Audit responsibilities in this case are not governed by company law, but by client instruction. The reasons for requesting the audit must be established and may include:

• suspicion of fraud
• systems failure or irregularities
• doubts as to competence or integrity of local client personnel.
  Management’s precise concerns will affect the scope and nature of audit work.
  Normal audit procedures may be modified to include:
• specific tests requested by management
• ‘value for money’ audit on branch efficiency.
  The form and content of the report(s) will depend on:
• the addressee (e.g. management, Nigerian auditors)
• the form of the branch financial statements (e.g. management accounts)
• the scope of audit procedures.
  An opinion in ‘true and fair’ terms can only be expressed if the branch financial statements themselves are intended to give a true and fair view/fair presentation.
  After discussion with management, these matters should be documented in a ‘tailored’ engagement letter.
  Our relationship with the Nigerian auditors must be clarified.
  They may be intending to place reliance on our audit work to form an opinion on the financial statements of the combined entity.
  This may require us to:
• complete an audit questionnaire
• perform additional tests at their request
• apply Nigerian Auditing Standards, if significantly different
• make our working papers available for review.
  We may need to use their work on the mainframe element of the computer system, for the branch audit.
  We should obtain management’s permission to arrange communication with the Nigerian auditors.
  Approach to computer system
  Theoretically, the computer system as a whole should include fairly strong general IT controls because:
• batch processing involves segregation of duties
• a mainframe installation requires good physical controls.
  However, a compliance approach is unlikely to be effective since:
• the system’s failure to keep pace with branch growth indicates that general IT controls over systems development are poor
• the local staff’s inability to refer to the foreign user manuals may mean that manual controls do not operate and programmed controls are overridden
• location of the mainframe in Nigeria (and necessary reliance on the Nigerian auditors) and the complexity of any controls in the communications software may mean that compliance tests are not cost-effective.
  The strain on the system as the business expands and the lack of detailed knowledge possessed by local staff create additional risks.
  For example:
• inventory may be slow-moving and potentially obsolete if the inventory control system is not operating effectively
• accounting records may be inaccurately updated if local controls over input and output are poor.
  Unless the client requests compliance tests, a substantive approach is most likely. This could include:
• the use of audit software to select inventory lines and receivables balances for detailed verification work (possibly using statistical techniques) and to prepare analyses, e.g. of inventory ageing
• ‘proof in total’ of balances or transactions (e.g. revenue if margins are fixed from cost of sales confirmed directly with head office records in Nigeria).
  However, the branch is new and this will limit the effectiveness of some analytical procedures as the branch has no established trading record. Comparisons with industry averages, budgets and other branches/head office will be most relevant when reviewing inventory turnover, receivables collection period, etc.
  Relationships with internal auditor
  It is unlikely that any significant reliance will be placed on the internal audit function since:
• the internal auditor is not sufficiently independent of the branch manager
• the scope of his work (set by manager), professional care (informal documentation and reporting) and technical competence (not a qualified accountant) appear to be limited.
  However, it may be possible to use the internal auditor to:
• assist in the preparation of systems notes and background information for the permanent audit file
• prepare analyses or reconciliations (e.g. of receivables circularisation replies to receivables ledger balances)
• (after a closer assessment of his competence) perform audit tests under supervision in low risk areas.
  Branch status
  Direct confirmation with head office (or Nigerian auditors) will provide evidence in respect of:
• branch purchases (= goods transferred to branch)
• the head office current account, which represents the branch’s finance.
  The Nigerian auditors will require confirmation of branch inventory and goods-in-transit to audit the allowance for unrealised profit in the head office financial statements.
  13-month accounting period
  The portion of the branch’s results to be aggregated in the company (combined entity) statement of profit or loss should be ascertained from Pinnacle Furnishings (or the Nigerian auditors). Additional cut-off tests may be necessary.
  Reliability of local management
  If the reason for requesting the audit was doubt as to the integrity of local management, then no reliance may be placed on local written representations.
  Summary
  The possibility of misstatements and irregularities is high, due to high inherent risk:
• because the branch is new
• the management request for non-statutory audit
• and high control risk:
• failure of system to keep pace with growth.
  Extensive substantive procedures will be necessary, with increased audit work towards the end of the period when the branch’s growth will further increase the control risk.