Question Tag: Audit Planning

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  • 10 Marks

AAA – Nov 2024 – L3 – Q4a – Audit of Ghana’s Domestic Debt Exchange Programme

Describe how to plan and execute an audit of Ghana’s domestic debt exchange program.

a) The Minister for Finance on December 5, 2022, invited holders of domestic bonds to voluntarily exchange GH¢137.3 (US$14.3) billion of the bonds and notes including E.S.L.A and Daakye Bonds for a package of 12 new eligible domestic bonds.

As Director of Audit at the Ghana Audit Service, describe how you would plan and execute an audit of the implementation of Ghana’s domestic debt exchange program as a form of CPD for a section of staff of the Ghana Audit Service.

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  • 20 Marks

AAA – May 2017 – L3 – Q2 – Risk Management in Audits

Describe audit risk and its components, and identify inherent risks in auditing a charity.

Home Care is a charity that provides accommodation for unemployed young people.
The constitution of the charity explains how the charity’s income could be spent and also contains a requirement that administrative expenditure cannot exceed 10% of income in any year.

The charity’s income is mainly derived from voluntary cash donations collected by volunteers from members of the public. Recently, the charity’s income has been impacted by the current global economic and financial meltdown.

Required:

a. Describe the term ‘audit risk’ and explain the THREE elements of risk that contribute to total audit risk. (8 Marks)

b. Using the information provided in the question, identify FOUR areas of inherent risk to be taken into account in planning the audit of Home Care and explain the effect of each of these risks on the audit approach. (12 Marks)

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q7 – Audit of IT Systems and Data Analytics

Evaluates factors influencing the use of CAATs in audit planning and identifies solutions to address audit trail loss.

CAATs

The availability of Computer Assisted Audit Techniques (CAATs) should be considered by auditors when planning the nature, extent, and timing of tests in an audit. Auditors must determine their testing strategies which will depend on their choice of either using a manual testing method or a computer-assisted method.

Required:

(a) Explain FIVE factors that will determine auditors’ choice of method of testing in the planning of an audit in a computer environment. (10 Marks)

(b) Identify FIVE solutions to loss of audit trail. (5 Marks)

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q5 – Environmental and Sustainability Audits

Steps in the audit process to identify environmental issues and major social concerns in a company's social policy report.

Green Issues

Oil and Gas Limited is a company involved in the upstream petroleum activities in the Delta Region. The restiveness of the youth in this area of operation was a result of environmental degradation of the region. Your firm has just been appointed as the auditors to the company. During the preliminary planning stage of the audit, you realised that the environmental issues could have an impact on the financial statements.

Required:

(a) Enumerate EIGHT steps you would include in the audit process in order to highlight environmental issues that may be apparent in the client’s business.

(8 Marks)

(b) Identify SEVEN major social issues that an auditor will be concerned with in a company’s social policy report. (7 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

The Cinnamon Group is an international business made up of ten subsidiaries and a head office. You are the manager in charge at the firm undertaking the group audit, but there are separate local auditors for the Cayenne subsidiary in the United States, the Habenaro subsidiary in Mexico, and the Hybrid subsidiary in Columbia. You are aware of the following information:

  1. Hybrid Issues: Hybrid is a loss-making subsidiary with current year-end losses totaling ₦27 million. There are significant control problems, high levels of bad debts, and 25% staff turnover. The local auditors have stated their intention to give a qualified opinion for the year just ended due to material issues.
  2. Cayenne Financial Year Misalignment: Cayenne operates to a financial year ending October 2013, differing from the group’s December 2013 year-end.
  3. Habenaro Sale: Shortly after the year-end in January 2014, the Cinnamon Group announced the sale of Habenaro for ₦250 million, and this disposal is currently ongoing.
  4. Loan Guarantees: The Cinnamon Group is guaranteeing loans of approximately ₦100 million for its subsidiaries.

