- 10 Marks
Question
b) You are a partner in a two-partner practice in a small rural town in Ashanti Region. Some local community groups recently got together and established a Non-Governmental Organisation (NGO). It aims to reduce poverty and inequality by supporting, influencing and advocacy around three interconnected pillars; Agriculture, Essential Services and Extractive Industry Governance.
The organisation is registered as a charity with a legal requirement to reinvest any excess of income over expenditure into the operation, or into other local community initiatives, as the management committee sees fit. The organisation is run by a management committee consisting of a member of the community council, the principal of the local school, two local business people, and the Parish Priest. Although, between them, they have considerable experience of various ‘for-profit’ and ‘not-for-profit’ ventures, none has particular experience of managing NGOs or charity organisations. The organisation is run on a day-to-day basis by the manager who is the only full-time employee experienced in the type of businesses involved. There is one other paid part-time employee – the assistant manager – but all other staff are volunteers.
It has been just over a year since the NGO was incorporated, and you are approached by a member of the management committee (a local business owner who is also one of your largest clients) to become the auditor of the NGO. He tells you that the committee, of course, would not expect you to provide this service entirely pro bono (free of charge). He also mentions that he knows you wouldn’t want to be seen to turn down this opportunity, given the way that “news can travel around in a small town”.
He is well aware that the revenue generated by the organisation is very low. The committee feels that the absence of an audit could be perceived as “negligent” or a “cover up” should any problems involving, for example, the misappropriation of assets emerge in the future.
Required:
Evaluate FIVE (5) challenges and other risks presented to your practice as a result of the request from your client to become the auditor of this NGO. (10 marks)
Answer
Challenges and other risks presented to your practice as a result of the request from your client to become the auditor of this NGO:
- High Audit Risk Due to Size and Control Environment: The audit risk of this charity is likely to be high due to its size and the difficulty of implementing adequate controls (e.g., segregation of duties, supervision). The lack of experience of the management committee in this type of business, combined with the reliance on volunteers, could lead to excessive dependence on the only paid staff members – the manager and the assistant manager.
- Intimidation Threat to Independence: The client is pressurizing the auditor to take on the audit of a small charity in which they are involved, potentially for less than the full commercial fee. This situation creates an intimidation threat to the auditor’s independence, as the client is also one of the largest clients of the audit practice.
- Potential Impact on Professional Reputation: Conducting the audit pro bono or for a reduced fee may raise questions about the auditor’s independence and objectivity. There is a concern that this could affect the firm’s reputation, especially in a small community where word spreads quickly.
- Risk of Bad Publicity: Given that this is a charity, any issues or failures related to the audit could attract significant negative publicity, potentially damaging both the auditor’s and the charity’s reputations.
- Possible Compromise of Audit Quality: The auditor may face pressure to deliver the audit at a lower fee, which could compromise the quality of the audit work. Additionally, the complexity and risks involved in auditing an NGO, particularly one with limited financial resources and a volunteer workforce, might require more time and effort than what the fee would justify.
- Tags: Audit Risk, Ethics, NGO Audit, Practice Management, Professional Challenges
- Level: Level 3
- Topic: Practice management, Professional responsibility and liability
- Series: NOV 2019
- Uploader: Dotse