Question Tag: IAS 37

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  • 10 Marks

CR – Nov 2024 – L3 – Q3a – Share-Based Payment and Contingent Liabilities

Accounting for share-based payments and contingent liabilities in financial statements.

(i) Share-Based Payment

Pee Manka PLC (PM), a hyper-growing firm in Ghana, prepares its financial statements on 31 December.

The following information is relevant:

  • The financial statements are authorised for issue on 31 March. On 31 December 2021, PM issued share options to seven (7) of its senior executives, giving each executive the option to purchase 2 million shares at GH¢6.50 per share. The fair value of each option at that date was GH¢4.00. The exercise of the share options was conditional on the completion of two-years’ service from 31 December 2021.

The company’s share price on subsequent dates was as follows:

Date Share Price (GH¢)
31 December 2022 13.50
31 December 2023 17.50
  • On 31 March 2023, after the 2022 financial statements were authorised for issue, PM’s Chief Finance Officer, one of the seven executives, unexpectedly resigned from her position in the company.
  • On 30 April 2023 another executive, Mrs. Torsah, was dismissed.
  • The five remaining executives exercised their options on 31 December 2023.

Required:

In line with IFRS 2: Share-Based Payment, recommend how the above scenario would have been dealt with in the financial statements of PM for the year ended 31 December 2023. (6 marks)

(ii) Contingent Liabilities and Share-Based Payment

  • Mrs. Torsah, who was dismissed, immediately instigated legal proceedings against PM, and it was probable, on the 28 February 2024, that she would be deemed to have completed the two-year qualifying period of her share option agreement.
  • Legal advice at that time was that she was also likely to be awarded GH¢3.5 million in compensation, and that it was possible that this could rise to GH¢5.8 million.

Required:

In line with IFRS 2: Share-Based Payment and IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain how the above scenario would impact your results in (i) above.

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  • 5 Marks

CR – Nov 2024 – L3 – Q2b – Accounting for Legal Claims

Assess and account for a legal claim against Agropah PLC under IAS 37.

ropah PLC (Agropah) prepares its financial statements to 30 June and usually authorizes them for issue on 25 August.

On 15 July 2024, Agropah received notice of a legal claim made by Odametey, a customer, for loss of profits allegedly due to the supply of faulty goods by Agropah on 30 April 2024. The amount claimed was GH¢5 million.

The directors of Agropah have estimated the following possible outcomes in respect of this legal claim:

  • 28% chance that the claim will not succeed.
  • 45% chance that the claim will succeed, and Odametey will be awarded GH¢3.2 million.
  • 27% chance that the claim will succeed, and Odametey will be awarded GH¢5 million.

Required:

In line with IAS 37: Provisions, Contingent Liabilities & Contingent Assets, explain how this legal claim should be accounted for and reported in the financial statements of Agropah for the year ended 30 June 2024.

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  • 6 Marks

FR – Nov 2024 – L2 – Q2a – Provisions and Contingent Liabilities

Determining the correct accounting treatment for warranty obligations and legal provisions in Kamara LTD’s financial statements.

Kamara LTD manufactures and sells health equipment and has a financial year-end of March 2024. It offers a one-year guarantee for equipment supplied directly to clients. One of the company’s clients is suing the business at the financial year-end for failing to fix equipment within the guarantee period. The company argues that the issue is due to the client disregarding usage instructions, and Kamara LTD believes it is not liable.

Kamara LTD’s lawyer has advised that it is more likely than not that the company will not be found liable. If found liable, the company is estimated to incur legal expenses of approximately GH¢24,000.

Kamara LTD also manufactures another line of equipment sold to wholesalers. During the financial year, it sold 3,200 items of this equipment, which come with a one-year repair guarantee. Based on past experience, 10% of items sold are returned for repairs. Of these returns:

  • 70% require minor repairs at a cost of GH¢64 per item.
  • 30% require significant repairs at a cost of GH¢200 per item.

Required:
Determine the correct accounting treatment to deal with the above issues in the books of Kamara LTD for the year ended 31 March 2024.

