- 20 Marks
Question
Phil Plc has been in business of manufacturing textile materials for about twenty years and has been rendering good returns to shareholders on their investments until about a few years ago, precisely in 2019. The business of the company went down drastically in 2020 due to measures taken to contain the spread of the COVID-19 virus, which included travel bans, quarantines, social distancing, and closures of non-essential services. The COVID-19 pandemic significantly caused disruptions to businesses worldwide, resulting in economic slowdown. The problem was aggravated with the Federal Government of Nigeria enforcing restrictions on movement. All businesses and offices were affected with exceptions of power distribution, oil and gas (petroleum), and retail companies.
COVID-19 pandemic impacted the economy generally, and the following were the impacts on the company:
- Increase in cost of raw materials as a result of devaluation of the currency due to the drop in the price of crude oil;
- Shortage in supply of key raw materials sourced from other countries, for example, China; and
- Increase in ocean freight costs and inland transportation.
The impact of the outbreak of COVID-19 directly caused economic losses through disruptions in supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. The crisis led to a decline in revenue.
However, despite the challenges, management continued to strive for impressive performance for the shareholders. A board member believed there is an unhealthy relationship between management and the board of directors as she accused management of lack of transparency and threatened to resign. The problem was compounded after the year-end audit when the auditors reported that the company’s internal controls were ineffective and accused management of fraudulent financial reporting. The external auditors also threatened to restate the prior year’s financial statements, believing there were misstatements of certain account balances.
The Managing Director and some directors argued that it is their responsibility to prepare financial statements and that auditors do not have the right to make restatements. However, the Chairman of the audit committee and a few directors supported the auditors and appealed to management to allow the auditors to perform their regulated duties, warning that they may report to the Financial Reporting Council on management’s activities.
The external auditors, surprised by management’s actions, threatened to resign. They were also uncomfortable with the following issues during the audit:
- The supporting documents from which financial statements were prepared;
- Review of opening balances revealing omission of some transactions and significant information in disclosures;
- Misapplication of accounting principles regarding amounts, classifications, presentation, and disclosures.
Added to the above, the external auditors identified risks likely affecting asset valuation and other significant accrued liabilities. Your firm is preparing for a discussion with the audit committee and has instructed your team to review specific sections.
Required:
a. Evaluate the rights and duties of the auditors in a professional engagement. (10 Marks)
b. Enumerate what you consider as the responsibilities of management and those charged with governance in Phil Plc. (5 Marks)
c. Discuss the reason why your firm may resign the appointment as the auditors of the company. (5 Marks)
(Total 20 Marks)
Answer
a. Rights and Duties of the Auditors
- Rights of the Auditor:
- Access to all accounting books and records at all times.
- Right to obtain all necessary information and explanations from management to conduct the audit properly.
- Right to receive notice of and attend all shareholders’ meetings, including the annual general meeting, to address matters impacting the audit.
- Right to speak at shareholders’ meetings on audit-related issues or auditor concerns.
- Right to receive copies of written resolutions if the company uses written resolutions
- Duties of the Auditor:
- Examine the financial statements and issue an opinion report on whether the statements provide a true and fair view.
- Ensure compliance with applicable financial reporting standards and laws.
- Form an opinion on whether the financial statements have been properly prepared per regulatory requirements, including verifying that appropriate accounting records have been maintained.
- Identify if the company has followed legal and regulatory provisions, and report any discrepancies identified.
- Highlight any issues affecting the audit or internal control weaknesses, especially where these impact the fairness of the financial statements
b. Responsibilities of Management and Those Charged with Governance
- Management Responsibilities:
- Prevention and detection of fraud.
- Preparation of accurate financial statements.
- Design and implementation of effective internal controls, including payment authorization and regular bank reconciliation.
- Providing auditors with unrestricted access to relevant information and additional details necessary for the audit.
- Ensuring compliance with accounting standards and providing auditors with written representations as required
c. Reasons for Auditor Resignation
- Consistent lack of integrity demonstrated by management, such as transparency issues and fraudulent financial reporting.
- Inability to obtain reasonable assurance, due to lack of supporting documents or omissions in transactions.
- Unpaid audit fees or if the audit is no longer economically viable for the firm.
- Threats to auditor independence, especially in cases of significant client disagreements on reporting matters.
- Potential loss of objectivity due to internal disputes among management that hinder audit functions and make it challenging to form an opinion
- Topic: Internal Audit and Corporate Governance
- Series: NOV 2023
- Uploader: Dotse