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)
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• The audit risk of this charity is likely to be high due to its size and consequent difficulty of implementing adequate controls (e.g. segregation of duties, supervision); due to the lack of the experience of the management committee of this particular type of business; and due to the fact that many of the staff are volunteers. This could lead to excessive reliance on the only paid members of staff – the manager and the assistant manager.
• In this case the client is pressurising the auditor to take on the audit of a small charity in which they are involved and do so for less than the full commercial fee. This puts the auditor in a difficult position and amounts (almost) to an intimidation threat to the auditor’s independence.
• It also raises a wider question of auditors doing work pro bono for charities or other good causes and brings up the issue of how this affects their independence. One view might suggest that never collecting a fee from the client would enhance independence since, if the auditor withdraws from the audit, or modifies the audit report, it will have no direct financial consequences for the audit firm.
• Another view would be that it would be much better if auditors charged in full for all work they did. They could still, as a firm, make charitable donations to perceived good causes, or for example, sponsor local fundraising events, but the decision to do that should be at arm’s length from any particular dealings with an individual client.
In this case, there is the need to consider if the fact that the request came from a committee member who is a client has any particular impact on the audit of that client. It might be going too far to suggest that it impugns the individual’s integrity but it certainly suggests a willingness on his behalf to use his relationship with the audit firm in a way that might not be considered wholly appropriate.
• Also, there is a heightened risk of bad publicity if anything goes wrong due to the fact that this is a charity and there could be significant publicity locally about the matter.