Question

Auditing and Assurance

You are the auditor of Sika Pa Rural Bank Ltd, a non-listed rural bank in Ghana. You are currently finalizing the audit for the year ended 31 December 2019. Your audit tests have proved satisfactory with the exception of the following four matters:

1. The year-end balance of short-term investments of GHS 12,500,000 includes an amount of GHS 7,000,000 with Gold Coast Securities Ltd which matured on 14^th March, 2018 but has not yet been received to the date of the completion of the field audit on 30^th April 2020. The directors are of the opinion that they will receive the full amount in the near future but do not know when.

During the year 2019, interest of GHS 1,400,000 was calculated on the principal amount of GHS 7,000,000 and taken to income.

The following are extracts of the balances before consideration of the outstanding matters:

1. Total Property, Plant and Equipment       -           GHS105,234,138
2. Current Assets                                          -           GHS 78,516,617
3. Current Liabilities                                     -           GHS 96,422,823
4. b)Included in the Loans and Advances balance of GHS 18,250,000 carried in the Statement of Financial Position at 31^st December 2019 is a total overdraft facility of GHS 13,500,000 The bank’s records indicate that out of the GHS 13,500,000 overdraft balance, a total amount of GHS 11,300,000 is unscheduled due to system generated balances over the past six years. This therefore does not represent a valid asset. The directors are not prepared to make the necessary adjustments in the 2019 accounts.
5. c)The total interest income amount shown in the statement of comprehensive income for the year ended 31^st December, 2019 is GHS 22,000,000 and the net operating results for the year showed a loss of GHS, 2,534,500 (2018: Loss of GHS 1,437,100)

Over the past four years, the management of the bank has operated a policy where they anticipate income on short-term investments and take credit to the statement of comprehensive income and debiting interest receivable account each year. Over the four year period, the bank has an amount of GHS 5,600,000 as interest receivable but this account is fictitious and does not represent a valid asset. The directors are not prepared to write off the whole amount in 2019 but want to spread it over the next five years.

4. The financial statements of Sika Pa Rural Bank Ltd do not contain a statement of cash flows and Changes in Equity.

Required

1. Comment on the financial reporting implications, and advise the further audit procedures to be performed if any.
2. Draft the Independent Auditor’s report on the financial statements for the year 2019.
3. Based on the outstanding matters above, prepare long form report / management letter to the client.

     

Note: You are to apply all the necessary accounting and auditing standards, laws and regulations that are applicable

Answer 1

a. Following is implications of each matters in audit report-

Matter	Implications
The year-end balance of short-term investments of GHS 12,500,000 includes an amount of GHS 7,000,000 with Gold Coast Securities Ltd which matured on 14th March, 2018 but has not yet been received to the date of the completion of the field audit on 30th April 2020. The directors are of the opinion that they will receive the full amount in the near future but do not know when.	Item represents significant item and if not corrected, financial statements will not present true and fair presentation. Auditor should consider providing a qualified opinion
During the year 2019, interest of GHS 1,400,000 was calculated on the principal amount of GHS 7,000,000 and taken to income.	Item represents significant item and if not corrected, financial statements will not present true and fair presentation. Auditor should consider providing a qualified opinion
he bank’s records indicate that out of the GHS 13,500,000 overdraft balance, a total amount of GHS 11,300,000 is unscheduled due to system generated balances over the past six years. This therefore does not represent a valid asset. The directors are not prepared to make the necessary adjustments in the 2019 accounts.	Item represents significant item and if not corrected, financial statements will not present true and fair presentation. Auditor should consider providing a qualified opinion
Over the past four years, the management of the bank has operated a policy where they anticipate income on short-term investments and take credit to the statement of comprehensive income and debiting interest receivable account each year. Over the four year period, the bank has an amount of GHS 5,600,000 as interest receivable but this account is fictitious and does not represent a valid asset. The directors are not prepared to write off the whole amount in 2019 but want to spread it over the next five years.	Management proposal to reverse over next 5 years is not as per GAAP requirement. Hence, if not reversed, the auditor should consider qualifying the report as financials does not represent true and fair view
The financial statements of Sika Pa Rural Bank Ltd do not contain a statement of cash flows and Changes in Equity.	As per the GAAP, statement of cash flow and changes in Equity is compulsory requirement. If not given, the financials is cannot said to be meeting the GAAP. Hence, auditor should consider providing adverse opinion
At overall level, these matters warrant an Adverse opinion and hence auditor should make adverse opinion