Required:

a. Set out how you would plan and control the group audit of the Cinnamon Group.
(5 Marks)

b. Consider the impact of each of the above issues on the group audit.
(10 Marks)

c. Explain the nature of the relationship between your firm and the auditors of the subsidiaries, making particular reference to the extent to which your firm may rely on the component auditors’ work and to the considerations involved where joint audits are conducted.
(5 Marks)

(Total: 20 Marks)

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  • 30 Marks

AAA – Nov 2014 – L3 – SA – Q1 – Group Audits

Identify business risks, audit planning effects, and implications of acquisitions for the consolidated financial statements audit of Wasp Ltd.

You are an audit manager in Ruby & Co, a firm of Chartered Accountants. One of your audit clients, Wasp Ltd., provides satellite broadcasting services in a rapidly growing market.

In February 2014, Wasp Ltd. purchased Xstatic Ltd., a competitor group of companies. Significant revenue, cost, and capital expenditure synergies are expected as the operations of Wasp Ltd. and Xstatic Ltd. are being combined into one group of companies.

The following financial and operating information consolidates the results of the enlarged Wasp Ltd. group:

Year-end 31 December 2014 (Budget) 2013 (Actual)
Revenue ₦6,827m ₦4,404m
Cost of Sales (₦3,109m) (₦1,991m)
Distribution Costs and Administrative Expenses (₦2,866m) (₦1,700m)
Research and Development Costs (₦25m) (₦22m)
Depreciation and Amortization (₦927m) (₦661m)
Interest Expense (₦266m) (₦202m)
Loss Before Tax (₦366m) (₦172m)
Number of Subscribers 14.9m 7.6m
Average Revenue Per Subscriber (ARPS) ₦437 ₦556

In November 2014, Wasp Ltd. purchased MTbox Ltd., a large cable communications provider in Gambia, where your firm has no representation. The financial statements of MTbox Ltd. for the year ending 31 December 2014 will continue to be audited by a local firm of Chartered Accountants. MTbox Ltd.’s activities have not been reflected in the above estimated results of the group.

Wasp Ltd. is committed to introducing its corporate image into Gambia.

In order to sustain growth, significant costs are expected to be incurred as operations are expanded, networks upgraded, and new products and services introduced.

Required:

a. Identify and describe the principal business risks for the Wasp group. (9 Marks)

b. Explain what effect the acquisitions will have on the planning of Ruby & Co’s audit of the budgeted consolidated financial statements of Wasp Ltd. group for the year ending 31 December 2014. (10 Marks)

c. Explain the role of a Letter of Comfort as evidence in the audit of financial statements. (6 Marks)

d. Discuss how non-consolidated entities under common control affect the scope of an audit and the audit work undertaken. (5 Marks)

(Total 30 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Outline audit procedures to identify material subsequent events and explain the purpose and importance of subsequent events review.

You have just concluded the audit of Roico Limited for the year ended 31 December, 2012. During the review of the working paper file, the partner in charge discovered that no information is available on activities after year-end. The partner instructed the team leader to carry out a review of the company’s activities after year-end. The team leader was not comfortable with the instruction and wants to know why it is necessary to examine accounting information relating to the next accounting period.

You are required to:

(a) Enumerate the audit procedures which would be carried out in order to identify any material subsequent events. (10 Marks)

(b) Discuss the purpose and importance of subsequent events review. (5 Marks)

(Total: 15 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q4 – Audit of IT Systems and Data Analytics

Discuss factors influencing the choice of audit testing methods in a computer environment and propose solutions to address the loss of audit trail.

The availability of computer-assisted audit techniques should be considered by the auditor when planning the nature, extent, and timing of tests in an audit. The auditor must determine his testing strategies which will depend on his choice of either using a manual testing method or computer-assisted method.

You are required to:

(a) Explain FIVE factors that will determine the auditor’s choice of method of testing in the planning of an audit in a computer environment. (10 Marks)

(b) Identify FIVE solutions to loss of audit trail. (5 Marks)

(Total: 15 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q3 – Audit of Specialized Industries

Identify seven key audit concerns in the extractive industry, focusing on labor issues, community impact, and compliance with regulations.

XYL Limited has been granted a license to operate in the extractive industry in the middle belt of the country, where there is an abundant mineral resource called Topaz. This mineral is in great demand in the manufacturing industries of Western Europe.

