Question Tag: Audit opinion

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  • 20 Marks

AA – Mar 2025 – L2 – Q4 – Letter of Representation

Explain letter of representation, its contents, and actions if management refuses to provide it.

a) During the audit of Abako Manufacturing LTD, the audit team from Henne Frema & Associates is awaiting written representations from management. One of the key areas of concern is the completeness of the financial records provided due to high turnover of staff especially at the finance department.

Required:

i) Explain letter of representation. (2 marks)

ii) Identify EIGHT statements/issues that may form part of a letter of representation. (4 marks)

iii) Discuss TWO actions that the auditor would take if management refuse to provide the letter of representation.

b) You are part of the team auditing a client who is part of a large multinational group. During the audit, your team noted that the company is reporting adverse liquidity and solvency ratios. Also, the company was in breach of its loan covenants and recently lost a major customer.

Your team has requested that management provide forecast of financial results showing that the company will be liquid and solvent in the foreseeable future, at least 12 months from the date of reporting to support management use of the going concern assumption in the preparation of the financial statements. Your team has also requested a letter of financial support from the company’s parent company.

The team has assessed that a material uncertainty exists and the use of the going concern assumption is inappropriate in the absence of the requested mitigation information.

Required:

i) State the type of audit report to be issued should management fail to provide the requested mitigation information. (4 marks)

ii) Assess the impact of the evidence provided on the audit report. Assume a material uncertainty still exists even after providing the needed evidence but the use of the going concern is appropriate. (6 marks)

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  • 20 Marks

AAA – Mar 2025 – L3 – Q3 – Audit of Complex Transactions and Provisions

Justify provisions for toxic emission fines, outline audit procedures for a new filter and provision, and identify risks in providing assurance for a disposal licence.

You are partner for a firm called Konamoah & Associates, who are auditors for Aluco, an aluminium processing company. Aluco has several issues with its aluminium and steel byproducts, including toxic emissions and a poor health and safety record for employees in the workshop. Aluco has proven to be very lucrative for your firm and you are busy planning the coming year’s audit visits after agreeing to continue this engagement some weeks earlier. The by-products arising from the production process include the following:

  • Sharp metallic fragments that require disposal under an annually granted licence.
  • Toxic exhaust gases that require treatment by a specific filter.
  • Carcinogenic oil that require storage in underground bunkers. Aluco is in the process of installing a new filter to process toxic exhaust gases. This represents an investment of GH¢2,000,000 and is material to the financial statements. The new filter is expected to reduce the number of toxic leaks that the company has caused by over 90%, although the suppliers of the filter, Adamah Enterprises, have only just rushed this product onto the market. In the last five years, Aluco has been fined material amounts of between GH¢200,000 and GH¢400,000 by the Tema Metropolitan Assembly, so this new filter is expected to reduce their liability substantially. During an initial planning meeting held at Aluco, the Finance Director Frank Afful suggested to you that the year’s provision for toxic emission fines be removed as the new filter is likely to reduce these to negligible amounts. He has also mentioned that Aluco will need to start supplying information to assist with the metallic fragment disposal licence application and asked if your firm would be interested in providing assurance on the information required. Required: a) As the Audit Partner, justify the need for any provisions in respect of toxic emission fines. (4 marks) b) What audit procedures are you required to perform to determine the most appropriate treatment of both the new filter and the provision in the financial statements of Aluco and any possible worst case impact on your audit report? (10 marks) c) Identify SIX risks that your firm might have by agreeing to provide required assurance for Aluco’s application for a disposal licence. (6 marks)

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  • 15 Marks

AA – Nov 2024 – L2 – Q4a – Going Concern Considerations and Audit Reporting

Outline factors raising concerns about going concern and how auditors should report findings.

During the audit of Darko Retail LTD, the audit team from Zalia Audit Firm observed that management has not performed a formal assessment of the entity’s ability to continue as a going concern. It was noted that though the financial statements show a favourable financial position, the company has been facing liquidity issues and has not been able to secure funds for a significant loan due shortly after the balance sheet date.

