ACCA · Question 17 · Audit and Assurance

SECTION B: CONSTRUCTED RESPONSE

SCENARIO: EDUCARE NGO

You are an audit senior at Horizon Partners. You are evaluating the internal controls of EduCare, an international Non-Governmental Organization (NGO) that provides educational resources to schools in developing nations. EduCare is funded by government grants and public donations.

During your review of the systems notes, you identified the following processes:

1. Procurement of Laptops: EduCare purchases thousands of laptops annually. To speed up the process, local country managers are given a budget and are allowed to select local suppliers, negotiate prices, and sign purchase contracts without any central oversight or approval from the head office.
2. Public Donations: EduCare relies heavily on street fundraising. Volunteers collect cash donations in unsealed plastic buckets. At the end of the day, volunteers take the buckets home and are trusted to deposit the cash into EduCare's local bank account by the end of the week. They then email a self-declared total to the head office.
3. Grant Expenditure: Government grants are provided for specific projects (e.g., building a library). However, all grant money and public donations are pooled into a single, general bank account. The finance clerk uses a spreadsheet to estimate how much money was spent on each specific project at month-end.
4. Supplier Payments: When local country managers receive invoices from laptop suppliers, they authorize the invoice and pay the supplier directly using a pre-signed chequebook provided by the head office at the start of the year.

REQUIREMENTS:
(a) Identify and explain FOUR deficiencies in the internal control system of EduCare. For each deficiency, provide a recommendation to address it, and a test of control the auditor could perform to verify the recommendation is operating effectively. (16 marks)
(b) Explain the inherent limitations of internal controls, specifically in the context of an NGO like EduCare. (4 marks)