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  • 10 Marks

AAA – L3 – Q56 – Reporting

Discuss materiality, true and fair concepts, and auditor's report effects for Gifty Goods and Cecilia's Contracts.

56 GG and CC

Described below are situations which have arisen in two unrelated audits and which are considered material.

(1) Gifty Goods

Although you are satisfied that closing inventories this year are fairly stated, the auditor’s report on the previous year’s financial statements was modified due to a restriction on the scope of the audit work in respect of the closing inventory figure. This led to a qualified opinion.

(2) Cecilia’s Contracts

The financial statements disclose the fact that a provision may be required to reduce inventories to their net realisable value if a contract with a major customer, representing 60% of the company’s revenue, is not renewed. A decision on this by the customer is not expected until after the financial statements are due to be signed.

Required

(a) State what is meant by, and explain the relationship between, the concepts of materiality and true and fair.

(b) State, with reasons, the effect on the auditor’s reports of the situations described above.

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  • 10 Marks

AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

55 Richmond Computers

Richmond Computers sells personal computers (PCs) to independent shops. You are the external auditor of Richmond Computers. Your interim audit revealed the following issues:

(1) The half year physical inventory count revealed that some PCs supposed to be in inventory were missing and that other machines which had been returned by customers were in inventory but had not been recorded as having been returned. A few of the missing PCs have been traced to directors who borrowed them for use at home.

(2) Two customers had been allowed to exceed their credit limits and new customers in the last year had not been allocated credit limits.

Required

Draft the section of your report to management dealing with the above deficiencies in internal control. Set out the deficiencies, their implications and your recommendations for improvement.

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  • 15 Marks

AAA – L3 – Q54 – Audit Reporting

Discuss modified audit opinions and outline the auditor's report for a material inventory issue at Eunice Pharmacies.

54 Eunice Pharmacies

During the course of your audit of Eunice Pharmacies for the year ended 30 April, you establish that the company did not carry out a year end physical inventory count at one of its retail branches and there are no alternative procedures that can be applied to confirm the quantities. The directors have estimated the branch inventory value.

At the conclusion of your audit you decide that the problem is material, but not pervasive, to the view given by the financial statements.

Required

(a) Explain the different types of modified audit opinions, giving an example of situations which may give rise to each type.

 

(b) Set out the main elements of the auditor’s report for the situation set out above.

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  • 15 Marks

AAA – Dec 2019 – L3 – Q54 – Audit Reporting

Explain types of modified audit opinions with examples for each type.

54 Eunice Pharmacies

(a) Explain the different types of modified audit opinions, giving an example of situations which may give rise to each type.                  (b) Set out the main elements of the auditor’s report for the situation set out above.

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  • 13 Marks

AAA – L3 – Q53 – Audit-related services

Discuss matters to consider before accepting a review of prospective financial information and issues in the resulting report for Filtane Limited.

53 BS Cipax
You are a manager in BS Cipax, a medium-sized firm which offers a range of services to audit and non-audit clients. You have been asked to consider a potential engagement to review and provide a report on the prospective financial information of Filtane Limited, a company which has been an audit client of BS Cipax for six years. The audit of the financial statements for the year ended 31 August 2015 has been completed and your firm issued an unmodified report.
Filtane Limited operates a chain of fashion stores across the country. Currently its merchandise are out of date and it sells clothing which do not reflect the late stand in mode fashion labels which are becoming more popular especially with the youth. Management is planning to revamp its image and stock the latest fashion in Africa and across the other continents. It also intends to invest in the latest technologies to include online real time trading on the internet in order to attract more customers, especially the up-and-coming youth, trendy middle-aged persons and even those far from its shops by attracting them to shop over the internet. The company has sufficient cash to fund half of the necessary capital expenditure, and has approached its bank, Boafo Bank Limited, with a loan application of GH¢32 million for the remainder of the funds required. Most of the cash will be used to invest in acquiring inventory and the technology for ensuring secure and safe online trading. The remaining cash will be used for refurbishment of the shops.
Management had informed the audit team, in the invitation to start the audit, of its intention to use the audited financial statements as the basis for preparing the prospective financial information to be used to seek for the loan from Boafo Bank Limited.
The draft forecast statements of profit or loss for the years ending 31 August 2018 and 2017 are shown below, along with the key assumptions which have been used in their preparation. The audited statement of profit or loss for the year ended 31 August 2015 is also shown below.