Required:
i) Outline FOUR factors that can raise questions about the going concern of Darko Retail LTD in the absence of a formal assessment by management.

ii) Describe how the audit team should report their findings related to the going concern assumption in their auditor’s report if they conclude that a material uncertainty exists but is not adequately disclosed in the financial statements.

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  • 20 Marks

AAA – May 2016 – L3 – Q4 – Audit Reporting

Review the suitability of proposed audit opinions for four audit clients and suggest necessary modifications.

You are the manager responsible for four audit clients of Globe & Co, a firm of Chartered Accountants. The year-end in each case is June 30, 2015.
You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports. Details are as follows:

a. Red Co. Limited is a subsidiary of Yellow Holdings Plc. Serious going concern problems have been noted during this year’s audit. Red will be unable to trade for the foreseeable future unless it continues to receive financial support from the parent company. Red has received a letter of support (‘comfort letter’) from Yellow Holdings Plc.
The audit senior has suggested that due to the seriousness of the situation, the audit opinion must at least be qualified ‘except for’. (5 Marks)

b. Edo Co Plc has changed its accounting policy for goodwill during the year from amortisation over its estimated useful life to annual impairment testing. No disclosure of this change has been given in the financial statements. The carrying amount of goodwill in the statement of financial position as at June 30, 2015, is the same as at June 30, 2014, as management’s impairment test shows that it is not impaired.
The audit senior has concluded that a modification to the opinion is not required but suggests that attention can be drawn to the change by way of an emphasis of matter paragraph. (6 Marks)

c. The directors’ report of Prompt Co Limited states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1.6% of total revenue for the year. The audit senior is satisfied that the revenue figures are correct.
The audit senior has noted that an unmodified opinion should be given as the audit opinion does not extend to the directors’ report. (4 Marks)

d. Audit work on the after-date bank transactions of Twinkle Co Limited has identified a transfer of cash from Star Co. Limited. The audit senior assigned to the audit of Twinkle has documented that Twinkle’s finance director explained that Star commenced trading on July 20, 2015, after being set up as a wholly-owned foreign subsidiary of Twinkle.
The audit senior has noted that although no other evidence has been obtained, an unmodified opinion is appropriate because the matter does not impact on the current year’s financial statements. (5 Marks)

Required:
For each situation, comment on the suitability or otherwise of the audit senior’s proposals for the auditors’ reports. Where you disagree, indicate what audit report modification (if any) should be given instead.

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  • 30 Marks

AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy, which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, further plunging the company and the industry into a downward slide in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism, and insecurity have also affected the operations of major international oil companies, which are the entity’s major customers. As a result of the above, the company recorded the following in its books of account:

  1. Financial losses: The company has made consistent losses from the financial year ended December 31, 2017, to date.
  2. Current liability position: The company’s current liabilities exceeded its current assets.
  3. Negative net operating cash position: The company has maintained a negative net operating cash position from December 31, 2017, to date.

Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.

The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 – 45%) of the total current liability balance. The borrowings stood at N1.5 billion, N1.6 billion, and N2 billion for the financial years ended December 31, 2019, 2020, and 2021, respectively. The finance costs in relation to the borrowings stood at N230 million in the year ended December 31, 2021 (2020- N214 million).

The company has currently defaulted on a number of its contractual obligations with its directors, and there was no directors’ remuneration in the current year due to its continuous loss-making position.

At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company. To pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed of. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors and annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters.

After the meeting with management, you have started the preparation for the year-end audit, and in compliance with regulatory requirements and auditing standards, a Key Audit Matter should be inserted on the opinion page.

Required:

(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)

(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)

(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)

(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)

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  • 30 Marks

AAA – Nov 2016 – L3 – Q1 – Forensic Auditing

Evaluate significant audit issues related to fraud by the MD/CEO, disclosure of discontinued operations, and audit responsibilities for internet banking.

