Question

You have been assigned as the audit team leader of Bank Salalah, a medium-sized bank, for the end of year audit. Your firm is a newly appointed audit firm of the bank. The bank has been operating in the last three years and has a plan of establishing its second branch to be located also in Salalah. Informal discussions with some employees disclose that employees are happy with the bank because “there are just few rules to follow”. However, your communication with previous auditors revealed several significant adjustments done in the bank accounts. One of these was in the inventory of office supplies. Initial review of bank procedures indicates material weaknesses including a flaw in the handling and recording of office supplies. There are also some indications of leniency in some basic operations like purchasing. For example, employees are allowed to get whatever they need from the storage room. Another example is, the purchase officer can buy from any supplier of his choice. Review of past financial reports indicates fluctuating income in the past three years. It was also noted that key officials were constantly rotated in any key positions of the bank. The management expects the auditor to report on weaknesses in the design and implementation of internal controls on top of the usual audit of financial statements of the bank.
Required: Discuss matters that you would consider in developing the audit strategy for Bank Salalah.

Answer 1

Internal Weakness in the bank:-

1. A flaw in the handling and recording of office supplies.
2. Employees are allowed to get whatever they need from the storage room
3. The purchase officer can buy from any supplier of his choice
4. Review of past financial reports indicates fluctuating income in the past three years

Audit Strategy

The auditor should establish an overall audit strategy that sets the scope, timing, and direction of the audit and guides the development of the audit plan.

In establishing the overall audit strategy, the auditor should take into account:

1. The reporting objectives of the engagement and the nature of the communications required by PCAOB standards,
2. The factors that are significant in directing the activities of the engagement team,
3. The results of preliminary engagement activities and the auditor's evaluation of the important matters in accordance with the standard, and
4. The nature, timing, and extent of resources necessary to perform the engagement.

Based on the previous auditor observations, the audit team leader has to strategize the strategy for the following points

1. Office supplies are easy to use and easier to run out of. Check whether there are different persons assigned for the handling and recording of supplies. There should not be the same person for handling and recording of supplies. This measure can make the improvement of the tracking of supplies.
2. Check whether only authorized people are allowed to enter the storage room and whether they had kept the track of every in and out of articles in the storage room.
3. Choosing the suppliers who will serve the bank best. Check whether before purchasing anything from the suppliers there is a authoritative permission by the officials.