Question Tag: Audit Procedures

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  • 10 Marks

AAA – Nov 2024 – L3 – Q5b – Anti-Money Laundering Regulations and Auditor Responsibilities

Discuss anti-money laundering regulations in Ghana and auditors' responsibilities in compliance.

Lamsey Jewelers is a family-owned business specializing in high-end jewellery, located in Dunkwa-On-Offin in the Central Region of Ghana. The company sources gold from various suppliers in the small-scale mining sector. Recently, the Minerals Commission received anonymous tips suggesting that Lamsey Jewelers may be involved in laundering money through its operations. Authorities suspect that the business could be used to conceal the origins of illicit funds through gold purchases and sales.

To investigate these suspicions, regulatory authorities have appointed Baba Yara and Associates, an independent auditing firm, to conduct a thorough review of Lamsey Jewelers’ operations and financial transactions. During the audit, Baba Yara and Associates discovered that Lamsey Jewelers has been accepting large cash payments for custom jewellery orders without conducting proper due diligence on the customers. Several transactions involving cash payments exceed typical retail amounts, raising suspicions of potential money laundering.

Required:

i) Discuss the key legal and regulatory requirements in Ghana related to anti-money laundering relevant to Lamsey Jewelers.

ii) Discuss the obligations placed on professional firms such as Baba Yara and Associates in relation to money laundering.

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  • 6 Marks

AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

Baaba & Associates, an audit firm, is conducting a year-end audit of Rashida LTD. The audit team is particularly concerned about the accuracy of the accounts receivable balance reported on the statement of financial position as of December 31, 2023. Therefore, as part of their audit procedures, they need to perform substantive tests to identify any material misstatements, errors, or fraud that could impact the accuracy of the financial statements.

Required:
Explain THREE substantive tests that the audit team at Baaba & Associates should perform to obtain sufficient appropriate audit evidence regarding the accuracy of Rashida LTD’s accounts receivable balance.

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  • 4 Marks

AA – Nov 2024 – L2 – Q5a – Tests of Control and Methods for Testing Controls

Explain two tests of control and their corresponding methods of testing.

Oboshie Audit Firm has been engaged to audit the financial statements of Abakah Manufacturing LTD for the year ended December 31, 2023. During the planning phase of the audit, the audit team identified that Abakah Manufacturing LTD relies heavily on its internal control system to ensure the accuracy and completeness of its financial reporting.

Required:
i) Explain TWO tests of control to be performed by Oboshie Audit Firm to evaluate the effectiveness of Abakah Manufacturing LTD’s internal controls over its financial reporting.

ii) Identify a method that should be used under each test of control in (i) above.

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  • 15 Marks

AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

Bob Removals Limited is a removals company. In the year ended December 31, 2015, the company made a trading profit of N800,000. You are the manager in charge of the audit.
The following issues have arisen:

(i) A customer is suing the company for N1 million for damage caused to antique furniture. The company is defending the claim and believes that the furniture was a reproduction as opposed to antique and therefore worth only N100,000.
(ii) A balance due from Safe Storage in respect of sub-contract work, of N300,000, has been outstanding for over six months. Your firm has been asked by Bob Removals’ accountant not to write to Safe Storage for direct confirmation of this amount as the latter company objects to such letters. You have been assured by the accountant that the relationship between the two companies is good and that the outstanding balance will be paid.
(iii) Bob Removals has recently invested in four new removal vans and is currently carrying out extensive refurbishment of its premises. As a result of this expenditure, the company has reached its overdraft limit of N500,000.

Required:

For each of the above issues:
a. State, with reasons, the audit work that you would expect to find when undertaking your review of the audit working papers for the year ended December 31, 2015.
b. Draft the relevant sections dealing with these issues of the written representation letter you would wish the directors to sign.