Havana Bank Plc was listed on the Nigerian Stock Exchange in February 2015. There was an initial public offer in the same period with proceeds of N5 billion. Part of the proceeds was expected to be utilized to strengthen the bank’s internet banking facility.

In November of the same year, the Managing Director/Chief Executive Officer (MD/CEO) proceeded on a three-week vacation to the United Kingdom but did not return at the time of concluding the audit of the 2015 financial statements early in 2016. It was observed that the MD/CEO had absconded with documents relating to the public offer. It was also noted that he kept drawing cash whilst in the United Kingdom amounting to N922 million.

The Bank closed its Gambian operations in June 2015 because it had made losses for two consecutive years. Prior to the two years before the closure, the operations in Gambia had grown into a network of five branches, contributing 15 percent of the gross income and 9.5 percent of the net profits of the group. The closure was not disclosed in the financial statements, but reference was made to the closure in the directors’ report.

As the Audit Manager in the firm of Chartered Accountants that audits Havana Bank Plc, you are required to:
a. Identify and explain the significant audit matters you will consider in forming an opinion in relation to the missing documents and the cash drawings by the absconded MD/CEO. (10 Marks)
b. Analyse and evaluate your views on the non-inclusion of the discontinued Gambian operations in the financial statements. (10 Marks)
c. Explain FIVE duties, as an auditor, in relation to the bank’s internet banking. (10 Marks)

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  • 10 Marks

AAA – May 2024 – L3 – SB – Q3a – Audit Reporting

Discuss forming an appropriate opinion due to scope limitations and evaluate drafted audit report extracts.

You are the Manager-in-charge of the audit of Moonshine Limited. Your auditor’s report for the financial year ended December 31, 2019, was signed without modification in February 2020. The scope of the audit for the year ended December 31, 2020, has been limited because the company’s Chief Executive Officer fled the country in April 2020, taking the accounting records with him.

You have identified a valuable training opportunity for Richard, a member of your audit team. As a training exercise, you have asked Richard to draft the extracts for the basis of opinion and opinion paragraphs that may not be standard wording in an unmodified auditor’s report.

Richard’s draft extracts were produced as follows:

  • Basis of Opinion (extract)
    “However, the evidence available to us was limited because accounting records were missing from early in the year and it was not possible to reconstruct them completely.”
  • Opinion (extract)
    “Because of the possible effect of the limitations in the information available to us, we do not express an opinion on the financial statements.”

Required:

  1. Discuss the principal matters relevant to forming an appropriate opinion on the financial statements of Moonshine for the year ended December 31, 2020. (8 Marks)
  2. Evaluate the suitability of Richard’s draft extracts. (2 Marks)

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  • 20 Marks

AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Assessing a company's ability to continue as a going concern and forming an audit opinion on material uncertainties

You are an audit senior in a firm of Chartered Accountants. You are about to commence work on the audit of B & Z Pharmaceuticals Limited, a family-owned and managed limited liability company. You have been informed by a business contact that the company has not been trading very successfully and is having difficulties with its bankers. However, you are not aware of any specific details.

The Engagement Manager on the audit is also aware of this information and is concerned about the ability of B & Z Pharmaceuticals Limited to continue in business for the foreseeable future. He has asked you to visit the company to ascertain the current state of affairs.

Required:

a. Prepare a list of questions that you would wish to ask and details of any information that you would wish to obtain from the Finance Director of B & Z Pharmaceuticals Limited, to enable you to identify indicators and assess the ability of the company to continue as a going concern. (16 Marks)

b. Explain briefly the audit opinion that you would give, assuming you concluded, after carrying out appropriate audit procedures, that there was a material uncertainty regarding the ability of the company to continue in business and management has included appropriate disclosures in the financial statements. (You are not required to draft the audit report). (4 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q3 – Audit Reporting

Assess material and pervasive effects on financial statements, audit procedures, and draft audit report opinion paragraphs for Tophem Bank’s foreign associate investment.

