Level 2 – Knowsia

AA – L2 – Q4 – Evaluation and review

Review auditor going concern responsibilities, identify five indicators from Afrimax Ltd financials, and state three audit procedures.

Question

a) Below is a summary of the financial information of Afrimax Ltd, an audit client.

Financial performance

Item	30 June 2025 GH¢ ‘million	30 June 2024 GH¢’ million
Revenue	231	506
Cost of sales	(235)	(352)
Selling, general and admin expenses	(48)	(52)
Income tax expense	(3)	(12)

Financial position

Item	30 June 2025 GH¢ ‘million	30 June 2024 GH¢’ million
Property, plant and equipment (PPE)	950	958
Inventory	39	42
Accounts receivable	94	111
Cash and cash equivalents	5	30
Borrowings	(830)	(830)
Accounts payable	(244)	(238)
Income tax payable	(17)	(21)
Share capital	(50)	(50)
Retained earnings	53	(2)

Additional information:

60% of PPE relates to the assets used in the provision of works under a contract with Jinex Industries Ltd while the remaining 40% relates to assets required for the provision of works under a contract with Sampax Ltd.
The Borrowings relate to a 3-year loan facility from Drobax Area Rural Bank Ltd. The loan balance is due on 31 December 2025.
In arriving at the carrying amount of inventory, a provision of GH¢12 million was posted.
An expected credit loss of GH¢18 million is also included in accounts receivable.
The decline in the revenue for the year is mainly due to a retarding level of activity for Sampax Ltd. In the previous year, this contract brought in revenue of approximately GH¢250 million.

Required: i) Explain the auditor’s responsibility with regards to going concern. ii) Identify FIVE indicators of going concern challenges at Afrimax Ltd. iii) State THREE audit procedures you would perform in determining the going concern status of Afrimax Ltd.

b) Patakex Telecommunications Ltd is an international telecom provider with operations in several African countries. You are the audit associate on the year-end audit for the financial year ended 31 March 2025.

One of the material revenue streams, international roaming charges (50% of total revenue), relies on a complex billing system. During the audit, inconsistencies were found in how revenue was recognized. The audit team planned additional substantive testing, including review of billing data, inter-operator agreements and cut-off testing. Materiality was determined using 5% of profit before tax.

Due to IT department delays and access restrictions, the team was unable to complete the planned audit procedures. Attempts to gather alternative evidence (bank receipts, usage data) were unsuccessful, as the data was incomplete. Management believes the revenue is fairly stated and insists that the audit should proceed.

Required: i) Identify and explain the type of audit issue that has arisen. ii) Evaluate whether the issue is material and/or pervasive. iii) Recommend TWO additional actions or communications the auditor should undertake before finalising the audit report. iv) Justify the appropriate type of audit opinion to be issued.

Answer

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Tags: Audit Procedures, Auditor Responsibility, Cash flow problems, Contract decline, Going Concern, High gearing, Indicators of going concern, Liquidity challenges, Loan repayment, Profitability issues
Level: Level 2

Topic: Evaluation and review

AA – L2 – Q3 – Audit Sampling

Differentiate between statistical and non-statistical sampling methods in auditing according to ISA 530. Explain the concepts of materiality and performance materiality in the context of an audit. Compare and contrast limited assurance and reasonable assurance engagements.

Question

a) ISA 530: Audit Sampling indicates that the decision to use statistical sampling or non-statistical sampling is a matter of professional judgment and does not indicate which should be used in any given situation. However, the standard is clear that sample size is not a valid criterion to distinguish between the selection of sampling methods. Therefore, the auditor should not base their decision on whether to use statistical or non-statistical sampling on the outcome of the calculation of sample sizes.

Required: Differentiate between statistical sampling and non-statistical sampling.

A core objective of an audit is to enhance the degree of confidence intended users can place in the financial statements. This is achieved through the expression of an opinion and is governed by key conceptual pillars. Central to this process are the concepts of materiality and the level of assurance provided.

Required: i) Explain the concept of materiality and performance materiality.

ii) Compare and contrast limited assurance and reasonable assurance.

Your client has outsourced their payroll processes to Azara Technologies (Azara), a payroll management company. You have asked the client how they are confident that the payroll that is processed is accurate and appropriate. They have indicated that Azara sends them the final payroll run for review before payment is done. They also mentioned they performed due diligence on Azara before contracting them and noted that they have other high-profile companies as clients and has a reputable audit firm as its Service Auditor who audits the payroll management service. Your client has shared with you the final approved payroll run for each month under review.

Required: State FIVE audit procedures to be performed on the payroll.

Answer

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Tags: Audit Sampling, ISA 530, judgemental sampling, non-statistical sampling, probability theory, Professional Judgment, sampling risk, Statistical Sampling
Level: Level 2

Topic: Audit Sampling and Other Selective Testing Procedures

AA – L2 – SA – Q5.10 – True and Fair

Meaning of ‘true and fair’ in financial statements.

Question

Which one of the following should be implied by the term ‘true and fair’ when applied to financial statements?

A Independent

B Free from misstatements

C Meaningful presentation and disclosure of information

D Complying with ethical standards

Answer

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Tags: Audit opinion, Financial Statements, ICAG, True and Fair
Level: Level 2

Topic: Completion Procedures and Reporting

AA – L2 – SA – Q5.7 – Tests of Controls

Identifying non-test of control.