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  • 6 Marks

CR – May 2016 – L3 – Q4b – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Discuss how the environmental liability for LALUPON Plc, arising from hazardous pollution, should be accounted for in its financial statements.

LALUPON Plc owns a piece of land in a residential area. PONJEB Ltd has leased the piece of land from LALUPON Plc and is using it to store and dispense gas. The Federal government has announced its intention to enact environmental legislation requiring property owners to accept liability for environmental pollution. As a result, LALUPON Plc introduced a hazardous policy and has begun to apply the policy to its properties.

LALUPON Plc has had a report of a gas leakage and subsequent fire outbreak which damaged surrounding properties, but no life was lost. LALUPON Plc has no right of recourse against PONJEB Ltd or its insurance company for the clean-up and compensations to owners of properties destroyed. At April 30, 2014, it is virtually certain that draft legislation requiring a clean-up of the land and payment of compensations to victims will be enacted.

Required:
Discuss how the above events should be accounted for in the financial statements of LALUPON Plc.

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  • 7 Marks

CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Gama Plastic Limited owns a number of plastic recycling plants in various parts of the country which supply most of the raw material used by Gama Plastic Limited for its production of household and corporate plastic products.

On December 1, 2015, the directors of Gama Plastic Limited announced publicly that it intends to voluntarily reduce the level of harmful emissions from its recycling plants through modifications of the plants.

The average useful economic life of these plants as of December 31, 2015, was 15 years. Gama Plastic Limited charges depreciation in relation to the recycling plants to cost of sales on a straight-line basis.

The directors believe that while the modifications will be effective from early 2016 onward, the actual cash costs of the modifications will be as follows:

Date Amount (N’000)
December 31, 2016 100,000
December 31, 2017 80,000
December 31, 2018 140,000

No contract was signed until 2016, but Gama Plastic Limited prides itself on its excellent public image and has a well-known reputation for meeting both legal and constructive obligations.

The directors of Gama Plastic Limited believe that it is appropriate to use discounted cash flow techniques and that an appropriate rate would be 10%, with the following discount factors:

Year PV Factor
1 0.909
2 0.826
3 0.751
4 0.683
5 0.620
6 0.564

Required:

Assuming the actual cash cost of the modification is a reliable estimate, calculate the provisions that should be included in the statement of financial position and the charges to the statement of profit or loss of Gama Plastic Limited in respect of the proposal for each of the years 2015 and 2016. (7 Marks)

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  • 7 Marks

CR – May 2021 – L3 – Q5a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Define provisions and discuss their misuse in creative accounting.

International Accounting Standard (IAS) 37 on Provisions, Contingent Liabilities, and Contingent Assets sets out the principles of accounting for these items. The inappropriate use of provisions has been an area where companies have been accused of manipulating financial statements and engaging in creative accounting.

Required:

What is provisions, and how is it employed by management to engage in creative accounting? (7 Marks)

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  • 14 Marks

CR – May 2023 – L3 – Q2a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Analyze Octopus Petroleum’s performance and ability to finance future oil spill costs

Octopus Petroleum PLC is a multinational oil and gas group operating in the Niger Delta areas of Nigeria. The company has been highly profitable over the years. The group explores and extracts natural resources, holds reserves, and has recently become involved in the downstream sector by opening various commercial retail outlets for the sale of petrol to motorists.

In June 2020, the company was involved in an ecological disaster in the Ogoni area of Niger Delta as a result of massive oil spillage due to some technical faults, thereby resulting in spilling oil into the surrounding ocean and damaging wildlife and local communities.

Investors are concerned about the future prospects of Octopus Petroleum PLC and whether it represents a safe investment since the company normally operates in the lucrative oil and gas sector.

