a. Inherent Risks Associated with the Audit of IRP

1. Dependence on Donations and Pledges:
   • IRP heavily relies on donations and pledges, which may not be properly documented or verified, creating inherent risks in revenue recognition. Pledges may be reported as revenue but not materialize, leading to potential overstatement of income.
2. Related Party Transactions:
   • The manager is a close relative of the CEO, raising concerns about related party transactions that may not be conducted at arm’s length. The risk of favoritism or improper transactions could lead to misstatements in financial reporting.
3. Lack of Strong Governance Structure:
   • With a board of trustees that meets infrequently and the concentration of management in the hands of one individual, there is a risk of weak internal controls and governance oversight. This may increase the risk of errors, fraud, or mismanagement.
4. Irregular Operations in Conflict Zones:
   • Activities are carried out in areas affected by insurgency, which may lead to difficulties in tracking and verifying the distribution of relief goods, travel, and safety expenses. This makes it harder for the auditor to confirm the accuracy and completeness of records.
5. High Volatility in Foreign Donations:
   • As the chairman seeks foreign funding, there is a risk of volatility in foreign currency exchange rates, and potential unrecorded or untraceable funds could be introduced. This complicates the verification of transactions and their proper recording.
6. Vulnerabilities in Financial Reporting:
   • The use of informal systems for recording donations, supplies, and expenses could lead to incomplete or inaccurate financial records, especially in light of the NGO’s relatively limited financial expertise.
7. Political and Social Risks:
   • The involvement of political associates in raising funds may increase the risk of political influence or pressure affecting financial decisions. The NGO may also face increased scrutiny from government bodies or external stakeholders, raising audit risks related to compliance.
8. Inadequate Documentation of Transactions:
   • Due to the informal nature of operations, there may be insufficient documentation for key transactions, such as delivery receipts or contracts with suppliers, increasing the risk of misstatements and fraud.

b. Five Audit Risks to Be Addressed by the Auditor

1. Revenue Recognition Risk:
   • There is a risk that donations and pledges, especially those not yet received, may be improperly recognized as revenue, leading to overstated income and financial position.
2. Misappropriation of Funds:
   • Given the concentration of management authority and limited oversight by the board, there is a significant risk of fraud or misappropriation of funds, particularly in the handling of cash and supplies.
3. Compliance Risk:
   • There may be non-compliance with local and international regulations governing the operations of NGOs, especially regarding the handling of foreign donations and adherence to tax laws. The auditor needs to assess this risk carefully.
4. Inventory and Asset Mismanagement Risk:
   • Given the nature of the relief activities, there is a risk of mismanagement or misappropriation of inventory (e.g., food and supplies), which may not be accurately recorded or accounted for.
5. Inadequate Disclosure of Related Party Transactions:
   • Due to the involvement of close relatives in key management roles, there is a risk that related party transactions may not be properly disclosed, leading to potential conflicts of interest or misstatements.