Question

Which of the following is NOT a test of control?

A Checking for sequential numbering of sales invoices

B Ensuring the segregation of duties between sales ledger staff and the cashier

C Checking for evidence of authorization for credit notes

D Test checking from dispatch notes to sales invoices

Answer

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Tags: Audit Software, Automated Audit Techniques, Data Analytics, ICAG
Level: Level 2

Topic: Audit and Assurance Evidence

AA – L2 – SA – Q5.6 – Internal Control Components

Components of internal control system.

Question

Select the appropriate component of a system of internal controls for each of the below examples.

The authorizing of inventory write-offs prior to inventory being scrapped.
The preparation of a reconciliation between the receivable’s ledger control account and the receivables ledger
A Control environment
B Control activity
C Information system and communication
D Information system and communication
E Control environment
F Control activity

Answer

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Tags: Control Components, ICAG, Internal controls, Inventory, Receivables
Level: Level 2

Topic: Planning and Approach for Audit and Assurance Engagements

AA – L2 – SA – Q5.5 – Sampling Non-Current Assets Level

Factors affecting sample size for valuation testing.

Question

When testing non-current assets for the valuation assertion, identify whether each of the below factors would necessitate a decrease in the sample size, an increase in the sample size or would have minimal impact on the sample size.

Stratification of the population
A significant increase in the number of other substantive procedures directed at the same assertion
A Decrease
B Increase
C Minimal impact
D Decrease
E Increase
F Minimal impact

Answer

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Tags: ICAG, Non-current Assets, Sampling, Valuation Assertion
Level: Level 2

Topic: Audit and Assurance Evidence

AA – L2 – SA – Q5.4 – Detection Risk

Influence on detection risk.

Question

Detection risk is influenced by:

A Internal audit

B The client

C Executive and non-executive directors

D The external auditor

Answer

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Tags: Audit Risk, Detection Risk, External auditor, ICAG
Level: Level 2

Topic: Planning and Approach for Audit and Assurance Engagements

AA – L2 – SA – Q5.3 – Materiality

Nature of materiality in auditing.

Question

Materiality is a matter of:

A Capacity

B Liquidity

C Profitability

D Judgment

Answer

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Tags: Audit Planning, ICAG, Materiality, Professional Judgment
Level: Level 2

Topic: Planning and Approach for Audit and Assurance Engagements

AA – L2 – SA – Q5.2 – Ethical Threats

Threat from designing client IT system.

Question

Sapphire & Co are the auditors of Zenith plc, a listed company. Zenith plc has approached Sapphire & Co to help it design and implement a new IT system. Which of the following threats is created if Sapphire & Co accepts this assignment?

A Intimidation threat

B Self-review threat

C Advocacy threat

D Familiarity threat

Answer

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Tags: Auditor Independence, Ethical Threats, ICAG, Self-Review
Level: Level 2

Topic: Professional and Ethical Considerations

AA – L2 – SA – Q5.1 – Director Responsibilities

Identifying non-director responsibility.

Question

Which one of the following is not a director’s responsibility?

A To inform the auditor of the date of the audit

B To keep proper accounting records

C To prevent fraud and error

D To supply information and explanations to the auditor

Answer

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Tags: Companies Act, Corporate Governance, Director Responsibilities, ICAG
Level: Level 2

Topic: Regulatory Framework and Audit Responsibilities

Level (SQ): Level 2

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AA – L2 – Q4 – Evaluation and review

Review auditor going concern responsibilities, identify five indicators from Afrimax Ltd financials, and state three audit procedures.

AA – L2 – Q3 – Audit Sampling

Differentiate between statistical and non-statistical sampling methods in auditing according to ISA 530. Explain the concepts of materiality and performance materiality in the context of an audit. Compare and contrast limited assurance and reasonable assurance engagements.

AA – L2 – SA – Q5.10 – True and Fair

Meaning of ‘true and fair’ in financial statements.

AA – L2 – SA – Q5.7 – Tests of Controls

Identifying non-test of control.

AA – L2 – SA – Q5.6 – Internal Control Components

Components of internal control system.

AA – L2 – SA – Q5.5 – Sampling Non-Current Assets Level

Factors affecting sample size for valuation testing.

AA – L2 – SA – Q5.4 – Detection Risk

Influence on detection risk.

AA – L2 – SA – Q5.3 – Materiality

Nature of materiality in auditing.

AA – L2 – SA – Q5.2 – Ethical Threats

Threat from designing client IT system.

AA – L2 – SA – Q5.1 – Director Responsibilities

Identifying non-director responsibility.

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Level (SQ): Level 2

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Review auditor going concern responsibilities, identify five indicators from Afrimax Ltd financials, and state three audit procedures.

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Differentiate between statistical and non-statistical sampling methods in auditing according to ISA 530. Explain the concepts of materiality and performance materiality in the context of an audit. Compare and contrast limited assurance and reasonable assurance engagements.

You're reporting an error for "AA – L2 – Q3 – Audit Sampling"

Meaning of ‘true and fair’ in financial statements.

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Identifying non-test of control.

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Components of internal control system.

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Factors affecting sample size for valuation testing.

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Influence on detection risk.

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Nature of materiality in auditing.

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Threat from designing client IT system.

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Identifying non-director responsibility.

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