Octopus Petroleum Group annual report for the year 2020 and its comparative figures are shown below:

Octopus Petroleum Group Consolidated Statement of Profit or Loss for the Year Ended December 31

Octopus Petroleum Group Consolidated Statement of Financial Position as at December 31

Additional Information:

  1. The N3,700 million provision for the Ogoni oil spill is an estimated cost net of relevant tax.
  2. Calculating the financial cost of the oil spill in Ogoni land has been slightly problematic. However, N530 million had been expended by year-end, while the future costs of clean-up and compensation are undetermined.
  3. One uncertain cost is fines payable to the Federal Government of Nigeria. Past fines have exceeded N2,500 million.
  4. Octopus Petroleum Group vertically integrated in 2020 by acquiring and rebranding petrol stations.
  5. Oil reserves were at record-high levels in 2020.
  6. Oil prices increased by approximately 5% during 2020.
  7. The company values inventory on a last-in-first-out (LIFO) basis, which contravenes IAS 2.
  8. Dividend payments remained at N625 million for both 2020 and 2019.
  9. Investors typically evaluate companies using these ratios:
    • Profitability Ratios:
      • Return on Capital Employed (ROCE)
      • Return on Equity (ROE)
      • Gross Profit Percentage
      • Operating Profit Percentage
    • Liquidity Ratios:
      • Current Ratio
      • Acid Test Ratio
    • Resource Utilization and Financial Position Ratios:
      • Inventory Turnover
      • Asset Turnover
      • Interest Cover
      • Gearing Ratio

Required:

(a) Analyze the performance of Octopus Petroleum Group over the two-year period. Your analysis should also consider the group’s ability to finance the cost of the oil spill in Ogoni land in the coming years. (14 Marks)

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  • 15 Marks

CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

Roman Limited prepares its financial statements in accordance with International Accounting Standards. On March 16, 2017, Roman Limited made a public announcement of a decision to reduce the level of emission of harmful chemicals from its factories. The average useful life of the factories on March 31, 2017 was 25 years. The depreciation of the factories is computed on a straight-line basis and charged to cost of sales. The directors formulated the proposal for emission reduction following an agreement in principle earlier in the year.

The directors prepared detailed estimates of the costs of their proposals, showing the following expenditures:

  • N60 million on March 31, 2018
  • N60 million on March 31, 2019
  • N80 million on March 31, 2020

All estimates were for actual anticipated cash payments. No contracts were entered into until after April 1, 2017. The estimate proved accurate regarding the expenditure due on March 31, 2018. When the directors decided to proceed with this project, they used discounted cash flow techniques to appraise the proposed investment, with an annual discount rate of 8%. The company has a reputation for fulfilling its financial commitments after it has publicly announced them. Roman Limited has made a provision for the expected costs of its proposal in the financial statements for the year ended March 31, 2017.

In accordance with the provisions of IAS 37 – Provisions, Contingent Liabilities, and Contingent Assets:

Required:
a. Explain the decision of the directors of Roman Limited to recognize the provision in the statement of financial position as at March 31, 2017.
(6 Marks)

b. Compute the appropriate provisions in the statement of financial position in respect of the proposed expenditure at March 31, 2017, and March 31, 2018.
(4 Marks)

Compute the TWO components of the charge to the statement of profit or loss in respect of the proposal for the year ended March 31, 2018. You should explain how each component arises and identify where in the statement of profit or loss each component is reported.
(5 Marks)

(Total 15 Marks)

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  • 30 Marks

AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

  • Provision for litigation (recognized in financial statements): ₦96 million
  • Litigation cases as defendant: 50
  • Litigation cases as plaintiff: 10
  • Claims in favor of the Bank: ₦2.7 billion
  • Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

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  • 15 Marks

FR – May 2017 – L2 – SB – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Explain criteria for recognizing provisions, differentiate between provisions and contingent liabilities, and apply IAS 37 to specific company scenarios.

a. IAS – 37 applies to all provisions and contingencies apart from those covered by the specific requirement of other standards.

Therefore, provisions differ from other liabilities because there is uncertainty about timing or amount of the future cashflow required to settle the liability.

