Question Tag: Audit Risk

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  • 15 Marks

AAA – Nov 2024 – L3 – Q2a – Audit Risks and Responses for Ecowud Co. LTD

Identifying audit risks in Ecowud Co. LTD and how auditors should respond.

Ecowud Co. LTD (Ecowud) is a sustainable goal-oriented company that develops, manufactures, and sells plywood made from rice husk and plastic waste. The company has a wide customer base, including construction companies and furniture manufacturers across Ghana and West Africa.

You are the Audit Manager of Adomako & Associates and are planning the audit of Ecowud for the year ended 31 December 2023. You and the Audit Engagement Partner attended a planning meeting with Ecowud’s Finance Manager.

You are reviewing the initial meeting notes to develop the audit strategy and plan. The following key matters were captured:

  1. Development Expenditure: Revenue for the year was forecast at GH¢32 million. During the year, Ecowud spent GH¢3.5 million on developing new types of plywood. Some of these are in the early stages of development, while others are nearing completion. The Finance Manager intends to capitalize the entire GH¢3.5 million spent on development since all projects are likely to succeed.

  2. Inventory Valuation: Ecowud uses a standard costing method to value inventory. However, the company has never updated its standard costs since adopting this policy. The company operates multiple warehouses in Ghana and across West Africa, most of which are third-party rented premises.

  3. Accounting Software: A new accounting software was developed internally and implemented in August. The old and new software did not run parallel, as management deemed it burdensome. Two months after implementation, the IT Manager resigned, and a new IT Manager will take over in January 2024.

  4. Long-term Loan and Share Capital: Ecowud restructured its finances, raising GH¢2 million through share issuance and GH¢3.5 million through a long-term loan. The loan has bank-imposed financial conditions, including a minimum total asset level. If breached, the loan becomes immediately repayable.

  5. Revaluation of Land & Buildings: Ecowud follows a revaluation model for land and buildings. The Finance Manager has announced that all land and buildings will be revalued at the year-end.

Required:
Identify FIVE audit risks in relation to Ecowud Co. LTD and for each risk, explain how the auditor should respond.

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  • 10 Marks

AA – Nov 2024 – L2 – Q5c – General Principles of Public Sector Auditing

Explain five general principles of public sector auditing under ISSAI.

There are general principles that guide the practice of auditing in the public sector in accordance with International Standards of Supreme Audit Institutions (ISSAI). The principles of auditing are not very different from auditing and assurance in the private sector.

Required:
In relation to the statement above, explain FIVE general principles of public sector audit.

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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 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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  • 1 Marks

AAA – Nov 2012 – L3 – AII – Q18 – Risk Management in Audits

Identifies the corporate factor that has increased the risk exposure of auditors over the last decade.

The rate of corporate ………… in the last ten years has tended to increase the risk exposure of the auditor.

 

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  • 30 Marks

AAA – Nov 2018 – L3 – Q1 – Audit of IT Systems and Data Analytics

Training audit personnel on issues and controls for online businesses audit

You are the audit partner of Rolami Adiatu & Company, a firm of Chartered Accountants. In the process of planning an audit, you have identified the need to train audit personnel involved in the audit of clients engaged in online businesses.

You have concluded arrangements with your human resources department to organize training for the firm’s audit team, which includes trainees, supervisors, and managers. You are preparing notes that will assist you in training the team to appreciate the problems that may arise in the audit of online businesses and how they could be minimized.

Required:

a. Prepare briefing notes explaining online systems and the operational advantages they offer to entities that use them. (6 Marks)

b. Identify the general and application controls needed to tackle the audit problems created by online systems. (9 Marks)

c. i. Discuss Electronic Data Interchange (EDI). ii. Explain four possible problems EDI may create for the auditor. iii. Explain four relevant controls to minimize the audit risk inherent in EDI systems. (15 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q4 – Risk Management in Audits

Assess audit risks in taking on Pony Bank Plc, recommend management and audit firm actions to address financial statement risks, and draft a management letter.

The management of Pony Bank Plc and its wholly owned subsidiary, Ponte Micro Finance Bank Limited, engaged in fraudulent activities involving the arrangement of bogus loans amounting to ₦5.5 billion in worthless assets, which were undetected by the previous auditors. The former auditors attributed the oversight to a well-organized group within Pony Bank that actively deceived and obstructed the audit process to conceal their actions.