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  • 15 Marks

AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

Badagry Yachting and Marina (BYM) have a marina on the West Coast of Nigeria and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of BYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

(i) 30% of the yachts on sale by BYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, BYM have also obtained separate finance on these yachts, which are therefore in effect being ‘double financed’.
(ii) Ten yachts shown as assets by BYM cannot be located, with no explanation other than that they have not been sold. These yachts are worth approximately N50 million.
(iii) Long delays have occurred in performing reconciliations, with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken.
(iv) Sales have been overstated by N100 million in the current financial statements.
The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified.

Required:

a. Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error. (6 Marks)
b. Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (3 Marks)
c. Describe what steps you would take to further investigate and then report on the matters referred to above. (6 Marks)

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  • 15 Marks

AAA – May 2017 – L3 – Q6 – Group Audits

Draft a memorandum describing challenges, procedures, and instructions for a group audit engagement involving subsidiaries and associates in different countries.

You are an Audit Senior in ABC firm of Chartered Accountants, a Pan-African audit firm. You just resumed from your examination leave and received the following email from Mrs. Chidi, an Audit Manager in your firm.

Dear Audu,

Welcome back from leave and best of luck in your examination.
We have just been appointed as financial statements auditors to Gbogbonise Plc., a conglomerate having its head office in Lagos. Our preliminary discussion with the group Chief Financial Officer (CFO) indicates that the company has five subsidiaries and two associates. One of the subsidiaries is incorporated and operates in Ghana while one of the associates is incorporated and operates in The Gambia. The other members of the group are incorporated and operate in Nigeria. The group operations cover automobiles, agriculture, and manufacturing.
We will be meeting with the audit committee in three weeks to present our audit plan and strategy for the assignment.

Required:

a. Challenges that may be encountered in this engagement. (5 Marks)

b. General procedures that may be performed on significant and non-significant components. (3 Marks)

c. Salient items to be included in the group audit instructions. (3 Marks)

d. Procedures to be performed relating to the consolidation of the group. (4 Marks)

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  • 20 Marks

AAA – May 2019 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Analyze the auditor's objectives, implications of going concern assumptions, directors' responsibilities, and risk assessment for going concern status.

Itanforiti Publishers Limited has been in the printing and publishing business for many years in Ibadan. The company has been performing well with a competitive advantage over many companies in the industry as a result of the engagement of a high-profile team of personnel and in-house printing of its published books.

The board of directors comprises two brothers and their wives. The older brother is the chairman, and the younger, the managing director. The fortunes of the company started dwindling in 2013 when conflicts could no longer be resolved amicably among the members of the board of directors.

The chairman, being a majority shareholder, assumed executive powers by combining the roles hitherto played by the managing director with his own as executive chairman in 2015. Governance of the company became unsettled, and key staff of the organization started resigning in turn.

In 2016, the financial reports of the company revealed its inability to pay creditors, and the supply of raw materials became irregular. In addition, the level of receivables became too high with a significant figure of doubtful and irrecoverable debts.

Your firm acts as auditors to the company, and you have been presented with the financial statements for the year ended 31st December 2017, for audit. The financial statements were prepared on a going concern basis.

Required:
a. Identify and explain the objectives of the auditor in the area of going concern in accordance with International Standards on Auditing (ISA 570). (5 Marks)
b. Explain the going concern assumption and the implications for the financial statements if the entity is not a going concern. (5 Marks)
c. Explain the going concern duties of the directors. (3 Marks)
d. Evaluate the risk assessment procedures to be performed by the auditor on the going concern status of the entity. (ISA 570). (7 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q6 – Review of Subsequent Events and Going Concern Assumptions

Evaluation of going concern issues at Wazobia Nigeria Limited and audit procedures to address identified risks.

Wazobia Nigeria Limited is a manufacturer of corrugated zinc roofs. Due to the economic recession, revenue continued to decline each year for the past three years. You are aware that the company had only N300,000 in cash at the year end. Extracts from the draft financial statements and other relevant information are given below.

Additional information:
(i) The bank loan was obtained in 2016 when the company started recording losses. The collateral for the loan is a fixed and floating charge on the assets of the company to the tune of the loan balance. The first tranche of repayment of the loan is due in 2019 and the amount repayable is N300 million.

