- 20 Marks
AA – L2 – Q19 – Risk Assessment
Question
BrightPath Charity is a non-profit organization whose constitution requires that it raises funds for educational projects. These projects seek to educate children and support teachers in various developing regions. Charities in the region where BrightPath Charity is based have recently become subject to new audit and accounting regulations. Charity income consists of cash collections at fundraising events, telephone appeals, and bequests (money left to the charity by deceased persons). The charity is small and the trustees do not consider that the charity can afford to employ a qualified accountant. The charity employs a part-time bookkeeper and relies on volunteers for fundraising. Your firm has been engaged as accountants and auditors to this charity because of the new regulations. Financial statements have been prepared (but not audited) in the past by a volunteer who is a recently retired Chartered Accountant.
Required:
(a) Describe the risks associated with the audit of BrightPath Charity under the headings inherent and control risks and detection risk and explain the implications of these risks for overall audit risk.
(b) List and explain the audit tests to be performed on income and expenditure from fundraising events.
Answer
(a) Inherent and control risks
(i) Charities can be viewed as inherently risky because they are often managed by non-professionals and are susceptible to fraud, although many charities and the volunteers that run them are people of the highest integrity who take a great deal of care over their work. The assessment of this aspect of inherent risk depends on each individual charity and the areas in which it operates.
(ii) Charities are also at risk of being in violation of their constitutions which is important where funds are raised from public or private donors who may well object strongly if funds are not applied in the manner expected.
(iii) Most small charities have a high level of control risk because formal internal controls are expensive and are not often in place. This means that donations are susceptible to misappropriation. Charities rely on the trustworthiness of volunteers. The auditors will assess the level of risk.
Detection risk
(iv) Detection risk comprises sampling risk and non-sampling risk. It is possible in this case that all transactions will be tested and therefore sampling risk (the risk that samples are unrepresentative of the populations from which they are drawn) is not present.
(v) Non-sampling risk is the risk that auditors will draw incorrect conclusions because, for example, mistakes are made, or errors of judgement are made in interpreting results, or because the auditors are unfamiliar with the client, as is the case here.
Audit risk
(vi) Audit risk is the product of inherent risk, control risk, and detection risk that the auditors will issue an inappropriate audit opinion. This risk can be managed by decreasing detection risk by altering the nature, timing, and extent of audit procedures applied. Where inherent risk is high and controls are weak (as may be the case here) more audit work will be performed in appropriate areas in order to reduce audit risk to an acceptable level.
(a) (i) Attend fundraising events and observe the procedures employed in collecting, counting, banking, and recording the cash. This will help provide audit evidence that funds have not been misappropriated and that all income from such events has been recorded. Sealed boxes or tins that are opened in the presence of two volunteers are often used for these purposes.
(ii) Perform cash counts at the events to provide evidence that cash has been counted correctly and that there is no collusion between volunteers to misappropriate funds.
(iii) Examine bank paying-in slips, bank statements, and bank reconciliations and ensure that these agree with records made at events. This also provides evidence as to the completeness of income.
(iv) Examine the records of expenditure for fundraising events (hire of equipment, entertainers, purchase of refreshments, etc.) and ensure that these have been properly authorized (where appropriate) and that receipts have been obtained for all expenditure. This provides evidence as to the completeness and accuracy of expenditure.
(v) Review the income and expenditure of fundraising events against any budgets that have been prepared and investigate any significant discrepancies.
(vi) Ensure that all the necessary licenses (such as public entertainment licenses) have been obtained by the trustees for such events in order to ensure that no action is likely to be taken against the charity or volunteers.
(vii) Obtain representations from the trustees to the effect that there are no outstanding unrecorded liabilities for such events – again for completeness of expenditure and liabilities.
- Tags: Audit Procedures, Charity Audit, Expenditure Testing, Fundraising Events, Income Testing
- Level: Level 2
- Uploader: Samuel Duah