Your firm, Vic Viv & Co, has recently taken on the audit of Pony Bank Plc.

Requirements:
a. Advise the engagement partner on the risks involved in taking up the audit.

(4 Marks)
b. Recommend appropriate actions for management and your firm to address financial statement risks.

(8 Marks)
c. Prepare a management letter with two matters suitable for submission to the directors.

(8 Marks)

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  • 20 Marks

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

Sweet Dreams, a limited liability company, is a new audit client and you are at the
planning meeting for the forthcoming audit. The company has grown rapidly and has
May 31 as year-end. The financial statements have not been audited in previous years
since the organization has only just converted from a partnership to a company.
The company’s bankers have requested that an audit be undertaken on the financial
statements for the year ending May 31, 2016. Higher levels of inventory required to
meet the increasing demand for its products have necessitated a request for an increase
in the bank’s overdraft facility.
The company makes beds, buying its materials directly. At the year-end, inventory
comprises raw materials, work-in-progress and finished goods. It does not undertake
continuous inventory counting but does intend to perform a full inventory count on
May 31, 2016. It uses standard costing system to value finished products and work-inprogress.

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  • 30 Marks

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

You are the Principal Partner in charge of a four-partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of Poles Apart Limited for the year ended 31 December 2013.

Poles Apart Limited was established two years ago and provides mobile phone service for individuals and businesses. The system established by the company comprises:

  1. Small portable mobile phones, which allow subscribers to contact or be contacted by any other telephone.
  2. The mobile phones can be used within the range of a local relay station that receives and sends calls to the mobile phone.
  3. The local relay stations are linked to a central computer that connects the calls to other users, often through a computer telephone network.
  4. Currently, the local relay stations cover one large city with a population of about 1,000,000. In the next year, the system will expand to all cities in Nigeria with populations over 250,000. By 2017, it will cover all motorways and cities with populations over 100,000, which will involve substantial capital expenditure and require additional borrowings.
  5. The cost of the relay stations and central computer is capitalized and amortized over six years.
  6. The mobile phones are manufactured by other companies and sold through retailers. Poles Apart Limited pays ₦2,000 to the retailer for each phone sold, which is capitalized and amortized over four years.
  7. Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Charges for calls from other operators are also calculated by the company’s main computer.
  8. All shares are owned by three wealthy individuals who serve as non-executive directors. They receive a fixed allowance and do not plan further investment in the company.
  9. Establishing the network of relay stations and subscribers will result in losses for at least three years, with current borrowings at about 20% of shareholders’ funds. It is expected that the company will be highly geared by 2016.
  10. As the company will not be immediately profitable, executive directors receive a basic salary and a bonus based on the number of subscribers.
  11. The owners plan to float the company on the local Stock Exchange in 2016. The flotation will involve issuing new shares to the public and the three non-executive directors selling some of their shares.
  12. Poles Apart Limited has several large competitors, each with comprehensive coverage of over 90% of the population.

Required:

a. Consider the risks associated with the audit of Poles Apart Limited. (12 Marks)

b. Describe the ethical matters you should consider in deciding whether your audit firm should accept the audit engagement. This should include considering whether your firm has the technical and logistical ability to carry out the audit. (12 Marks)

c. Advise on whether you should accept or decline the audit assignment, giving your principal reasons for coming to this decision. (6 Marks)

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  • 15 Marks

AA – Nov 2016 – L2 – Q7 – Audit of Public Sector Entities

This question focuses on audit areas to consider for not-for-profit organisations and other factors peculiar to their audits.

Savealife Nigeria is the local member of Savealife International, a Non-governmental Donor Agency.

Required:

a) Summarise the main audit areas to consider in relation to the audit of Savealife Nigeria.
(10 Marks)

b) Highlight other factors peculiar to such not-for-profit organisations that the Auditor needs to consider.
(5 Marks)

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  • 20 Marks

AA – May 2019 – L2 – Q2 – Planning an Audit

Examination of benefits and procedures related to interim and final audits, including risk assessment considerations.

