Question Tag: Control Risks

Question:

During the audit year, on the review of the audit work done on Community Microfinance Bank (a new significant audit client), you noted the following issues:

• At the audit strategy stage, it was agreed that the audit of loans and advances would involve reliance on the effectiveness of internal controls. However, during the test of controls, it was noted that five loans were not approved by the appropriate approving officers. Further review indicated that the loans were genuinely issued to customers but were only approved by officers whose approval limit had been exceeded.
• During the period under review, the tax authority carried out a tax investigation and noted a significant variance between the company’s estimated tax liabilities and the tax authority’s position. From further discussion, it was noted that the previous tax computation was done by a junior staff who does not have the requisite experience and the computations were not duly reviewed by experienced senior officers of the company.
• The company deployed a new loan disbursement software which is linked to the financial reporting software. From your review of the new software, the initiator of a transaction could approve the same transaction as long as he/she changes the designation to approving authorities after initiation. You have flagged this as a possible control risk.
• During your review of the receivables account, a variation was noted between the amount in a customer’s receivables balance in the ledger and the client confirmation. However, the variance was considered not material and not adjusted for. During discussion with the Receivables Manager, it came to your attention that the client in focus is a family member of the Managing Director.

The team is considering the impact of the above observations on the audit.

Required:

(i) Draft a report to management evaluating the implications of the above observations on the control environment and the audit strategy/procedures. (15 Marks)
(ii) Comment on whether the issues are to be reported to those charged with governance of the entity. (10 Marks)