Forecast statement of profit or loss

Year ended Note relevant to forecast Year ending Year ending
31 August 2015 (Audited) information 31 August 2016 (Forecast) 31 August 2017 (Forecast)
GH¢’000 GH¢’000 GH¢’000
140,000 1 172,000 184,000
(113,000) 2 (126,000) (128,400)
27,000 46,000 55,600
(6,800) (8,000) (7,600)
20,200 38,000 42,000

The forecast has been prepared for use by the bank in making its lending decision, and was to be accompanied by other prospective financial information including a forecast statement of cash flows.
Note 1: The forecast increase in revenue is based on the following assumptions:
(i) All shops will be stocked with new modern and in mode fashion to attract new customers to the shops and many persons who don’t live in the vicinity of the shops will also be attracted through on-line shopping by December 2015.
(ii) Prices will increase by an average of 25% in December 2015.
Note 2: Operating expenses include mainly staff costs, depreciation of property and fittings, and repairs and maintenance to the shop fittings and equipment as well as ensuring continuous safe and secure on-line shopping.
Required:
(i) Explain the matters to be considered by BS Cipax before accepting the engagement to review and report on the prospective financial information of Filtane Limited.
(ii) Assuming the engagement is accepted, and the results of the examination procedures show that the prospective financial information have been prepared in accordance with the assumptions and appear reasonable, discuss the issues that will be in the report your firm will issue in respect of the forecast statement of profit or loss.

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  • 5 Marks

AAA – L3 – Q52 – Internal audit and outsourcing

Compare and contrast assurance and consulting audit activities per IIA's internal auditing definition.

The IIA’s definition of Internal Auditing states, among others that: “Internal Auditing is an independent, objective assurance and consulting activity….”

Required:

Compare and contrast an Assurance and a Consulting Audit activity.

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  • 10 Marks

AAA – L3 – Q51 – Assurance services

Suggest procedures for reviewing interim financial information of Dablaseem Hospital Company Ltd.

Dablaseem Hospital Company Ltd. prepares its annual financial statements to 31st December each year. Due to the magnitude of the transactions, interim financial statements for each half year are prepared at the end of June every year. This is done to facilitate the early completion and audit of the annual financial statements. Nhwehwem & Associates are the independent financial statement auditors of Dablaseem Hospital Co. Ltd. This year’s interim financial information have been prepared and are ready for review.

You are the audit senior of the auditing firm and the head of the audit team to carry out the review of the interim financial information.

Required:

Suggest the procedures you would use to carry out the review of the interim financial information.

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  • 14 Marks

AAA – L3 – Q50 – Audit-related services

Clarify matters in the terms of engagement for a due diligence review of Robson Construction Co.

Your audit client, Presco Co (Presco), is a national hotel group with substantial cash resources. Its accounting functions are well managed, and the group accounting policies are rigorously applied. The company’s financial year end is 31 December.
Presco has been seeking to acquire a construction company for some time to bring in-house the building and refurbishment of hotels and related leisure facilities (e.g., swimming pools, squash courts, and restaurants).
Presco’s management has recently identified Robson Builders Co (Robson) as a potential target and has urgently requested that you undertake a limited due diligence review lasting two days next week.
Further to their preliminary talks with Robson’s management, Presco has provided you with the following brief on Robson Builders Co:
The chief executive, managing director, and finance director are all family members and major shareholders. The company name has an established reputation for quality constructions.
Due to a recession in the building trade, the company has been operating at its overdraft limit for the last 18 months and has been close to breaching debt covenants on several occasions.
Robson’s accounting policies are generally less prudent than those of Presco (e.g., assets are depreciated over longer estimated useful lives).
The company’s management team includes a qualified and experienced quantity surveyor. His main responsibilities include:
(1) supervising quarterly physical counts at major construction sites
(2) comparing costs to date against quarterly rolling budgets, and
(3) determining profits and losses by contract at each financial year end.
Although much of the labour is provided under subcontracts, all construction work is supervised by full-time site managers.
In August 20X7, Robson received a claim that a site on which it built a housing development in 20X4 was not properly drained and is now subsiding. Residents are demanding rectification and claiming damages. Robson has referred the matter to its lawyers and denied all liability, as the site preparation was subcontracted to Sarwar Services Co. No provisions have been made in respect of the claims, nor has any disclosure been made.
The auditor’s report on Robson’s financial statements for the year to 30 June 20X7 was signed, without modification, in March 20X8.
Required:
(a) Identify and explain the specific matters to be clarified in the terms of engagement for this due diligence review of Robson Builders Co.                                                                                                                                                                                                                        (b) State, with reasons, the principal additional information that should be made available for your review of Robson Builders Co.

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  • 9 Marks

AAA – L3 – Q49 – Audit-related services

Explain key characteristics of review, agreed-upon procedures, and compilation engagements.

Explain the key characteristics of the following engagements:

  • A review engagement
  • Agreed-upon procedures
  • A compilation engagement

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  • 15 Marks

AAA – L3 – Q48 – Assurance services

Discuss the statement that assurance work offers audit firms less work, lower risk, and lower assurance compared to standard audits.

The growth in assurance-type work provides a great money spinning opportunity for audit firms to provide a lower level of assurance, involving less work and reduced engagement risks, compared to the standard audit.

Required:

Discuss this statement.

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