Most large audits would be split into two phases. The systems assessment work and transaction testing are carried out during interim audit which takes place close to the end of the year. The balance of the work and testing of items of the statement of financial position takes place at the final audit shortly after the year-end. You are required to:

a. Identify FOUR key benefits that may arise from spreading the audit work across interim audit and final audit. (2 Marks)
b. Explain THREE audit procedures that would be carried out during the interim audit and FIVE of the audit procedures that can be carried out during the final audit. (8 Marks)
c. ISA 300 specifically states that some procedures can only be performed at or after the year-end. Identify TWO of these procedures. (2 Marks)
d. An auditor is required by ISA 315 to identify and assess the risks of material misstatement at both the financial statement and assertion levels. Explain FOUR of the issues to be considered by the auditor on risk assessment at the planning stage of the audit. (4 Marks)
e. Compare systems based audit approach with substantive approach. (4 Marks)

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  • 10 Marks

AA – Nov 2023 – L2 – Q2b – Professional and Ethical Considerations, Audit and Assurance Risk Environment

This question discusses five key factors to consider before accepting an audit engagement.

Afrak and Associates is an Audit Firm that has been providing audit and assurance services for over 20 years. The firm has recently received a request from a new client, XYZ Ltd., to provide audit services. The audit engagement will cover the financial statements for the year ended December 31, 2022.

Required:
Explain FIVE (5) factors Afrak and Associates must consider prior to accepting the audit engagement, paying attention to, risk areas that may give rise to liability, including fraud, error, and non-compliance.
(10 marks)

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  • 20 Marks

AA – Nov 2019 – L2 – Q3 – Audit and Assurance Evidence

Discusses the audit objectives, sources of evidence for inventory audit, and why stocks present high audit risk.

The information in the financial statements of your client, Honesty Company Limited, represents claims by management in relation to its responsibility to prepare financial statements that give a true and fair view of the company’s state of affairs and results of operations for the year under review. These claims are referred to as financial statement assertions.

Required:
a) Outline the audit objectives for the audit of stock (inventories) in the financial statements. Your answer should relate to the financial statement assertions. (8 marks)

b) Discuss FOUR (4) sources from which evidence can be obtained to confirm the quantities and value of stocks. (8 marks)

c) Explain why stocks present high audit risk. (4 marks)

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  • 5 Marks

AA – Nov 2017 – L2 – Q3b – Audit and Assurance Risk Environment

Describe five financial events or conditions that may cast doubt on the going concern assumption of an organization.

One of the basic assumptions underlying the preparation of financial statements is the going concern concept, which assumes that the entity has the ability to continue to operate into the foreseeable future. However, some events and conditions may cast doubt on the entity’s ability to continue as a going concern.

Required:
Describe five financial events or conditions that may cast doubt about the going concern assumption of an organization.

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  • 15 Marks

AA – Nov 2017 – L2 – Q3a – Audit and Assurance Risk Environment

Describe four factors affecting judgment about materiality in an audit context.

Anaba Sampson is an audit assistant at Global Accountants, a firm of Chartered Accountants. During the audit of a client’s account, for the year ended 31 December 2011, Anaba detected an error amounting to GH¢10.00 in respect to each interest payment, which recurred multiple times. The Chief Accountant advised Anaba not to request any adjustment entry, claiming the errors were insignificant. The company had 3,000 deposit accounts, and interest was paid half-yearly.

Required:
i) Describe four factors affecting judgment about materiality.

ii) Discuss the advice of the Chief Accountant.

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  • 20 Marks

AA – Nov 2015 – L2 – Q3 – Audit and Assurance Risk Environment

Identifying audit risks and auditors' responses, performing proof in total calculations for revenues and expenses, and proposing internal controls for club operations.

You are the senior responsible for planning the audit of Hometown Football Club Limited (HFC) for the year ended May 31, 2008.

HFC runs a football club which was promoted to the top division in the league this season. The football season starts on September 1 and ends on May 31 so that the players get a break over the summer months.

HFC owns their football stadium, which now has the capacity to seat 25,000 people. Of the 25,000 seats, 19,000 are allocated to HFC supporters (home supporters) and are sold to season ticket holders only. The remaining 6,000 tickets are for away supporters and cannot be sold to HFC supporters.

Season tickets cost GHS175 for children. Following their recent promotion, all the season tickets have been sold this year with 70% of season tickets sold to adults and the remaining 30% to children. Tickets for away supporters are always sold at GHS20 per ticket, regardless of whether the ticket is sold to an adult or a child. On average, 50% of away supporter tickets have been sold for each of the 14 home games played at HFC’s stadium during the football season.

