Revision questions on limitation of internal control system NBAA May 2019.

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Ngezi Ltd enjoyed sales revenue of TZS.400 million and profits of TZS.60 million for the financial year ended 31st December 2017. However, the financial accountant of the firm has recently been dismissed for allegedly misappropriating Company funds. The fraud was carried out over a five-month period in 2017 during which the accountant allegedly colluded with one of the Company’s salespersons and with a member of staff in an independent debt collection agency engaged by Ngezi to misappropriate individual sums totaling to TZS.22,200,000 received from some of Ngezi’s 1,900 customers. The fraud was uncovered in the course of a business conversation in March 2018, when the chief executive of Ngezi was hosting a day party for some customers. The Directors of Ngezi assert that the auditor was negligent in failing to discover the fraud when auditing the financial statements for the year ended 31st December 2017. The auditors have stated that any system of internal controls has inherent limitations, and that they reject the allegation of negligence. They strongly claim that any reasonable independent review of their audit documentation will confirm that they were not negligent in their audit work.

REQUIRED:

(i) Evaluate the inherent limitations in both internal controls and the audit process itself.

(ii) Explain why these limitations may result into failure to detect a fraud even when the audit is properly performed.

Author: amidu edson

I am certified accountant with more than 5 years of teaching experience. Currently am teaching auditing and assurance, management accounting and financial accounting for student preparing for professional exams such as ACCA and CPA.

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