(ii) Wazobia renegotiated its credit line with a major supplier and extended payment terms from 60 days to 90 days in order to improve working capital.

(iii) The terms for accessing the undrawn facilities stipulate that the company must meet certain covenants, including that interest cover is maintained at 2:1 and the ratio of bank loan to total assets does not exceed 1:1.

(iv) The contingent liability relates to litigation against the company by one of its customers for an alleged breach of contract to supply roofing sheets based on agreed specifications.

Required:
(a) Identify and explain the matters which may cast significant doubt on the company’s ability to continue as a going concern in the foreseeable future. (10 Marks)
(b) Recommend the appropriate audit procedures to be performed to adequately address the going concern matters identified. (10 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q4 – Advanced Audit Planning and Strategy

Discussion of engagement letter elements, reasons for rejecting an engagement, procedures for new client acceptance, and opening balances audit.

As a Senior Manager in Inagbe and Co. (Chartered Accountants), you act as a mentor to some of the young auditors in practice. As a mentor, you discuss frequently with your young mentees on professional and personal matters. Zainab Nigeria Limited is a cosmetics company and has just recently appointed Inagbe and Co. as its auditor. One of your young mentees has been asked to be part of the engagement team. The mentee has come to you for some advice and you decided to use the opportunity to explain the process and procedures to be carried out when accepting a new engagement.

Required:

(a) Explain the elements of an engagement letter. (7 Marks)
(b) Discuss the circumstances under which an auditor may reject an audit engagement. (3 Marks)
(c) Discuss the procedures that an audit firm needs to carry out before accepting to audit a new client. (4 Marks)
(d) Explain the audit procedures that should be carried out on opening balances. (6 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q3 – Audit Completion and Final Review

Evaluation of audit evidence sufficiency, recommendations for further procedures, and reporting internal control deficiencies in accordance with ISA 265.

You are the manager responsible for the audit of Seraphim Nigeria Limited, a manufacturing company which produces biscuits. The company’s financial year ended on December 31, 2018, and you are reviewing the audit work which was completed on a number of material balances and transactions: assets held for sale, capital expenditure, and payroll expenses.

A summary of the audit procedures carried out by the audit team is given below:

(i) Provision for Restructuring:
The board approved changes in the management structure of the company. The directors determined that the company was ‘top heavy’ and decided that 80% of the middle management staff should be laid off. The Finance Director had estimated the cost of the restructuring to be N180 million and a manual journal has been posted to record a provision for restructuring costs. The Finance Director has overridden the segregation of duties control by posting this journal and approving it himself. He told the team that he had done it because he wanted to preserve the confidentiality of the transaction. The audit team discussed the planned restructuring with the Managing Director (MD). The audit team relied on the discussions with the MD and the board resolution approving the restructuring as audit evidence.

(ii) Investments:
The company’s investments trading portfolio is outsourced to a fund manager – Hala Funds Management Limited, which processed all trades done by the company. The investments balance and income on investments recorded in the financial statements have been traced and agreed to year-end reports from the service organization. The audit team relied on the reports from the fund manager which was given to them by the Chief Financial Officer (CFO) of the company.

Based on discussions, the audit team determined that the CFO had not classified the investments in line with the requirements of IFRS 9, and the interest income on its bonds investment was computed using the contractual rate.

The company made some investments directly without passing them through the fund manager, which is not in line with the company’s policy. The audit team traced and agreed those transactions to the bank statement. The amounts of investments made directly without involving the fund manager were not considered material.

Required:
For each of the two matters described above:
(a) Comment on the sufficiency and appropriateness of the audit evidence obtained. (10 Marks)
(b) Recommend further audit procedures to be performed by the audit team. (8 Marks)
(c) Explain the matters which should be included in a report in accordance with ISA 265: Communicating Deficiencies in Internal Controls to Those Charged with Governance and Management. (2 Marks)

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  • 20 Marks

AAA – May 2017 – L3 – Q1 – Planning | Audit evidence | Evaluation and review

Assess the audit implications of subsequent events involving bad debt and legal actions, describe subsequent events review, and recommend audit procedures for identifying material subsequent events.

