You are the external auditor of Mankani Motors (MM), a listed transportation company that hires vehicles to different companies. MM has about 650 vehicles in total, consisting of Vans and Lorries. Occasionally, the vehicles break down or are involved in road traffic accident. If a vehicle is badly damaged or suffers a serious mechanical fault, it is Segbefia’s job to inspect the vehicle and to make a decision either to have it repaired or written off and sold for the residual value. Segbefia is a qualified mechanic, with many years’ experience of working with heavy goods vehicles and has excellent contacts in the trade. In cases where he decides to scrap the vehicle, he will usually dispose of it to a contact in fairly close proximity to where it has broken down or been crashed.
The CEO of MM has been reviewing some statistics produced by the company. She has noticed an apparent anomaly in relation to Segbefia’s work. Up to about one year ago, Segbefia recommended scrapping about 15% of the vehicles he inspected, irrespecive of whether they had broken down or been involved in an accident. However, in the last 12 months he has recommended scrapping nearly 90% of broken-down vehicles, but only about 10% of the vehicles that were involved in accidents. The CEO is concerned that Segbefia may be involved in some kind of fraudulent or “irregular” activity. The CEO has asked you, as an external auditor, to conduct a discreet investigation to discover if this is indeed the case and, if not, to produce a report that explains Segbefia’s seemingly anomalous behaviour.
Required:
i) Appraise the extent to which the external auditor is the most appropriate person to carry out such an investigation. (6 marks)
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If a company needs to have such an investigation carried out there are at least three possible options available to it.
Firstly, conduct the investigation in-house using, for example, the internal auditor or some suitable internal resource.
Secondly, an external consultant with no other connection to the company could be used. Falling between the two, so to speak, would be the option of using the external auditor by commissioning them to do it as a special assignment.
The advantages of the latter option are:
- They already have a certain familiarity with the company so briefing them would be easier and they should be in a position to complete the assignment more quickly and cheaply than another external consultant.
- Most auditors of any size would have the resources and the expertise to carry out the assignment. It might not be possible, for example, to say the same about the internal audit team.
- There would – hopefully – be no questions over the integrity, independence, or objectivity of the external auditors.
- The client could expect to be covered by an appropriate level of indemnification (via the auditor’s Professional Indemnity Insurance) if the work is done by the external auditor.
- On the other hand, the external audit would charge a fee which might be avoided if the internal auditor were to be used. The internal auditor would also be even more familiar than the external auditor about the company but their objectivity might not be quite as assured.
- The ultimate decision is a judgement for management to make and depends on the particular circumstances of each case.
ii) Analyse FOUR (4) matters to be taken into consideration before deciding whether or not to accept this appointment in addition to continuing as auditor. (4 marks)
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- We would need to be satisfied with the terms of reference in relation to our investigation e.g. are we expected to gather evidence that would be of sufficient quality that it could be used in legal proceedings against Segbefia?
- We would need to be assured that we would have full access to all relevant records
- We would need to be assured that we had the expertise and resources to take on the assignment.
- We would need to discuss the degree of reliance to be placed on report and by whom? For example, could the report be used by the entity’s insurer?
- We would need to ensure sufficient time was available to complete the report.
- We would need to discuss the form of report required e.g. agreed upon Procedures, or some sort of assurance report.
- We would need to be assured that a sufficient fee would be available for the complexity and risk involved in the assignment.