Auditor-General’s compliance with audit of state-owned companies: Critical evaluation 5
The first, second and third parts of this article were published on Monday, October 24, 2022, Wednesday, October 26, 2022 and Monday November 7, 2022.
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A comprehensive review of the 2018 to 2019 Financial Statements of an important SOC audited by the GAS and signed on behalf of the A-G reveals many errors including the following:
• The Report of the Directors signed on April 22, 2021 is not in line with the requirements of Section 136 of the CA 992 in many important aspects: there was no disclosure of the audit fee of GHS250,000, inadequate details were disclosed on the state of affairs and dividend paid (only a net loss of GHS2,585.15 before tax was disclosed), there was no disclosure on particulars of entries in interests of register, corporate social responsibility, nor steps being taken to build the capacity of Directors.
• On page one of the 2018 FS that provides Corporate Information, it is disclosed that the auditor is Ghana Audit Service, however, note (e) on page two of the same report states that, “in accordance with section 134(5) of the Companies Act 1963 [the previous private audit firm] shall continue in office as Auditor of the Company.”
• Misstatement of inventories in the 2018 FS as GHS191,822,000 instead of GHS387,962,000. Surprisingly, the misstatement is repeated in 2019 as comparative.
• Poor presentation of the audit report with many editing and formatting issues, report requires serious editing.
• The audit report is signed by a Deputy A-G on behalf of the A-G but it is not dated. There is no ICAG licence number provided to confirm that the GAS or the individual who signed the FS is licensed by the ICA.
• There were many casting errors in both the 2018 and 2019 financial statements.
Per regulation 5 of Audit Service CI 70, the Board of Audit Service is to establish a system to ensure that appropriate quality control standards are developed and used in monitoring and evaluating audit work carried out by individuals and institutions appointed by the A-G to carry out work on behalf of the A-G. Importantly, based on ISA 200.3, the purpose of an audit of financial statements is to enhance the degree of confidence of intended users in the financial statements through an expression of opinion by the Auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
The identified errors highlighted above would definitely detract from the degree of confidence by intended users of the above 2018 and 2019 audited financial statements.
Lack of value addition of the A-G audit to the SOEs
A Director of Finance of an SOE was interviewed on his experience and observations when his entity was audited by the GAS.
The analysis of his response raised the following key concerns:
• Though some areas of the GAS and private independent firm’s audits of accounts, respectively, are the same, they are, however entirely different in most important areas: The auditors of GAS do not set materiality levels for the audit and communicate to the auditee so a lot of time is spent on less important or immaterial observations or queries. Consequently, the more important issues like the review of business strategy or the success or failure of the business are not given due consideration. Per ISA200.6, the concept of materiality should be applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements.
• The Audit Service normally requests for the trial balance and draft accounts, and other schedules including fixed assets, etc. before they commence their fieldwork. However, the GAS audit staff are only interested in contracts, invoices, and payment vouchers. 80 per cent of their work is what a junior auditor at a private firm of auditors would do, vouching entailing verification of documents.
• On the question of value addition of the audit to the entity, he responded that, “there is minimal benefit, there is no value added, the only value derived is the signing of the accounts.” Credible financial statement audits reinforce investor confidence and they add to board and management understanding of the business and the risks it faces. Skilled and experienced audit professionals work with clients and relevant external parties to understand the changing business environment and to add value beyond the financial statements through the business insights they bring to engagements.
• During the audit they send audit observations in bits, say four batches, then exit the audit without any formal briefing or discussion of the observations. They then expect the auditees to respond within 30 days after they had submitted the observations in batches. Their expectation is without considering formal discussion in a debriefing or exit meeting.” This information indicates that the audit practice of the GAS is not consistently in line with the Regulation 34 of Audit Service CI 70 which requires a (1) team leader to issue formally audit observations made at audit location in the course of an audit undertaken by members of the Service within two weeks after completion. And that (2) an audit team of the Service shall (a) take steps to fully discuss with the audited organisation, findings and recommendations arising from an audit undertaken with respect to the audited organisation and (b) obtain written responses from the audited organisations for the observations made before leaving the audit location. Moreover, ISA 230. 10 requires the auditor to document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place.
• There is no risk and internal control review or system documentation and hence there is no application of systems or risk based auditing. They just focus on documents; they merely conduct substantive auditing comprising verification of documents. Independent auditors do not just focus on the numbers but they gain an understanding of the businesses overall systems and controls environment. This enables them to identify deficiencies in the accounting systems or controls for which recommendations can be made, making the business more efficient and less prone to fraud or error.
• System-based auditing consists mainly of study and evaluation of the system of internal control for the period subject to the audit; and actual verification of assets, liabilities, revenues, and expenses which, together with the assurance provided by the system of internal controls, provide sufficient evidence to support the expression of an opinion on the financial statements. The use of system-based auditing enables audit work to be reduced to the minimum level consistent with an effective audit, it provides management with an independent and objective analysis of any weaknesses in internal controls, and is particularly suited to the audit of computerized systems.
• They do not consider post balance sheet events. IAS 10 prescribes when an entity should adjust its financial statements for events after the reporting period; and the disclosures that an entity should give about the date when the financial statements were authorised for issue and about events after the reporting period.
ISA 560.5 requires the auditor to perform audit procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial statements have been identified.
Critical review
The detailed and critical review of the A-G’s report on Public Boards, Corporations and other Statutory Institutions for the period ended December 31, 2021 reveals a lot of issues requiring attention:
Firstly, out of the GH¢17.48 billion reported as irregularities by the A-G, GH¢45.67 million is an overstatement due to currency translation errors caused by posting cedi amounts in the USD column of the summary table and retranslating into cedis.
Secondly, analysis of the detailed report of SOEs like ECG, SSNIT, COCOBOD, GNPC, BOST, etc. indicates that excess of budgeted expenditure and receivables, including the amounts due from the Government of Ghana and customers of the utility companies of GH¢14 billion and US$468.66 million, which at the rate used by the A-G of GH¢ 6.01 to US$ translates into GH¢2.82 billion thus giving a total of GH¢16.82 billion.
This represents 96.10 per cent of the GH¢17.48 billion reported as irregularities in the A-G’s report that may be doubtful and questionable.
Therefore, the Ghanaian public’s expectation of the A-G’s recovery through surcharging and disallowance to retrieve the GH¢17.48 is unfounded. Unfortunately, the release of the figures led to demonstrations by Civil Societies Organisations who have mistakenly equated the irregularities reported by the A-G as entirely due to infractions and corruption.
Even before Parliament considers and debate the report, the President has already instructed the head of SIGA to work with the A-G and name the perpetuators of the infraction. More details will be provided.
Auditor-General’s compliance with audit of state-owned companies: Critical evaluation 4
Auditor-General’s compliance with audit of state-owned companies: Critical evaluation (3)
Auditor-General’s compliance in audit of state-owned companies: Critical evaluation
A-G’s audit, its compliance with Financial Management Rules: A Critical Evaluation
To be cont’d
The writer is an auditor