Tophem Bank Nigeria Plc has been operational for 20 years, with your firm auditing the company for the past five years. During the year, Tophem acquired an investment in Accra Insurance Limited, a foreign associate, which is accounted for using the equity method and listed at ₦575 million on the Statement of Financial Position as of December 31, 2016. Tophem’s income for the year includes its share of Accra’s net income. However, the audit team was denied access to Accra’s management, auditors, and financial data.

Following a review of the audit file for the year ended December 31, 2016, your partner has recommended a modified opinion for the audit report, providing a draft outline and requesting your input to complete it.

Requirements:
a. Evaluate the circumstances under which a matter could be both material and pervasive in its effect on the financial statements.

(4 Marks)
b. Explain EIGHT appropriate procedures to follow in the audit assignment before finalizing the audit opinion.

(8 Marks)
c. Draft an appropriate basis of opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)
d. Draft an appropriate opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)

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  • 6 Marks

AA – May 2016 – L2 – Q7a – Audit Evidence

Identify additional information needed to determine the audit opinion for Musky Fresh Ltd following supplier difficulties.

Musky Fresh Limited has been in existence, for a number of years, importing perfume. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of perfume which is manufactured exclusively by one company. The perfume is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this agreement, Musky Fresh Limited pays a percentage of its takings to the store, with a minimum annual payment of N100,000 per store.

The audit is nearing completion, but you have just heard that the Arabian 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. (6 Marks)

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  • 6 Marks

AA – Mar 2024 – L2 – Q1a – Audit and Assurance Evidence

Ways in which management can support auditors in obtaining appropriate and sufficient audit evidence.

Management of Bagabu Ltd has a filing system that is largely manual. Their external auditors have expressed concern about how to obtain appropriate and sufficient evidence to support their opinion.
Required:
State FIVE (5) ways management of Bagabu Ltd can support the auditors to obtain appropriate and sufficient audit evidence to support their opinion.

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  • 10 Marks

CR – July 2023 – L3 – Q3b – Regulatory framework and ethics

Identify ethical issues in financial statement adjustments and recommend actions for the new Finance Director to address these breaches.

b) Axim Manufacturing plc has just employed Mr. Kennedy Owusu as the Finance Director of the company. The previous Finance Director, Mr. Ebenezer Anokye, completed the financial statements for the year ended 31 December 2021 before he left. The Auditors of the company are also done with the audit of the financial statement for the year, expressing an unmodified opinion on the accounts. Mr. Ebenezer Anokye is loved by the General staff, Management members and the Board of Directors for his ability in making the organisation profitable over the years, and “guaranteeing” increased end-of-year bonus payments to staff, as a consequence.

Mr. Kennedy Owusu wanted to familiarise himself with the operations of the company, and therefore decided to go through the financial statements for the previous year. He is dismayed to find several errors in the financial statements. The previous Finance Director, Mr. Ebenezer Anokye, passed several adjusting entries in January, 2022 to reflect in the 2021 financial statements. In one of such instances, Mr. Ebenezer Anokye recognised revenue on a large order received on December 28, 2021 but shipped on January 3, 2022. The narration or explanation given to this adjusting entry is, “omission of previous year sales, now recorded”.

Also, purchase of inventory in October 2021, which was fully sold by the end of the year had been recognised in January 2022. Finally, depreciation expense had been reduced by GH¢230,000. All these adjustments were designed to increase profit after tax or earnings per share, culminating in increased bonus payment to Management and the General staff.

Required:

i) Identify the ethical issues involved in the adjustments made by Mr. Ebenezer Anokye.

(5 marks)

ii) Recommend the possible actions that Mr. Kennedy Owusu, the new Finance Director, should take to resolve the ethical breaches and to reverse the wrong accounting treatments. (5 marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

You have recently been promoted to Senior Manager of Life Matters and Associates, a firm of Chartered Accountants. As part of your job description, you are to handle two clients in a given month. Below are some issues you will be faced with during the audit of these clients. The financial year-end for each client is 30 September 2020.

