- 15 Marks
Question
Egunje Distributors Limited is a private company in which Chief Idowu is the major shareholder. Chief Idowu set up the business to help provide resources for his philanthropic gestures. He has been involved in the major control activities, and the business was achieving its purpose, and things were working well.
After a number of years, Chief Idowu stepped aside from the business and handed over effective management to one of his subordinates, whom he elevated to the rank of General Manager (GM). The GM followed Chief Idowu’s control processes for only one year and then introduced new ideas and processes, resulting in undue amounts being transferred into his private accounts rather than the company’s accounts. This has affected the results of the company.
While Chief Idowu has not decided to take any hasty action, he has decided to bring in your firm, due to its size, so that through your work, he may understand the reasons for the dwindling performance. It has been discussed and agreed that your report on the audit will provide insight into the reasons for the observed decline in performance.
Required:
a. Discuss the control environment, focusing on the requirements of ISA 315 – Identifying and assessing the risk of material misstatement through understanding the entity and its environment, that will be relevant to this situation. (9 Marks)
b. Evaluate the control activities that will require your attention. (6 Marks)
Answer
a. Control Environment Relevant to ISA 315 Requirements:
- Integrity and Ethical Values: Evaluate if the new GM’s personal conduct and ethical standards align with the values established by Chief Idowu, as this directly influences the risk of misstatement.
- Management’s Philosophy and Operating Style: Assess how the GM’s new approach impacts the company’s financial reporting, as deviations from established processes may increase risks.
- Organizational Structure: Examine the organizational structure, especially the distribution of authority and responsibility, to determine if the GM’s role is being misused.
- Commitment to Competence: Review the qualifications and experience of personnel appointed by the GM, as their competence affects the reliability of the control environment.
- Human Resource Policies: Investigate if there were changes in HR policies related to recruitment, promotion, or compensation that could lead to conflicts of interest.
- Accountability: Assess how the company establishes and enforces accountability within its workforce, especially concerning the GM’s financial conduct and adherence to control activities.
b. Control Activities Requiring Attention:
- Segregation of Duties: Evaluate whether the GM has bypassed segregation of duties, allowing unauthorized transactions without proper checks.
- Authorization and Approval Procedures: Review the process for authorizing transactions to identify if any approval controls were weakened or circumvented by the GM.
- Reconciliation Processes: Examine reconciliation of accounts, particularly concerning transactions involving the GM’s private accounts, to detect unauthorized fund transfers.
- Access Controls: Assess the controls over access to cash and bank accounts to ensure funds are not easily misappropriated.
- Documentation and Recordkeeping: Verify that adequate documentation exists for all transactions, ensuring transparency and traceability to reduce misappropriation risk.
- Management Review and Oversight: Review the frequency and quality of management oversight over financial transactions, as lack of oversight may have contributed to the GM’s unchecked behavior.
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