because it had made losses for two consecutive years. Prior to the two years before the closure, the operations in Gambia had grown into a network of five branches, contributing 15 percent of the gross income and 9.5 percent of the net profits of the group. The closure was not disclosed in the financial statements, but reference was made to the closure in the directors’ report.
As the Audit Manager in the firm of Chartered Accountants that audits Havana Bank Plc, you are required to:
a. Identify and explain the significant audit matters you will consider in forming an opinion in relation to the missing documents and the cash drawings by the absconded MD/CEO. (10 Marks)
b. Analyse and evaluate your views on the non-inclusion of the discontinued Gambian operations in the financial statements. (10 Marks)
c. Explain FIVE duties, as an auditor, in relation to the bank’s internet banking. (10 Marks)
Answer
a. Significant Audit Matters (10 Marks)
- Fraud Risk Assessment:
- Evaluate the absence of public offer documents and substantial cash withdrawals as indicators of potential fraud.
- Assess the impact on internal controls, governance, and overall financial reporting reliability.
- Materiality of Misstatements:
- Determine whether the missing documents and unapproved withdrawals materially affect financial statements.
- Audit Evidence:
- Obtain supporting documents and corroborative evidence, including bank statements and board minutes, to verify the legitimacy of the cash withdrawals.
- Management Representation:
- Require a representation letter from the remaining directors acknowledging responsibility for missing documents and withdrawals.
- Disclosure in Financial Statements:
- Ensure appropriate disclosure of fraudulent activities as per ISA 240 and IAS 10 regarding subsequent events.
- Legal and Regulatory Implications:
- Evaluate potential non-compliance with legal and stock exchange requirements for public offers.
b. Non-Inclusion of Discontinued Gambian Operations (10 Marks)
- Non-Compliance with IFRS 5:
- Lack of disclosure violates the requirements for discontinued operations under IFRS 5.
- Financial Impact:
- Assess the effect of discontinued Gambian operations on the group’s financial position and performance.
- Evaluate the need for proper classification and separate disclosure of income, expenses, and cash flows from discontinued operations.
- Audit Opinion:
- Consider issuing a qualified opinion or emphasis of matter if management fails to provide adequate disclosure.
- Consistency with Director’s Report:
- Verify consistency between the financial statements and the director’s report as required under ISA 720.
- Stakeholder Relevance:
- Evaluate whether the omission of this disclosure misleads investors and other stakeholders, affecting their decision-making.
c. Auditor Duties Related to Internet Banking (10 Marks)
- Risk Assessment:
- Assess risks associated with internet banking, including cybersecurity threats and unauthorized access.
- Control Environment:
- Review the design, implementation, and effectiveness of IT controls related to internet banking.
- Regulatory Compliance:
- Verify compliance with Central Bank of Nigeria (CBN) regulations and other applicable guidelines for electronic banking.
- Audit Evidence Collection:
- Gather sufficient and appropriate evidence regarding the functionality and security of internet banking systems.
- Fraud Prevention Measures:
- Evaluate the bank’s fraud detection and prevention mechanisms, including encryption and multi-factor authentication.
- Data Integrity and Confidentiality:
- Review measures ensuring data confidentiality, accuracy, and availability for internet banking users.
- Third-Party Service Providers:
- Assess the impact of outsourced services related to internet banking operations.
- Incident Response Plan:
- Verify the existence and adequacy of response plans for cyber-attacks or system failures.
- Uploader: Kofi