Ican 2025 Advanced Audit And Assurance Question 3

Sleep Insurance Plc has been making consistent losses with no dividends paid to the shareholders for over five years. Aggrieved shareholders of the company made allegations against the management that there had been certain unusual transactions in the financial statements of the company over the years. The shareholders further considered that management were incompetent and corrupt, therefore, they should resign to give way for efficient and reliable people who will manage the company effectively. The allegations of financial impropriety prompted the Financial Reporting Council (FRC) to conduct a field visit to the company. The on-site visit revealed material internal control weaknesses, such as: (i) improper review and reconciliation of branch expenditures; (ii) premiums collected from the insured, which were not completely remitted by marketing staff who deal directly with those customers; (iii) cash takings by cashiers which were in most cases not banked intact; (iv) expenditures of top management which were not reviewed before payment; (v) related party transactions, which were solely approved by the Managing Director were not subjected to internal audit review; (vi) some transactions, were not supported by invoices and receipts before payments were made; (vii) marketing staff collecting claims for jobs not done, and cases of outright cash suppression, which were common in the company; (viii) certain fraud committed by staff, which were treated as staff loans, to ameliorate the situations in which many staff had been sacked due to this infraction; and (ix) schedules for material account balances, which were not provided for review. Upon receiving the preliminary report of the FRC team, the aggrieved shareholders believed they have been vindicated and were wondering why the external auditors of the company had not been able to detect these infractions over the years and communicate to them for immediate action. They threatened to take the external auditors to court for negligence and to ask for compensation from them for what they had lost over the years. On enquiry by some of the aggrieved shareholders of the company, a partner in a reputable firm was of the opinion that most of the issues identified may not be detected by external auditors except if an investigation is conducted on the company’s financial activities.