Due to the need for heavy equipment requiring intensive capital outlay, indigenous companies could not invest in the sector. Moreover, the technical expertise required in mining this product is not locally available.

The company was not only granted the license but also granted a pioneer status. The local community where operations take place supply the necessary labor, both skilled and unskilled. After a year, the workers’ union found out that they were paid far less than what the company is paying in similar operations in nearby countries. As a result of labor union activities, many workers were retrenched, and the company started making use of locals who had just completed secondary school education. Union activities were proscribed.

Being an extractive industry, the local people were affected as they could no longer carry out their economic activities as before.

Your firm has just been appointed as auditors of XYL Limited after three years of operation.

You are required to:

Explain SEVEN areas of concern that would be of interest to you as auditor and provide reasons for their importance. (15 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q2 – Audit Planning and Strategy

Outline reasons for audit planning and describe procedures for planning the audit of an existing client.

Planning an audit involves establishing the overall audit strategy for the engagement and development of an audit plan.

You are required to:

(a) Enumerate SEVEN reasons for audit planning. (7 Marks)

(b) Explain EIGHT audit procedures you would consider in planning the audit of an existing client. (8 Marks)

(Total: 15 Marks)

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  • 10 Marks

AAA – May 2016 – L3 – Q3a – Planning | Audit evidence

Use analytical procedures to assess the financial statement extracts and their impact on the audit of accounts receivable.

Your audit and assurance firm has just accepted a financial statement audit engagement from Lunch Special Ltd., a restaurant that prepares lunch for the general public and on special orders. The company operates at a number of sales points in the city.

The company uses a computerised system that has networked all the Sales Points to its Head Office. Your firm is planning the new audit and has received the draft financial statements for the year. As the audit senior to lead the engagement team, you are examining the financial statements, an extract of which is shown below:

Required:
i) Using analytical procedures at the planning stage, state your observations drawn from the extracts from the draft financial statements and how they may impact your audit of the Accounts Receivables. (10 marks)

 

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  • 5 Marks

AAA – May 2016 – L3 – Q1a – The regulatory environment | The audit approach | Planning

Discuss types of information indicating non-compliance and evaluate the impact on financial statements per ISA 250.

a) Everclean Water Limited processes and packages portable water for local consumption. The factory is situated in a valley in a first-class residential area of the city. A major road used by most residents runs in front of the factory. Often this road is flooded with spill-over of water from the factory thus hindering vehicular and pedestrian movement. Management of the company on such occasions uses the services of a contractor to pump out the water from the road. This situation contravenes the provisions of the Factories, Offices and Shops Act 1970, Act 328. Everclean Water Limited has engaged Nadab and Associates as the auditors. In their preliminary tour of the factory the senior partners became aware of the flooding situation in the area. Back in the office the senior partners consulted ISA 250 “Consideration of laws and regulations in an audit of financial statements” for guidance on the auditor’s responsibility to consider laws and regulations in an audit of financial statements before carrying out the audit assignment.

i) State examples of the possible type of information that might have come to the auditors’ attention that might indicate non-compliance with the Factories, Offices, and Shops Act. (5 marks)

ii) Evaluate the possible effect on the financial statements for non-compliance with the law according to ISA 250. (5 marks)

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  • 20 Marks

AAA – Nov 2019 – L3 – Q2 – The audit approach, Planning, Audit evidence

Evaluate five business risks facing Retail Specialist Co. Ltd (RSCL) during audit planning.

Retail Specialist Co. Ltd (RSCL) is a large company, operating in the retail industry, with a year ended 31 December 2018. You are a manager in Jen & Co, responsible for the audit of Retail Specialist Co. Ltd (RSCL), and you have recently attended a planning meeting with Olivia Danso, the finance director of the company. As this is the first year that your firm will be acting as auditor for Retail Specialist Co. Ltd (RSCL), you need to gain an understanding of the business risks facing the new client. Notes from your meeting are as follows:

Retail Specialist Co. Ltd (RSCL) sells clothing, with a strategy of selling high fashion items under the RSCL brand name. New ranges of clothes are introduced to stores every eight weeks. The company relies on a team of highly skilled designers to develop new fashion ranges. The designers must be able to anticipate and quickly respond to changes in consumer preferences. There is a high staff turnover in the design team.