You are reviewing the Audit Senior’s draft auditor’s reports for the two clients, Factory Co Ltd and Toys Co Ltd.

Toy Co Ltd

The Audit Senior suggests that Toys Co Ltd’s audit opinion should not be qualified but should include an emphasis of matter paragraph after the audit opinion to highlight the situation below:

In October 2020, a legal claim was filed against Toys Co Ltd by a toy retailer. The suit was from a customer who slipped on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability in the notes to the financial statements. Audit working papers also provided sufficient evidence that no provision is necessary as Toys Co Ltd’s lawyers have stated in writing that the likelihood of the claim succeeding is remote. The amount of the claim is fixed and is adequately covered by cash resources.

Factory Co Ltd

Factory Co Ltd, a listed company, permanently closed several branches in May 2020, with all closure costs finalised and paid in August 2020. The said branches all produced the same items, which contributed 10% of Factory Co Ltd’s total revenue for the year ended 30 September 2020 (2019 – 23%). The closure has been discussed accurately and fully in the Chairman’s statement and Directors’ Report. However, the closure was not stated in the notes to the financial statements nor separately disclosed on the financial statements.

The audit senior has proposed an unmodified audit opinion for Factory Co Ltd as the matter has been fully addressed in the Chairman’s statement and Directors’ Report.

Required:

a) Evaluate whether the Audit Senior’s draft auditor’s report is appropriate, and where you disagree, recommend the amendment necessary to the draft auditor’s report of:

i) Toy Co Ltd (4 marks)

ii) Factory Co Ltd (6 marks)

b) Assuming the auditors of Life Matters and Associates are contemplating whether to use an emphasis of matter paragraph and other matter paragraph in the audit report, explain both options and the situations when each is relevant. (10 marks)

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  • 10 Marks

AAA – May 2017 – L3 – Q5b – Audit evidence | Reporting

Discuss the audit considerations related to inventory valuation at lower of cost and net realizable value and the implications of a refund policy on the audit report.

You are an audit senior in Patampa and Associates, and nearing the end of the audit of Duakor Ltd. for the year ended 30 June 2016. Duakor Ltd owns a chain of clothing stores and also has a manufacturing division where it makes its own label brand “Dumas.” Own label clothing represents 50% of the inventory and sales of Duakor Ltd. The financial statements show a profit before tax of GH¢14m (2015 GH¢6m) and a statement of financial position total of GH¢46m (2015 GH¢30m). The following points have arisen on the audit:

i) Duakor Ltd. values its inventory at the lower of cost and net realizable value. Cost is determined by deducting a suitable estimated profit margin from the selling price. Inventory in the statement of financial position as at 30 June 2016 was GH¢2,530,000.

ii) Duakor Ltd. has a refund policy which states that a customer who is not satisfied with their purchase may return their goods within 28 days of purchase and obtain an exchange or a cash refund. Experience has shown that exchanges and refunds are common, as Duakor Ltd’s shops do not provide fitting rooms, space being at a premium. Duakor Ltd. does not make any provision in the financial statements for refunds.

Required:

Comment on the matters you will consider in relation to the implications of the above points on the audit report of Duakor Ltd. (10 marks)

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  • 5 Marks

AAA – Nov 2023 – L3 – Q5c – Reporting

Comment on a draft audit report regarding a warranty provision disclosure.

c) On 1 July 2022, Obidi Ltd introduced a ten-year warranty on all sales of its cooking equipment. Total sales of the cooking equipment for the year ended 31 March 2023 amounted to GH¢2.5 million. The draft Auditor’s Report for the year ended 31 March 2023 showed revenue of GH¢5.6 million.

The notes to the financial statements disclosed that since the introduction of the warranty, Obidi Ltd’s cooking equipment has been guaranteed to be free from defects under normal household use. As a result, no provision was recognised, as the amount of the obligation cannot be measured with sufficient reliability.