Required:

  1. Explain the criteria for recognition of provisions in the financial statements and distinguish between provisions and contingent liabilities.
    (6 Marks)

b. The following activities took place in THREE different companies:

  1. Otapiapia Plc: A Rat Trap Company based in Nigeria has just secured exportation of rat killers to South Africa. The advertising slogan of the rat killers is “KILL the BLACKS.” A South African anti-racist movement with a representative in Nigeria is claiming N15,000,000 from the company as damages because the advertising slogan allegedly compromises the dignity of black people. The company’s legal representative believes that the success of the claim will depend on the judge who presides over the case. They estimate, however, that there is a 70 percent probability that the claim will be thrown out and a 30 percent probability that it will succeed.
  2. Ire-Akari Motors Plc: A Nigerian company that specialises in the manufacture of “made-in-Nigeria cars.” During the current financial year, 100 cars have been completed and sold. During testing, a defect was found in their steering mechanism. All 100 customers that bought the cars were duly informed of the defect and were told to bring their cars back to have the defects repaired at no cost. All the customers have indicated that this is the only remedy they require. The estimated cost of the recall is N10.5m. The manufacturer of the steering mechanism, a quoted company with sufficient funds, has accepted responsibility for the defect and has undertaken to reimburse Ire-Akari Motors Plc for all costs that it might incur.
  3. Abeokuta Electricity Company Plc: This company sold a number of electricity transformers with a warranty in the year ended December 31, 2015. At the beginning of the year, the provisions for warranty stood at N5,625,000. A number of claims have been settled during the period for N3,000,000. At the year-end, there were unsettled claims for 300 customers. Experience is that 40% of the claims submitted do not fulfil warranty conditions and can be defended at no cost. The average cost of settling other claims will be N52,500 each.

Required: Explain how the matters in (b)(i) to (b)(iii) above should be accounted for in the financial statements of the three companies using figures to illustrate your points where appropriate.
(9 Marks)

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  • 5 Marks

FR – May 2017 – L2 – Q2a – Financial Reporting Standards and Their Applications

Discuss how to account for the cost of site reclamation and the financial effects of an earthquake.

Akakpo Ltd obtained a license free of charge from the government to dig and operate a gold mine. Akakpo Ltd spent GH¢6 million digging and preparing the mine for operation and erecting buildings on site. The mine commenced operations on 1 September 2014. The license requires that at the end of the mine’s useful life of 20 years, the site must be reclaimed, all buildings and equipment must be removed, and the site landscaped. At 31 August 2015, Akakpo Ltd estimated that the cost in 19 years’ time of the removal and landscaping would be GH¢5 million, and its present value is GH¢3 million.

On 31 October 2015, there was a massive earthquake in the area, and Akakpo Ltd’s mine shaft was badly damaged. It is estimated that the mine will be closed for at least six months and will cost GH¢1 million to repair.

Required:

i) Demonstrate how Akakpo Ltd should record the cost of the site reclamation as at 31 August 2015 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(3 marks)

ii) Explain how Akakpo Ltd should treat the effects of the earthquake in its financial statements for the year ended 31 August 2015 in accordance with IAS 10 Events after the Reporting Period.
(2 marks)

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  • 6 Marks

CR – Nov 2021 – L3 – Q2c – IAS 38: Intangible Assets

Advise Zunka Ltd on how to account for the cost of adapting equipment and the provision for potential damages in a legal case for patent infringement.

Zunka Ltd (Zunka) is a private pharmaceutical company in Ghana, which imports medical equipment manufactured under a patent. Zunka subsequently adapts the equipment to fit the market in Ghana and sells the equipment under its own brand name. Zunka originally spent GH¢6 million in developing the know-how required to adapt the equipment, and, in addition, it costs GH¢100,000 to adapt each piece of equipment. Zunka has capitalised the cost of the know-how and the cost of adapting each piece of equipment sold as patent rights.

Zunka is being sued for patent infringement by Sajida Ltd (Sajida), the owner of the original patent, on the grounds that Zunka has not materially changed the original product by its subsequent adaptation. If Sajida can prove infringement, the court is likely to order Zunka to pay damages and stop infringing its patent. Zunka’s lawyers are of the view that the court could conclude that Sajida’s patent claim is not valid.

Sajida has sued Zunka for GH¢10 million for using a specific patent and a further GH¢16 million for lost profit due to Zunka being a competitor in the market for this product. Zunka has offered GH¢14 million to settle both claims but has not received a response from Sajida.