Most sales are made in-store, but there is also a very popular catalogue, from which customers can place an order online, or over the phone. The company has recently upgraded the computer system and improved the website, at significant cost, in order to integrate the website sales directly into the general ledger, and to provide an easier interface for customers to use when ordering and entering their credit card details. The new online sales system has allowed overseas sales for the first time.

The system for phone ordering has recently been outsourced. The contract for outsourcing went out to tender and Retail Specialist Co. Ltd (RSCL) awarded the contract to the company offering the least cost. The company providing the service uses an overseas phone call centre where staff costs are very low.

Retail Specialist Co. Ltd (RSCL) has recently joined the Ethical Trading Initiative. This is a ‘fair-trade’ initiative, which means that any products bearing the RSCL brand name must have been produced in a manner which is clean and safe for employees, and minimises the environmental impact of the manufacturing process. A significant advertising campaign promoting Retail Specialist Co. Ltd (RSCL)’s involvement with this initiative has recently taken place. The RSCL brand name was purchased a number of years ago and is recognised at cost as an intangible asset, which is not amortised. The brand represents 12% of the total assets recognised on the statement of financial position.

The company owns numerous distribution centres, some of which operate close to residential areas. A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm. The authority also monitors the noise level of each centre, and can revoke the operating licence if a certain noise limit is breached. Two licences were revoked for a period of three months during the year.

To help your business understanding, Olivia Danso has e-mailed to you extracts from the draft statement of comprehensive income, and the relevant comparative figures, which are shown below.

Extract from draft Statement of Comprehensive Income
Year ending 31 December

Revenue: Retail outlets 2018 Draft (GH¢ million) 2017 Actual (GH¢ million)
Phone and on-line sales 1,030 1,140
Total revenue 425 395
Operating profit 1,455 1,535
Finance costs 245 275
Profit before tax (25) (22)
Profit before tax 220 253

Additional Information:

Number of stores 2018 Draft 2017 Actual
Number of stores 210 208
Average revenue per store GH¢ 4·905 mn GH¢ 5·77 mn
Number of phone orders 680,000 790,000
Number of on-line orders 1,020,000 526,667
Average spend per order GH¢ 250 GH¢ 300

Required:

a) Prepare briefing notes to be used at a planning meeting with your audit team, in which you evaluate FIVE (5) business risks facing Retail Specialist Co. Ltd (RSCL) to be considered when planning the final audit for the year ended 31 December 2018.

(10 marks)

b) Using the information provided, identify and explain FIVE (5) risks of material misstatements that may affect the financial statements you are going to audit. (10 marks)

 

 

 

 

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  • 10 Marks

AAA – Mar 2024 – L3 – Q1b – The regulatory environment, Practice management, The audit approach

Discussion of issues with an audit engagement letter for Kumanji Ltd in accordance with ISA 210.

Ayesu & Associates, a reputable auditing firm, was approached by Kumanji Ltd to conduct an annual financial audit for the fiscal year ending December 31, 2023. Below is the audit engagement letter.

Re: Engagement Letter for the Audit of Financial Statements of Kumanji Ltd

We are pleased to confirm the terms of our engagement for the audit of your financial statements for the year ended December 31, 2023. This letter will serve as our agreement with Kumanji Ltd and outlines the scope of our services, responsibilities, and fee structure. Please review this letter carefully and let us know if you have any questions or concerns.

Audit Period: The audit will cover the financial statements of Kumanji Ltd for the fiscal year beginning January 1, 2023, and ending on March 31, 2023.

Audit Fees: Our fee structure will be based on a fixed fee of GH¢5,000 for the audit, payable in two installments. The first installment of GH¢2,500 will be due at the commencement of the audit, and the remaining GH¢2,500 will be due upon completion of the audit.

Timeline for Reporting: We will deliver the audit report and financial statements to you within two months after the conclusion of our fieldwork.

