Level (SQ): Level 3

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  • 10 Marks

AAA – L3 – Q66 – Reporting

Define and explain the use of Emphasis of Matter and Other Matter paragraphs in an auditor's report for Kweku Medical Co.

You are the partner responsible for the audit of Kweku Medical Co, for the year ended 30th April 2014. The final audit has been completed and you have asked the audit manager to draft the auditor’s report. The manager is aware that there is guidance for auditors relating to the auditor’s report in ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The manager has asked for your assistance in this matter.

Required:
(i) Define an “Emphasis of Matter paragraph” and explain, providing examples, the use of such a paragraph.
(ii) Define an “Other Matter paragraph” and explain, providing examples, the use of such a paragraph.

Note: You are not required to produce draft paragraphs.

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  • 10 Marks

AAA – L3 – Q65 – Reporting

Prepare a management report on payroll internal control deficiencies at Bibini Co. Ltd., including implications and recommendations.

Kofi & Co. have audited the annual financial statements of Akoma Co. Ltd., a public limited liability company, for the year ended 31st December 2014. The accounting system of the company is partially computerised.
During the audit, it was detected that just two members of staff, out of one hundred and fifty workers, were entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. The chief accountant only confirms that the amount of the wages and salaries cheque agrees with the total of the net wages column in the payroll, then he signs without any reasonableness check of the amount of the total wages cheque. This situation is a serious deficiency in the system of internal control which can have serious implications. As audit senior, you are considering communicating this situation to the management, showing the deficiency, implications, and recommendations.

Required:
Prepare an appropriate report to management on the deficiency noted in the system of internal control for payroll.

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  • 8 Marks

AAA – L3 – Q64 – Subsequent events

Identify four financial statement areas relevant to subsequent events review, with relevant post-year-end information and reasons.

Identify four areas of the financial statements to which a review of subsequent events might be relevant. For each area state what kind of information available after the reporting period might be relevant, and why.

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  • 15 Marks

AAA – L3 – Q63 – Audit-related services

Assess audit procedures and alternative audit opinions for Maris Vintages' going concern status due to loan repayment issues.

You are the audit manager in charge of the audit of Maris Vintages, a company which imports and distributes palm wine. In recent years the company has become less profitable due to the large range of palm wines now carried by supermarkets. The draft financial statements for the year ended 30 November 20X8 show that current liabilities exceed current assets by $200,000.
The company’s major source of finance is a bank loan of $500,000 which is due for repayment in full on 31 October 20X5. The company is currently negotiating with its bankers for a replacement long-term loan of $1 million. They intend to use some of the loan to reposition themselves in the marketplace to establish the superiority of their wines over those sold in supermarkets.
The directors submitted a profit forecast with their loan application and are optimistic that their application will be successful. However, they do not expect negotiations to be completed before the annual general meeting in March. Your firm has been asked not to approach the bank directly.

Required
(a) Set out the audit procedures you would perform in order to establish the ability of Maris Vintages to continue as a going concern.
(b) Discuss the alternative audit opinions that might be relevant to the financial statements of Maris Vintages together with the circumstances in which each would be appropriate.

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  • 10 Marks

AAA – L3 – Q62 – Audit-related services

Evaluate audit seniors' proposals for auditor’s reports for two clients with going concern and non-disclosure issues.

You are the manager responsible for the audit of two, unrelated, audit clients. In each case you are currently reviewing the audit working papers and the audit seniors’ recommendations for the type of auditor’s report to be issued. Details are as follows:

(1) PrimeTech Laptops is a subsidiary of CoreTech Computers. Serious going concern problems have been noted during this year’s audit. PrimeTech Laptops will be unable to trade for the foreseeable future unless it continues to receive financial support from CoreTech Computers. A letter of support has been received and a copy is filed on the current audit file.
The audit senior has suggested that, due to the seriousness of the situation, the audit opinion should be modified.

(2) During the year, Rania Textiles has made a small loan to one of its directors but this has not been disclosed in the financial statements. Such disclosure is required by local legislation. Your auditor’s report gives an opinion on compliance with such legislation.
The audit senior has suggested that, as the amount involved is small, an unmodified opinion should be issued.

Required:
For each client, comment on the suitability or otherwise of the seniors’ proposals for the auditor’s reports. Where you disagree, indicate what kind of modification (if any) should be given instead

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  • 12 Marks

AAA – L3 – Q61 – Audit Evidence

Discuss reliability of directors' written representations and actions if directors refuse to sign, focusing on revenue and expenditure.