As a result, the directors of Zunka estimate that the damages it faces will be between the amount offered by Zunka and the amount claimed by Sajida. The directors of Zunka would like advice as to whether they have correctly accounted for the costs of the adaptation of the equipment and whether they should make a provision for the potential damages in the above legal case in the financial statements for the year ended 31 March 2021.

Required:

Advise the directors of Zunka on how the above transaction should be accounted for in its financial statements for the year ended 31 March 2021 in accordance with relevant International Financial Reporting Standards (IFRS).

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  • 7 Marks

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

Kaase Ltd, a public limited company, operates in the technology sector in Ghana. The company has decided to restructure one of its business segments, affecting employees in two locations. In the first location (A), half of the factory units were closed by 31 March 2021, and the affected employees’ pension benefits were frozen. After restructuring, the present value of the defined benefit obligation in this location was GH¢8 million. Before restructuring, the value was GH¢10 million, and the fair value of plan assets was GH¢7 million, resulting in a net pension liability of GH¢3 million.

In the second location (B), all activities were discontinued, and employees will receive GH¢4 million in exchange for a pension liability of GH¢2.4 million. Kaase Ltd estimates that restructuring costs excluding pension costs will be GH¢6 million. No formal announcement has been made due to a planned rights issue. The pension liability is currently included in non-current liabilities.

Required:
Recommend the accounting treatment of the above transaction in the financial statement of Kaase Ltd, including financial statement extracts for the year ended 31 March 2021, in accordance with relevant International Financial Reporting Standards (IFRS).

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  • 20 Marks

AAA – Dec 2023 – L3 – Q2 – Audit Evidence | Evaluation and Review

Evaluate the accounting treatment of cash-settled share-based payments, regulatory penalties, and property valuation, and outline relevant audit procedures for each.

You are the Manager responsible for the audit of Rail Expert Plc, a listed entity whose principal activity is the operation of a regional railway network. The audit for the year ended 28 February 2021 is the first year your firm is auditing Rail Expert Plc. The draft financial statements received from your client indicated a total asset of GH¢58 million and a profit before tax of GH¢7.4 million. The detailed audit fieldwork has started, and the audit supervisor has brought the following matters to your attention in relation to the testing of key accounting estimates:

a) Cash-settled share-based payment scheme
On 1 March 2020, Rail Expert Plc granted 550,000 share appreciation rights to 55 executives and senior employees of the company, with each eligible member of staff receiving 10,000 of the rights. The fair value of the rights was estimated on 28 February 2020 by an external expert using an options pricing model at GH¢4.50 each. Rail Expert Plc prides itself on good employee relations, and the senior management team has estimated that all 55 staff will qualify for the rights when they vest three years after the granting of the rights on 1 March 2020. The company recognized an expense of GH¢825,000 with its associated liability in the draft accounts. (7 marks)

b) Regulatory penalties
Rail Expert Plc has been subject to a review by the national railways regulator following a complaint from a member of staff with safety concerns. The regulator identified breaches in safety regulations and issued a penalty notice on 30 September 2020. Rail Expert Plc has appealed against the initial penalty payable. Negotiations with the regulator are still ongoing, and the amount payable has not yet been finalized. Rail Expert Plc currently estimates that the total penalty payable as a result of the breach will be GH¢1.3 million, which it expects to repay in equal annual installments over the next ten years, with the first payment falling due on 1 March 2021. The company’s draft statement of profit or loss for the current year recognizes an expense of GH¢1.3 million, and the draft statement of financial position includes a liability for the same amount. (7 marks)

c) Property development
Rail Expert Plc owns an industrial property which it has historically used as a maintenance depot for its engines and carriages. The company has an accounting policy of revaluing its properties to fair value, and at the interim audit, it was noted that the depot was recorded at a carrying amount of GH¢2.5 million in the non-current asset register. During the first week of the audit fieldwork, the audit supervisor identified a year-end journal which has uplifted the depot to a fair value of GH¢4.9 million in this year’s statement of financial position as at 28 February 2021. Management has advised that this represents the estimated sales value of the building following Rail Expert Plc’s plan to develop the building as a residential property. The client has confirmed that the property is suitable for conversion into residential apartments at an estimated cost of GH¢1.2 million and has negotiated secured finance for the development with their bank. The development will be subject to the payment of fees to the local council’s building regulator of GH¢173,000. (6 marks)

Required:
Evaluate the client’s accounting treatments above and state THREE (3) audit procedures you will undertake when auditing each of the transactions.