2. Following is auditors report-

INDEPENDENT AUDITOR’S REPORT

TO THE MEMBERS OF Sika Pa Rural Bank Ltd

Report on the Standalone Financial Statements

We have audited the accompanying financial statements of Sika Pa Rural Bank Ltd (“the Company”) which comprise the Balance Sheet as at 31 December, 2019, the Statement of Profit and Loss, Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the (Standalone) Financial Statements

The Company’s Board of Directors is responsible with respect to the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the accounting principles generally accepted in India, including the Accounting Standards. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the. Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.

We have taken into account the provisions of the standard, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made thereunder.

We conducted our audit in accordance with the Standards on Auditing acceptable in the country. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and the disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal financial control relevant to the Company’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial controls system over financial reporting and the operating effectiveness of such controls. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company’s Directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion on the standalone financial statements.

Basis for Adverse Opinion

(a) The Bank’s short term investments are carried in the Balance Sheet at GHS 12,500,000. The Management has not stated the short term investments for uncertainty in collection to the extent of GHS 7,000,000 held with one party. The Company’s records indicate that had the Management accounted for the uncertainty, the balance of short term investment would have been lower by GHS 7,000,000. Accordingly, loss for the year and shareholders’ funds would have been reduced by GHS 7,000,000, respectively.

(b) The Bank’s net earnings include income of GHS 1,400,000 calculated on uncertain short term investments. Had the Company not accounted for income, loss for the year would have been higher by GHS 1,400,000.

(c) The Bank’s overdraft asset balance includes GHS 11,300,000 which is unscheduled due to system generated balances over the past six years. The Management has not reversed the assets in the records for the year. The Company’s records indicate that had the Management accounted for the uncertainty, the balance of overdraft assets would have been lower by GHS 11,300,000. Accordingly, loss for the year and shareholders’ funds would have been reduced by GHS 11,300,000, respectively.

(d) The Bank’s interest receivable balance includes GHS 5,600,000 which is fictitious assets. The Management has not reversed the assets in the records for the year. The Company’s records indicate that had the Management accounted for the uncertainty, the balance of overdraft assets would have been lower by 5,600,000. Accordingly, loss for the year and shareholders’ funds would have been reduced by 5,600,000, respectively.

(e) The Company’s financial assets does not include the Cash flow statement and Statement of Changes of Equity. The Company’s financial statement does not meet the requirement of the GAAP.

Adverse Opinion

In our opinion and to the best of our information and according to the explanations given to us, the financial statement of the Bank does not present true and fair view.

For and on behalf of X & Co

Chartered Accountants

Firm’s registration number:

3. Management letter is as follows-

Your financial statements does not present true and fair view. The auditors of the Company believe that the assets and liabiltiies, loss for the year are not fair presented.

In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit. Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk.

The definition of good internal controls is that they allow errors and other misstatements to be prevented or detected and corrected by (the bank’s) employees in the normal course of performing their duties. If the auditors detect an unexpected material misstatement during your audit, it could indicate that your internal controls are not functioning properly. Conversely, lack of an actual misstatement doesn’t necessarily mean that your internal controls are working. As long as there’s a reasonable possibility for material misstatement of account balances or financial statement disclosures, your internal controls are considered to be deficient.

The management of the Company has represented that these matters mentioned in our Basis of Opinion does not present significant item however, in our professional opinion, the assets, liabilities and losses of the Bank does not present true and fair view.