You are the audit manager in charge of the audit of Serwah Ghanaba Ltd for the year ended 31 December 2014. The partner in charge of the audit instructs you to carry out a review of the company’s activities during the financial year end. The following issues came up during the review.

i) On 28 February 2015, Jessica Mensah, who owed the company GH¢500,000.00, was killed by some robbers on her way to Accra after a visit to her hometown. The amount was part of the GH¢800,000.00 debtors appearing on the statement of financial position for the year end 31 December 2014. It was realized that it will not be possible to recover the amount from the family of Jessica Mensah.

ii) In another development, the marketing director of the Company, Stephen Odoi, who was due to retire on 31 March 2015, embarked on a 6-month leave prior to retirement with effect from 1 October 2014. Investigation instituted in May 2015 revealed that Mr. Stephen Odoi took a contract appointment with another company from 1 November 2014. As a result of the investigation, the company decided to bring an action against Mr. Stephen Odoi to recover the salary paid to him from 1 November 2014 to 31 March 2015.

Required:

a) Assess the audit implications of issues (i) and (ii) above. (10 marks)

b) Describe the nature and purpose of subsequent events review. (5 marks)

c) Recommend the audit procedures which would be carried out in order to identify any material subsequent events. (5 marks)

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  • 10 Marks

AAA – May 2016 – L3 – Q4b – Audit-related services | Planning

Suggest procedures for reviewing interim financial information for a company.

Dabiasem Insurance 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 Dabiasem Insurance Co. Ltd. This year’s interim financial information has been prepared and is 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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  • 10 Marks

AAA – May 2016 – L3 – Q3b – Audit evidence | Planning

Outline procedures for reviewing the opening balances in draft financial statements.

Demonstrate how you will review the opening balances in the draft financial statements. (10 marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – Q2 – Audit Evidence, Evaluation and Review

Discuss the need for financial statement amendments and audit procedures for three subsequent events: a lawsuit, a warehouse flood, and a receivable.

Omega Ltd was incorporated to engage in the production, supply and retail of sachet water. The final audit for the Financial Statements ending 31 December 2022 is nearly complete and it is proposed that the Financial Statements and Audit Report will be signed in March 2023. Revenue for the year is GH¢78 million and profit before tax is GH¢7.5 million. The following events have occurred subsequent to the end of the reporting year of the company.

  1. Lawsuit:
    A key supplier of Omega Ltd is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by the supplier is GH¢1 million. This has been disclosed as a contingent liability in the Notes to the Financial Statements. However, correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Omega Ltd of GH¢0.6 million. It is likely that the company will agree to this.
    (7 marks)
  2. Warehouse:
    Omega Ltd has three warehouses sited in different locations. Following extensive rain on 20 February, 2023, one of the warehouses was completely flooded and as a result, all inventory in the warehouse valued at GH¢1 million was damaged and has been disposed off. The insurance company has already been contacted. No amendments or disclosures have been made in the financial statements.
    (7 marks)
  3. Account Receivables:
    A customer of Omega Ltd has been experiencing cash flow problems and its year-end balance is GH¢0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. Omega Ltd believes that as the company has been trading for many years, they will receive some, if not full payment from the customer, hence the receivables balance has not been adjusted.
    (6 marks)

Required:
Using the three issues above: a) Discuss whether the financial statements require amendment;
b) Describe audit procedures that should be performed in order to form a conclusion on the amendment; and
c) Explain the impact on the audit report should the issues remain unresolved.

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  • 10 Marks

AAA – Nov 2016 – L3 – Q5b – Assurance Services | Audit Evidence

Evaluate the environmental issues that could lead to misstatements and recommend audit actions for J & K Mining Company.

J & K Mining Company operates in the Abuakwa Community of the Eastern Region as a Sand Wining Company. The youth of the area had been opposing the activities of the company of late. Sasana, the Managing Director of J & K Mining Company, approached Kaku & Associates, a Chartered Accounting firm, to accept an attest engagement to examine and report on the environmental issues of J & K Mining Company Ltd. for the year ended 31 December 2013.