You are the external auditor of Jonas Healthcare Services Co.
A written representation letter has been prepared in which the directors have been asked to confirm that all revenue has been included in the financial statements and that when there is weak evidence of expenditure, the expenditure has been for the benefit of the company and not for the personal benefit of any employee or director.
Required
(a) Discuss the reliability of audit evidence provided by directors in the written representation letter and whether you should rely wholly on the representations of the directors or whether you should obtain other evidence.

(b) Describe the action you would take and the conclusions you would reach if the directors refused to sign a written representation letter. Your answer should specifically consider the statements in the letter concerning completeness of revenue and validity of expenditure.

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  • 15 Marks

AAA – L3 – Q60 – Evaluation and review

Identify further information needed to assess Jemila Foods' going concern status due to supplier financial difficulties.

Jemila Foods has been in existence, importing foodstuffs such as rice, for a number of years. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of food which is manufactured exclusively by one company which is based in Bharat. The food is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this minimum annual payment of $10,000 per store.

The audit is nearing completion but you have just heard that the Bharat manufacturer is facing serious financial difficulties and that supplies have ceased.

Required:

(a) Set out the further information the auditor would require before reaching his audit opinion.                                                                  (b) Set out the possible forms of report that the auditor may issue.

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  • 10 Marks

AAA – L3 – Q59 – Going Concern

Identify factors indicating that a company may not be a going concern.

You are responsible for the audit of Asante Co, a limited liability company, for the year ended 31 December 20X8. The principal activity of Asante Co is the provision of high-quality packaging services for manufacturing companies. The company was established 3 years ago and has significantly exceeded its growth targets in each subsequent year.

Historically, the packaging process was labour-intensive, but in September 20X8, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a covenant specifying that the company’s debt:equity ratio should not exceed 1:1.

A comparison of the draft financial statements for the year ended 31 December 20X8 with the previous year indicates a significant increase in revenue with a small increase in profitability. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency and reduction in labour costs will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind with its payments to the taxation authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last 3 months’ instalments.

Required:

(a) Identify, and explain, from the information provided above, factors which indicate that Asante Co may not be a going concern.  (b) Outline the matters to which you would direct your attention in the period after the end of the reporting period in order to determine whether Asante Co can continue as a going concern for the foreseeable future.

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  • 20 Marks

AAA – L3 – Q58- Reporting

Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.

 Yams Co
The directors of Yams Co have decided that this year, motor vehicles should be depreciated on a reducing balance basis. Previously this has been done on a straight line basis. Profits have fallen by GH₵18,000 as a result.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

Answer:
The relevant figure in terms of materiality is GH₵18,000. This represents 12% of profit before tax, which is above 5%, so the amount is material.

Depreciation of non-current assets is described in IAS 16. A change from one method of depreciation to another is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position. Such a change does not, however, constitute a change of accounting policy (IAS 8); it is a change in accounting estimate.

In Yams Co there is nothing to suggest that such a change in accounting estimate is warranted. Furthermore, motor vehicles are a normal class of non-current asset, so it would be highly unusual to change the method of depreciation.

If the directors are unable to give a satisfactory explanation for the change, a modified audit opinion on the grounds of material misstatement would be appropriate. The qualification is only material (and not pervasive) and an ‘except for’ opinion is correct

(b) Plantain Co
A competitor of Plantain Co wrote a damaging article about one of its products. Having consulted its lawyers, Plantain Co has decided to take legal action and is suing the competitor for GH₵500,000. The court case will be heard in September of this year and Plantain Co’s lawyers have informed them that there is an 80% chance of success. As a result, Plantain Co has adjusted its profits upwards by GH₵100,000.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

(c) Papaya Co
On 10 February 20X5, Papaya Co were informed that one of their leading customers had gone into liquidation. At 31 December 20X8, the balance owed was GH₵45,000. The directors thought they had better reflect this in the financial statements so they disclosed this in the notes to the financial statements.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

(d) Melon Co
During the valuation of inventory it was discovered that a line of inventory had been valued under LIFO. This had resulted in a misstatement of GH₵8,000. A further line of inventory was clearly obsolete and should not have been included at all. In the financial statements, this had been included at a valuation of GH₵4,000.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

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  • 10 Marks

AAA – L3 – Q57 – Reporting

Discuss deficiencies in database maintenance and advertising deals at Glenda Publishing, their consequences, and recommendations.

57 Glenda Publishing
Described below are situations which have arisen at Glenda Publishing, a company involved in publishing activities.
(1) Database maintenance
Routine maintenance work is behind schedule resulting in a backlog of input for new subscriptions, cancellations, and changes of addresses.
(2) Advertising deals
As a result of staff shortages, some deals with advertisers are not being recorded and order confirmations are not being sent out.

Required:
For each situation, set out the deficiencies, their consequences, and your recommendations for improvement.

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