Stevens and Associates have completed the audit of the accounts of Eno Serwah & Co. Ltd for the year ended 31 December 2015. The auditor’s opinion on the financial statement has been favourable to Eno Serwah & Co Ltd. Internal check procedures after the audit revealed a shortage of cash of Two Million Ghana cedis (GH¢2m). The Directors of Eno Serwah & Co Ltd. put a freeze on the payment of the audit fees on the grounds that the audit could not detect the shortage.
Required:
Discuss the stand taken by the Directors of the company. (10 marks)
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Responsibility for Prevention of Fraud
Management
- The responsibility for the prevention of fraud, other irregularities and errors rest with management. Management has the fiduciary role of safeguarding assets since the directors of a company are regarded in law as acting in stewardship capacity concerning the property under their control. Management can discharge these responsibilities by adopting methods such as;
- The installation of an effective accounting system
- The institution and the operation of an appropriate system of internal control.
- Ensuring that employees understand and comply with relevant codes of conduct.
- Maintaining a register of relevant legal requirements and ensuring that operating procedures and conditions meet the required standards.
- The establishment of an independent internal audit function and the appointment of audit committees.
Responsibility for Detection
The primary responsibility for the detection of fraud, other irregularities and errors rests with management. This role of detection is an extension of its role in preventing.
Auditor
- The auditor is not responsible for preventing fraud, other irregularities or errors. Audit procedures should be designed to give a reasonable expectation of detecting any material misstatement, whether intentional or unintentional in an entity’s financial statements. The auditor cannot prevent a fraud or other irregularity from occurring, however, the annual recurring audit may act as a deterrent.
- The auditor is to report to management when he identifies significant weaknesses in the structure of accounting and internal control and deficiencies in their operation.
- The auditor’s responsibility regarding the detection of fraud, other irregularities and error is to plan, perform and evaluate his audit work so as to have a reasonable expectation of detecting material misstatement in the financial statement whether they are caused by fraud or other irregularities or errors.
- On the basis of the above it is wrong for the Directors to refuse to pay the audit fees. If it is found that the auditors are negligent in their performance of duty then the directors can bring a charge against them in court or file a complaint with ICAG. (1 mark each for any 10 valid points)