Conflicts of Interest: We do not anticipate any conflicts of interest that may affect our independence or objectivity during the audit. If any conflicts arise, we will address them promptly.

Audit Scope: We will perform audit procedures in accordance with Generally Accepted Auditing Standards (GAAS) to obtain reasonable assurance about whether the financial statements are free from material misstatement. Specific audit procedures will be determined during the audit process.

Contingency Plan: We do not have a contingency plan in place for unexpected disruptions or events that may affect the audit process.

Please acknowledge your agreement to the terms outlined in this letter by signing and returning a copy to us at your earliest convenience. If you have any questions or require clarification on any aspect of this engagement, do not hesitate to contact us.

We look forward to working with you and providing high-quality audit services to Kumanji Ltd. Thank you for entrusting us with this important engagement.

Required:
In accordance with ISA 210: Agreeing the terms of audit engagements, discuss FIVE (5) issues with the engagement letter. (10 marks)

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  • 10 Marks

AAA – May 2020 – L3 – Q1b – Planning, Audit evidence

Analyze specific issues pertinent to the audit of Mobilefone Ltd, including risks associated with the rapid growth of the client, weak internal controls, and the introduction of new products.

Mobilefone Ltd (Mobilefone) is a large communication group which operates from several locations around the world. It has recently announced plans to expand its operations where it will offer a range of mobile communication facilities and provide internet services such as access, navigation, and internet-related software and services.

You are an Audit Manager of Kasim Hamza & Co. and you have been assigned with the planning work for the audit of Mobilefone, and this will be the second year in which your firm has provided its audit services.

You have just met with the Finance Director (FD) of Mobilefone prior to agreeing on the engagement letter for this year. The FD has informed you that Mobilefone has continued to grow quickly, with financial accounting systems changing rapidly and appropriate control systems being difficult to maintain. Additional services in terms of review and implementation of control systems have been requested. An internal audit department has recently been established within Mobilefone, and the controller wants you to ensure that external audit work is limited by using this department.

You have also learned that Mobilefone is to market a new type of mobile telephone, which is able to intercept messages from the emergency services. The legal status of this telephone is unclear at present, and development is not being publicized. The granting of the franchise to market the mobile telephone is dependent on the financial stability of Mobilefone. The FD has indicated that Kasim Hamza & Co. may be asked to provide a report to the mobile telephone franchiser regarding Mobilefone’s cash flow forecast for the year ending 31 March 2019, to support the franchise application.

Required:
As part of risk assessment procedures for the audit of Mobilefone for the year ending 31 March 2019, analyze FIVE (5) specific issues pertinent to this particular audit.
(10 marks)

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  • 12 Marks

AAA – Nov 2018 – L3 – Q1a – The audit approach, Planning

Analytical review and risk assessment based on the draft statement of profit or loss for Black Gold Co. Ltd

 

Your audit firm, Beauties Consult, is going to audit for the first time the financial statements of Black Gold Co. Ltd. for the year ended 31 December, 2017. Black Gold Co. Ltd. operates a chain of fuel filling stations in the Greater Accra, Ashanti and Western Regions of Ghana. Customers pay cash for the main products – premium, diesel, and kerosene.

According to its directors, the company has had a “challenging” year and is renegotiating its bank overdraft facility with its bankers. The Statement of Profit or Loss for the year ended 31 December, 2016, is shown below together with the draft Statement of Profit or Loss for the year ended 31 December, 2017.

Required:
As head of the audit team, you are carrying out risk assessment at the planning stage. Perform an analytical review of the draft statement of profit or loss to identify possible risk areas requiring further audit work and provide the necessary risk responses. (12 marks)

 

 

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  • 20 Marks

AAA – May 2018 – L3 – Q1 -Planning, Audit Evidence, Evaluation and Review

This set of questions requires a comprehensive approach to investigating the losses incurred by PQR Ltd., focusing on key areas such as planning the investigation, evaluating potential undervaluation of inventory, performing tests to quantify any undervaluation, identifying reasons for high material consumption, and verifying the accuracy of material consumption in the management accounts. The investigation involves considerations like resource allocation, scope definition, inventory count accuracy, valuation methods, wastage, theft, and cut-off procedures.