The draft report on the Financial Statements of Obidi Ltd for the year ended 31 March 2023 was unmodified.

Required: As the Managing Partner, comment on the draft report before you. (5 marks)

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  • 10 Marks

AAA – Nov 2019 – L3 – Q5b – Current Issues, Audit-related Services

Discuss the financial reporting implications of a restructuring and recommend auditor actions if financial statements are not amended.

You are the manager responsible for the audit of Obeyeyie Co. Ltd (OCL), a manufacturing company with a year ended 31 December 2018. The audit work has been completed and reviewed and you are due to issue the audit report in three days. The draft audit opinion is unmodified. The financial statements show revenue for the year ended 31 December 2018 of GH¢ 15 million, net profit of GH¢ 3 million, and total assets at the year-end are GH¢ 80 million.

The finance director of OCL e-mailed you this morning in addition to a WhatsApp message to tell you about the announcement yesterday of a significant restructuring of OCL, which will take place over the next six months. The restructuring will involve the closure of a factory and its relocation to another part of the country. There will be some redundancies and the estimated cost of closure is GH¢ 250,000. The financial statements have not been amended in respect of this matter.

Required:

i) Comment on the financial reporting implications, and advise the further audit procedures to be performed. (6 marks)

ii) Recommend the actions to be taken by the auditor if the financial statements are not amended. (4 marks)

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  • 10 Marks

Nov 2016 – L3 – Q5a – Reporting | Audit Evidence

Analyze the reluctance of Racific Co.’s directors to disclose going concern issues and the implications for the auditors.

You are the manager responsible for performing hot reviews on audit files where there is a potential disagreement between your firm and the client regarding a material issue. You are reviewing the going concern section of the audit file of Racific Co, a client with considerable cash flow difficulties, and other, less significant operational indicators of going concern problems. The working papers indicate that Racific Co is currently trying to raise finance to fund operating cash flows, and state that if the finance is not received, there is significant doubt over the going concern status of the company. The working papers concluded that the going concern assumption is appropriate, but it is recommended that the financial statements should contain a note to explain the cash flow problems faced by the company, along with a description of the finance being sought, and an evaluation of the going concern status of the company. The directors do not wish to include the note in the financial statements.

Required:
i) Consider and comment on the possible reasons why the directors of Racific Co. are reluctant to provide the note to the financial statements. (5 marks)

ii) Discuss the implications for the auditors if the directors refuse to include the disclosure note. (5 marks)

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  • 10 Marks

AAA – Nov 2016 – L3 – Q4a – Reporting

Determine audit opinions and actions for various scenarios in Zealow Company Ltd.'s audit.

a)

Upon the completion of the audit of Zealow Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following:

  • There was a material inconsistency between the financial information and other information in documents containing the financial statements and the auditor’s report thereon. The material inconsistency has been traced to the financial information, but management has refused to effect any change when requested to do so.
  • Stocks worth GH¢5 million were valued at cost in the financial statements. The review of the post-balance sheet events indicated that not all the stocks could be sold in the normal course of business. Some were damaged and some have become obsolete and slow moving. The total assets of the company is GH¢20 million. If the stocks were valued at net realizable value, the value would have reduced by GH¢2.0 million. The Directors have refused to allow the stocks to be valued at lower of cost and net realizable value and valued all the stocks at cost.
  • Management refused to allow auditors to carry out the circularization of debtors. The receivables figure was material in the financial statements. In addition, the auditors have not received a reply to the letter of enquiry sent to the company’s solicitors in respect of a major litigation affecting the company. The auditors assessed that the effect of the two items is both material and pervasive.
  • Subsequent events indicated that a major debtor has become insolvent. The amount involved was material. The directors refused to recognize the provision for a write-off of the amount.

