• 20 Marks

AAA – Nov 2023 – L3 – SB – Q3 – Internal Audit and Corporate Governance

Discuss audit activities, key focus areas, and factors of concern in auditing Giant Club.

Giant Club has been in existence for about 6 years. The club membership comprises of eminent individuals in society and has a certificate of registration under the relevant laws. It has an approximate enrollment of 1,000 members. The club’s funding is supported by membership fees, parking fees, rental fees, voluntary donations, and income from endowment investments.

The club has been named as a beneficiary under the wills of two deceased members. Collection on the proceeds of the estate is made subsequent to the balance sheet date. Collections from the will receivable in the amount of N6,200,000 have been recorded based on the available information from the estate administrators. During the 2020 financial year, the club was committed to giving scholarships to seven students in various higher institutions. Accordingly, the club has agreed to pay these individuals regular pocket money in addition to providing medical coverage as needed. Since it is a non-for-profit organisation (NFPO), the club has not been conducting an independent statutory audit of the financial statements since inception. However, the club has been appointing its officers as and when due every two years.

The new Treasurer, who is a professional accountant, took over the control of the treasury and his review revealed that:

  • There was no periodic review of inventory items and background check on vendors/suppliers;
  • There were calls from vendors stating they haven’t been paid when records show payments have been made;
  • There were cases of cash takings not banked;
  • No control over cheque lodgments and reconciliation of the bank account;
  • No background check for those who handled money;
  • The computers used for transactions did not have protective passwords;
  • No evidence that the organisation sent acknowledgements to contributors with a record of such acknowledgements kept on file;
  • When new members were admitted and they made yearly subscription payments, the club did not issue pre-numbered tickets, which could then be compared to funds deposited;
  • When cheques were issued, supporting documentation of expenses and approvals at the time of signing cheques were not available; and
  • Requests for reimbursement were not checked for arithmetical accuracy and reasonableness before approval.

The new management of Giant Club has just appointed your firm as the external auditor, and you have been selected as the senior in charge of the audit.

Required:

a. Discuss the activities you will carry out when performing the audit of the Club. (10 Marks)

b. Evaluate the key audit areas that you will focus on to get enough audit evidence on this type of audit.

(5 Marks)

c. Determine other factors that should be of concern in this type of audit. (5 Marks)
(Total 20 Marks)

a. Audit Activities

  • Review the internal control environment, focusing on cash management, inventory control, and the authorization of expenditures.
  • Assess the procedures for acknowledging and recording donations, ensuring accuracy and completeness.
  • Evaluate the process for handling cheques, including authorization, lodgment, and reconciliation, to detect and prevent potential misappropriation.
  • Verify membership and subscription controls, ensuring that payments are tracked and reconciled with pre-numbered tickets.
  • Examine documentation procedures, confirming that expenditures are approved with supporting documentation at the time of cheque issuance.
  • Confirm proper password protection and access control measures on computers handling financial data to prevent unauthorized access.
  • Check the adequacy of record-keeping and reporting of estates and endowments received, ensuring these are accounted for properly in the financial statements​.

b. Key Audit Areas for Evidence

  • Substantive Testing Approach: Apply substantive testing due to weaknesses in internal controls, focusing on completeness and accuracy of recorded transactions.
  • Income Recording: Verify completeness of income sources (donations, fees, rentals) and assess the risk of fund misuse.
  • Analytical Procedures: Use analytical procedures to validate reported figures and assess the reasonableness of recorded income and expenses.
  • Financial Statement Review: Examine the appropriateness of accounting policies used and the accuracy of financial statement presentation.
  • Organizational Structure Review: Assess the structure and oversight within the club to ensure proper segregation of duties and governance​.

c. Additional Audit Concerns

  • Cash Significance and Limited Controls: Cash transactions may be vulnerable to theft or misuse due to limited oversight and controls.
  • Income Source Risks: Donations and informal income channels may not be fully recorded or traced, posing audit challenges.
  • Scope Limitations: Incomplete documentation or unavailability of records may limit the scope of audit procedures.
  • Predictable Income Issues: Lack of regular, predictable income may hinder effective analysis and control over financial planning.
  • Restricted Funds: Check if any funds are restricted to specific uses, as these require monitoring to ensure compliance.
  • Expenditure Proportion Sensitivity: Ensure that funds allocated to administration versus program expenses align with NFPO standards and public expectations​
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