We were appointed as the external auditors of a regulated financial services entity operating under a highly intricate corporate structure and a unique, non-traditional business model. The nature of its operations presented substantial audit complexities, particularly in areas of revenue recognition and related party transactions.
Key Challenges:
Complex Revenue Streams:
Due to the client's bespoke business model, the application of IFRS 15 – Revenue from Contracts with Customers posed significant interpretation challenges, especially in determining the timing and classification of revenue.
Related Party Transactions:
The business involved numerous inter-company and related party arrangements, raising concerns regarding arm’s length pricing and proper disclosure in accordance with international financial reporting standards.
Weak Internal Controls:
Several control deficiencies were identified during the initial planning phase, which rendered the management accounts unreliable for audit purposes.
Regulatory Pressures & Timelines:
The client operated in a regulated industry with strict financial reporting deadlines. Timely execution of the audit, without compromising on quality, required the rapid deployment of experienced audit professionals.
Findings & Outcomes:
Our audit identified several material issues:
Accruals Misaligned with Policy:
Numerous accrual balances were not in line with the entity’s documented accounting policies. We proposed audit adjustments to correct these discrepancies.
Non-Compliant Revenue Recognition:
A portion of the revenue was recognized prematurely or lacked contractual support, and certain related party transactions were not priced at arm’s length. Adjustments were proposed in line with IFRS 15, which significantly impacted reported figures.
Impact on Capital Adequacy:
The audit adjustments affected the capital base of the company, leading to a breach in the minimum capital adequacy requirements. This necessitated urgent regulatory notification and reporting, which we supported the client in managing promptly.
Recommendations & Client Collaboration:
As part of our value-driven approach, we delivered a detailed internal controls report, outlining specific, actionable recommendations to remediate identified deficiencies.
These included enhancements to revenue recording processes, strengthening of related party disclosures, and better documentation of accruals.
The management team was proactive and receptive to our recommendations, initiating corrective actions immediately.
Value Addition Beyond the Audit:
Regulatory Return Review:
We performed a comprehensive review of the client’s regulatory filings and advised on the correct treatment of financial metrics, ensuring alignment with applicable regulatory frameworks. This helped the client avoid potential future breaches.
Cybersecurity Health Check:
Given the sensitivity of financial data, we conducted a high-level cybersecurity review, identifying key gaps in the client’s information security posture. Practical recommendations were provided to improve cyber resilience and regulatory compliance.
Conclusion:
Our timely, risk-focused audit not only ensured compliance and transparent reporting but also empowered the client to strengthen its internal control environment and regulatory standing. Through collaborative effort, we supported the client in navigating a complex audit with significant challenges—delivering assurance, insights, and long-term value.
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