As the Senior Audit Manager in MNO & Co, a firm of Chartered Accountants, you have
just had a meeting with a Senior Partner at the firm, in which he informed you that you
have to carry out an investigation requested by the Management of ECO Ltd.

i) One of ECO Ltd’s subsidiaries, PQR Ltd, has been making losses for the past year. ECO Ltd’s management is concerned about the accuracy of PQR’s most recent quarter’s management accounts. The summarised statements of profit or loss for the last three quarters are as follows:

Quarter to 31-Mar 2018

GH¢’000

 Quarter to 31-Dec 2017

GH¢’000

 Quarter to 30-Sep 2017

GH¢’000
Revenue 429  334  343
Opening inventory 180 163 203
Materials 318 251 200
Direct wages 62 54 74
560 468 477
Less closing inventory (162) (180) (163)
Cost of goods sold 398 288 314
Gross profit 31 46 29
Less overheads (63) (75) (82)
Net loss (32) (29) (53)
Gross profit (%) 7.2% 13.8% 8.5%
Materials (% of revenue) 78.3% 70.1% 70.0%
Labour (% of revenue) 14.5% 16.2% 21.6%

ii) ECO Ltd’s management board believes that the high material consumption as a percentage of revenue for the quarter to 31 March 2018 is due to one or more of the following factors:

  • Under-counting or under-valuation of closing inventory
  • Excessive consumption or wastage of materials
  • Material being stolen by employees or other individuals

iii) PQR Ltd has a small number of large customers and manufactures its products to each customer’s specification. The selling price of the product is determined by:

  • Estimating the cost of materials;
  • Estimating the labour cost; and
  • Adding a mark-up to cover overheads and provide a normal profit.

iv) The estimated costs are not compared with actual costs. Although it is possible to analyse purchase invoices for materials between customers’ orders, this analysis has not been done.

v) A physical inventory count is carried out at the end of each quarter. Items of inventory are entered on inventory sheets and valued manually. The company does not maintain perpetual inventory records and a full physical count is to be carried out at the financial year end, 30 June 2018.

vi) The direct labour cost included in the inventory valuation is small and should be assumed to be constant at the end of each quarter.

vii) Historically, the cost of materials consumed has been about 70% of revenue. The management accounts to 31 March 2018 are to be assumed to be correct.

Required:

a) Identify and describe the matters that you should consider and the procedures you should carry out in order to plan an investigation of PQR Ltd.’s losses. (10 marks)

b) Explain the matters you should consider to determine whether closing inventory at 31 March 2018 is undervalued. (3 marks)

c) Describe the tests you should plan to perform to quantify the amount of any undervaluation. (3 marks)

d) Identify and explain the possible reasons for the apparent high materials consumption in the quarter ended 31 March 2018. (2 marks)

e) Describe the tests you should plan to perform to determine whether materials consumption, as shown in the management accounts, is correct. (2 marks)

(Total: 20 marks)

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  • 10 Marks

AAA – April 2022 – L3 – Q1c – Audit evidence, Assurance services

Discuss the challenges and audit approaches in performing an assurance engagement on an electronic processing system.

K. O. and Associates, a firm of Chartered Accountants, has accepted a statutory audit engagement from Special Cream Ltd, a bookshop with many sales points across the country. In 2021, the company implemented a computerised system that has been networked to all sales points to the Head Office in Accra. In the middle of 2021, the company started accepting mobile money as a means of payment in addition to cash and cheque payment. Mobile money payments are confirmed with an accounts staff before books are supplied.

In planning the audit of Special Cream Ltd, the Audit Manager, Samuel Alhassan, identified risks associated with electronic processing systems which provide additional challenges for auditors.

Required: i) Discuss FOUR (4) challenges K. O. and Associates would encounter in performing an assurance engagement on the electronic processing system. (4 marks)

ii) Discuss FOUR (4) audit approaches K. O. and Associates should adopt in performing an assurance engagement on an electronic processing system. (6 marks)

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