HFC’s other revenue streams include the sale of football kits and other memorabilia from the club shop, and food and drink sales from the club snack bars.

Following promotion to the top division, the club added an extra stand to the stadium to increase the seating capacity to the current level of 25,000. Other existing areas of the stadium also underwent maintenance in order to restore them to their original condition. The work was carried out during June and July 2007 and cost a total of GHS3,360,000. To finance this, HFC took out a GHS2,900,000 loan on June 1, 2007. The loan carries an interest rate of 7% and is repayable over the next five years. The loan is secured on the stadium.

The directors feel that the club’s greatest assets (other than the stadium) are the football players themselves. The players have performed so well this year that some of the other football clubs in the same division have made preliminary offers to buy three of HFC’s players. HFC is particularly pleased about this as these players joined the club through their youth academy programme. Consequently, the directors would like to value these three players as intangible non-current assets in HFC’s financial statements. The players will be valued at the offer price received from the other clubs. The directors feel this is a prudent valuation because they are confident that the eventual selling price would be much higher than the preliminary offer.

One of the major drawbacks of the club’s promotion has been that the club has had to increase the level of players’ salaries. The total salary expense for the year is estimated to be in the region of GHS2,800,000. This is a particularly surprising figure as it is higher than the other operating costs for the year, which are estimated at GHS2,400,000.

HFC has just appointed a team of internal auditors. They have not been in position long enough to help you with your audit work, but the directors are keen for the internal auditors to improve the company’s internal controls in relation to the club shop and snack bars.

Required:

a) Using the information provided, describe FIVE (5) audit risks and explain the auditor’s response to each risk.
(10 marks)

b) Describe how the auditor could perform a proof in total calculation to confirm each of HFC’s revenue from ticket sales, loan interest, and payroll expense for players’ salaries.
(4 marks)

c) Explain THREE (3) internal controls the internal auditors of HFC should implement relating to the club shop or snack bars, and state the objective of each of the three controls.
(6 marks)

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  • 12 Marks

AA – Nov 2021 – L2 – Q1b – Audit and Assurance Risk Environment

Discusses six business risks faced by an audit firm when auditing a technology retailer.

Mogya Bi Accounting Firm is the Auditors of Abronyeh Enterprise (Abronyeh), a retailer selling computers, phones, and other high-technology equipment. Abronyeh was set up just a year ago by its sole owner Adam Joseph. Adam Joseph has employed several bookkeepers to help him with accounting records and the preparation of financial statements, and the most recent one has just left. In order to start the business, Adam Joseph re-mortgaged his house and, in addition, took out a business loan. As part of the loan agreement, Adam Joseph is obliged to provide a copy of the annual financial statement.

Required:
Explain SIX (6) business risks that Mogya Bi Accounting Firm faces when conducting the audit of Abronyeh and explain why they could be identified as risks.

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  • 10 Marks

AA – Mar 2024 – L2 – Q2b – Audit and Assurance Risk Environment

Discuss audit risks and the necessary measures auditors should take to mitigate issues in the engagement.

Abansro Corporation is a publicly traded company in the manufacturing industry. The company is yet to appoint an auditor to replace its previous auditor. A member of the board of Abansro Corporation, who is also a friend of the owners of an audit firm, referred the audit firm to Abansro Corporation. The board approved the appointment of the audit firm without considering the potential audit risks associated with the referral.

The audit firm conducted the audit for the year 2022, and the audit opinion issued was unqualified. However, in the course of 2023, it was discovered that there were material misstatements in the financial statements that were not detected by the audit firm. These misstatements resulted in a significant loss for the company and its shareholders.

As a result, Abansro Corporation faced legal action from its shareholders for the losses incurred due to the misstatements. The audit firm was also held liable for negligence and breach of professional duty.

Required:
i) Describe THREE (3) audit risks for a board member referring his friend who is the owner of an audit firm to be appointed by Abansro Corporation. (6 marks)

ii) What measures should have been undertaken by the Auditors to mitigate the issues associated with this engagement? (4 marks)

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  • 10 Marks

AAA – Nov 2020 – L3 – Q1b – The audit approach | Practice management | Professional responsibility and liability

Evaluate five risk considerations and issues before accepting an engagement from Phobia Foods Ltd, focusing on financial position, client expectations, and fee structure.