Required:
i) Evaluate the environmental issues that may lead to the risk of misstatements in the Financial Statements. (3 marks)

ii) Recommend the actions and the audit procedures that Kaku and Associates should undertake when they realize that J & K Mining Company Ltd. has environmental issues that may affect the Financial Statements. (7 marks)

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  • 10 Marks

AAA – Nov 2017 – L3 – Q1b – Audit Evidence, The Audit Approach

Describe the auditor's procedures and evidence required in relation to related party transactions.

Central to a number of government investigations in various countries have been companies trading with organisations or individuals other than at arm’s length. Such transactions were made possible by a degree of control or influence exercised by directors over both parties. Directors are responsible for the identification of such related party relationship and transactions, however, the auditor has a responsibility of ensuring good reporting in that area.

You are the audit senior of an audit firm preparing to audit a group company and its subsidiaries and sub-subsidiaries, which also trade with companies owned by some directors of the parent company.

Required:
What procedures and evidence should the auditor consider to discharge his responsibility in relation to related party transactions?

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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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  • 10 Marks

AAA – May 2020 – L3 – Q5a – The regulatory environment

Analyze the factors influencing the development of new auditing standards and discuss the procedures involved in their creation.

The auditing profession is very dynamic and constantly confronted with new challenges emanating from the political and economic spheres. To meet these challenges the global authority responsible for the regulation of accountancy profession, The International Federation of Accountants (IFAC) has been ensuring that the standards for conduct of audit and assurance engagements are revised and brought up to date all the time.

Required:

i) Analyze the factors that influence the development of new Auditing Standards. (6 marks)

ii) Discuss the procedures for developing new Auditing Standards. (4 marks)

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  • 20 Marks

AAA – May 2020 – L3 – Q3 – Audit evidence, Evaluation and review

Discusses audit procedures for accounting estimates, the appropriateness of written representations, and additional audit procedures.

GGC Co. Ltd (GGCL) specializes in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years, and this is partly due to the warranties that the company gives to its customers. It guarantees its products for five years, and if problems arise during this period, it undertakes to fix them or provide a replacement.

You are the manager responsible for the audit of GGCL, and you are performing the final review stage of the audit and have come across the following issues:

Receivable balance owing from Nhyira Co. Ltd
GGCL has a material receivable balance owed by its customer, Nhyira Co. Ltd. During the year-end audit, your team reviewed the aging of this balance and found that no payments had been received from Nhyira Co. Ltd for over six months. GGCL would not allow this balance to be circularized. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision
The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management is yet to confirm acceptance of this representation.

Required:

  1. Describe the audit procedures required in respect of accounting estimates.
    (8 marks)
  2. For each of the two issues above:
    i) Discuss the appropriateness of written representations as a form of audit evidence; and
    (6 marks)
    ii) Describe additional procedures the auditor should now perform in order to reach a conclusion on the balance to be included in the financial statements.
    (6 marks)

(Total: 20 marks)

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  • 10 Marks

AAA – Nov 2018 – L3 – Q3b – Audit approach, Government external audit and public accountability

Discussing the importance of environmental issues in an audit and how to carry out an environmental audit.

Eco-Essence is a limited liability company set up to produce water and pharmaceutical products. Currently, it produces only sachet water. It has all the necessary certifications for production, including that of the Food and Drug Authority (FDA), Environmental Protection Agency, and District Assembly. The company operates from a quasi-residential area. Of late, the residents of the area have been complaining of an increase in the noise levels from the plant, pollution as a result of the sachet water rubbers, wastewater from the plant making some part of the community marshy, and deterioration of the quality of the roads due to the weight of heavy-duty vehicles.

Required:
i) Briefly outline why environmental issues are important to you in the audit of Eco-Essence. (3 marks)

ii) Discuss how you will carry out an environmental audit on Eco-Essence. (7 marks)

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