Required:
i) For each of the items, recommend the type of audit opinion to be issued. (8 marks)

ii) Consider what action the auditors should take in view of management’s refusal to accept the recommendations and/or allow the auditor to carry out the necessary audit procedures. (2 marks)

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  • 8 Marks

AAA – Nov 2017 – L3 – Q5b – Reporting, Audit Evidence

Evaluate the suitability of the unmodified audit report issued for a client with significant going concern uncertainties and recommend improvements.

Your firm, Atinalp Consulting, is the Auditor of Ghana Kitchen Utensils Limited, a company that was incorporated in the 1960s, as part of Ghana’s industrial revolution after the Republic had attained independence. It manufactures and distributes kitchenware in the local and the West African markets. It has seen good old days but has suffered from the effects of cheap imports in the past few years.

The financial statements for the year ended 31 December 2015 have the following note:

Going Concern

The Company incurred a net loss for the year ended 31 December 2015 of GH¢24.8 million (2014: GH¢14.4 million) and as of that date its current liabilities exceeded its current assets by GH¢37.8 million (2014: GH¢24.9 million). The Company continues to incur losses.

The directors are engaging with strategic investors to help turn the fortunes of the Company around. A strategic investor has shown substantial interest in the Company and has approached the directors of the Company with the intent of acquiring a controlling interest in the Company. In September 2015, the shareholders passed a resolution authorizing the directors to enter into discussion with this strategic investor. If discussions are successful, this strategic investor will become a major shareholder. Based on preliminary discussions, the strategic investor is expected to further invest into the operations of the Company in addition to financing the necessary acquisition of shares directly from the company.

The investments and expertise of this strategic investor are expected to ensure a change of the Company to one that is profit-making. In pursuance of this transaction, the company has completed a professional revaluation of its assets and equipment.

The financial statements are prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realization of assets and settlement of liabilities will occur in the ordinary course of business.

The ability of the Company to continue as a going concern largely depends on the successful conclusion of the takeover by the strategic investor and its ability to execute plans to turn around the fortunes of the Company.

The opinion section of the audit report issued by your firm was as follows:

Opinion

In our opinion, the financial statements give a true and fair view of the financial position of Ghana Kitchen Utensils Limited as at 31 December 2015, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act, 1963 (Act 179).

Required:
Comment on the suitability of the report issued and recommend some improvement, if any, you believe would be necessary under the circumstances.

(8 marks)

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  • 10 Marks

AAA – May 2020 – Q5b – Reporting, Evaluation and Review

Discuss the impact of unresolved audit issues on the audit report and recommend completion stage procedures for two client scenarios.

You are the audit manager of Onipa Hia & Co., a local firm of Chartered Accountants located in Adabraka in the Greater Accra Region. You are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The Audit Senior has raised the following issues:

African Designs Co. Ltd (ADCL)
ADCL’s year-end is 30 September; however, subsequent to the year-end, the company’s sales ledger has been corrupted by a computer virus. ADCL’s Finance Director was able to produce the financial statements prior to this occurring; however, the audit team has been unable to access the sales ledger to undertake detailed testing of revenue or year-end receivables. All other accounting records are unaffected, and there are no backups available for the sales ledger. ADCL’s revenue is GH¢15.6 million, its receivables are GH¢3.4 million, and profit before tax is GH¢2 million.

Ghana Design Co. Ltd (GDCL)
GDCL has experienced difficult trading conditions, and as a result, it has lost significant market share. The cash flow forecast has been reviewed during the audit fieldwork, and it shows a significant net cash outflow. Management is confident that further funding can be obtained and so have prepared the financial statements on a going concern basis with no additional disclosures; the Audit Senior is highly skeptical about this. The prior year’s financial statements showed a profit before tax of GH¢1.2 million; however, the current year’s loss before tax is GH¢4.4 million, and the forecast net cash outflow for the next 12 months is GH¢3.2 million.

Required:
For each of the two issues:
i) Describe the impact on the audit report if the issues remain unresolved. (5 marks)
ii) Recommend procedures the audit team should undertake at the completion stage to try to resolve the issue. (5 marks)

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