You have been recently promoted as the Ethics Partner in Famous Chartered Accountants, a licensed audit firm. At your first visit to the Managing Partner, he informs you of an appointment by Phobia Foods Ltd (PFL), and gives you a file to go through. You open the file and find a copy of an e-mail from the Managing Director of PFL, extracts which read as follows:

From: Managing Director, Phobia Foods Ltd.
To: Managing Partner, Famous Chartered Accountants
Subject: Evaluation of Business Expansion Plan and Associated Items

Congratulations on your offer of appointment as auditor cum advisor of our company. As discussed in our earlier meeting, Phobia Foods Ltd (PFL) would like to open three more outlets, two in Sunyani and one in Sogakope. The necessary financing will be obtained through a new bank loan and the rescheduling of the payments of the existing loan, which is technically in default.

Your appointment and fees
Your audit fee will be GH¢16,000 for the year ended 30 June 2018.Your fee for evaluation of our expansion plan and advisory services in relation to obtaining a bank loan will be GH¢9,000. For advisory services and business efficiency and strategic decisions, your fee will be GH¢3,400 per month for the next two years.

Shareholders and key management issues
Five founding directors, each with equal shares, incorporated PFL which commenced trading in 2009. I still maintain my original 20% holding.

Audit and accounts 2016-2018
Ofosu-Mensah & Associates., a firm of licensed auditors audited the accounts for the years ended 30 June 2016 to 30 June 2018 inclusive. The audit of PFL for the year ended 30 June 2018 was signed off on 16 November 2018 with an unqualified opinion, notwithstanding that qualified opinions had been published on the previous two years’ accounts. The shareholders of PFL approved your firm’s appointment at the annual general meeting held on 15 April 2019 for the year ended 30 June 2019.

The funds raised by the new bank loan will be used for expansion of the business. Your firm is also expected to advise the company on the application for the new bank loan and the rescheduling of repayments of the existing loan in default.

Yours sincerely,
Managing Director.

Required:

Evaluate FIVE (5) risk considerations and issues for Famous Chartered Accountants that should be identified prior to accepting this engagement. (10 marks)

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  • 20 Marks

AAA – Aug 2022 – L3 – Q2 – Audit evidence | Professional responsibility and liability

Evaluate audit risks for Pato Plc and discuss the impact of management's refusal to provide written representation.

a) Pato Plc offers internet streaming services for films and TV programs and subscription services. You are the recently appointed Senior Manager of Tinka Partners responsible for the audit of Pato Plc. You are planning the audit as required by ISA 300: Planning an audit of financial statements and have come across these two issues following a discussion between the audit engagement partner and a representative of the client’s management:

Legal Case:
In January 2022, a legal case was initiated against Pato Plc by Filmco Plc, a film production company. Filmco Plc claims that Pato Plc has infringed on its copyright by streaming a film in specific countries for which a license has not been acquired. Pato Plc insists that the film is covered by a general license which was acquired several years ago. Pato Plc’s Finance Director is not willing to recognize the legal claim within the financial statements as he is confident that the claim against the company will not be successful, and he does not want to discuss it further with the audit team, emphasizing that there is no relevant documentation available for evaluation at this time.
(7 marks)

Annual Incentive Scheme:
For several years, Pato Plc has operated an annual incentive scheme for staff, under the terms of which employees are eligible to receive an annual incentive payment linked to the achievement of selected targets. The scheme operates for all employees, with some employees’ targets linked to profitability, while others are aligned to non-financial measures including customer satisfaction, customer loyalty, and customer complaints, among others. Participants in the scheme are entitled to earn a maximum annual incentive payment of 5% of their salary. Approximately 6,590 employees, including the senior executive directors, are entitled to participate in the annual incentive scheme. Last year the average bonus payment was GH¢1,250 per participant.
(7 marks)

Required:
Evaluate the principal audit risk(s) in planning the audit of Pato Plc.

b) The Management of Pato Plc has decided not to provide the audit firm with the written representation for the legal case as they feel that it is unnecessary. The potential provision for the legal case is 6% of profit before tax.
Required:
As the Auditors of Pato Plc, discuss the steps you should take and the impact on the audit report in relation to the refusal to provide the written representation.
(6 marks)

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