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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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  • 20 Marks

AAA – Nov 2016 – L3 – Q3 – Planning | Audit Evidence

Identify and explain audit risks, procedures, and evidence related to Kpandu Sika Ltd. for the year ended 31 December 2015.

You are a manager in Amable & Co, a firm of Chartered Accountants, responsible for the audit of Kpandu Sika Limited for the year ended 31 December 2015. Kpandu Sika Limited is a company listed on the Ghana Stock Exchange (GSE) which has been a client of your firm in the past three years. The company manufactures consumer electronic appliances which are then sold to major retail organizations. You are aware that during the last year, Kpandu Sika Limited lost several customer contracts due to cheap imports. However, a new division has been created to sell its products directly to individual customers in Ghana and worldwide via a new website, which was launched on 1 December 2015.

Financial information provided by the Finance Manager is shown below:

STATEMENT OF PROFIT OR LOSS

 

STATEMENT OF FINANCIAL POSITION AS AT

 

EQUITY AND LIABILITIES

NOTES:
i) Kpandu Sika Limited established an equity-settled share-based payment plan for its executives on 1 January 2015. 250 executives and senior managers have received 100 share options each, which vest on 31 December 2015 if the executive remains in employment at that date and if Kpandu Sika Limited’s share price increases by 10% per annum. No expense has been recognized this year as Kpandu Sika Limited’s share price has fallen by 5% in the last six months, and so it is felt that the condition relating to the share price will not be met this year-end.
ii) On 1 July 2015, Kpandu Sika Limited entered into a lease which has been accounted for as a finance lease and capitalized at GH¢19 million. The leased property is used as the head office for Kpandu Sika Limited’s new website development and sales division. The lease term is for five years and the fair value of the property at the inception of the lease was GH¢76 million.
iii) On 30 June 2015 Kpandu Sika Limited’s properties were revalued by an independent expert.
iv) A significant amount has been invested in the new website, which is seen as a major strategic development for the company. The website has generated minimal sales since its launch last month, and advertising campaigns are currently being conducted to promote the site.
v) The long-term borrowings are due to be repaid in two equal installments on 30 September 2016 and 2017. Kpandu Sika Limited is in the process of renegotiating the loan, to extend the repayment dates, and to increase the amount of the loan.
vi) The provision relates to product warranties offered by the company.
vii) The overdraft limit agreed with Kpandu Sika Limited’s bank is GH¢5.7 million.

Required:
a) Using the information provided by the Finance Manager, identify and explain the principal audit risks to be considered in planning the final audit.
(10 marks)

b) State the principal audit procedures which should be performed in respect of the provision for the product warranties offered by the company.
(6 marks)

c) State the principal audit evidence which you would expect to find in respect of the classification of the new lease in terms of IAS 17 Leases (Do not consider the application of the new leasing standard IFRS 16 Leases).
(4 marks)

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  • 20 Marks

AAA – April 2022 – L3 – Q2 – Evaluation and review, Group audits, Current issues

Comment on matters raised and state audit evidence required for Lartey Company Ltd for the year ended 30 September 2020.

Lartey Company Ltd (LCL) is a Private Limited Liability Company that was incorporated several years ago under the Companies Act, 1963 (Act 179) now Companies Act, 2019 (Act 992). The company is currently listed on the Ghana Stock Exchange. LCL is one of the world’s leading leisure travel providers, operating under several brand names to sell packaged holidays. The company catered for more than 10 million customers in the last 12 months. Draft figures for the year ended 30 September 2020 show revenue of GH¢320 million, profit before tax of GH¢15 million, and total assets of GH¢410 million. LCL’s executives earn a bonus based on the profit before tax.

You are the senior manager responsible for the audit of LCL. The final audit is nearing completion, and the following points have been noted by the audit senior for your attention:

  1. Acquisition of Esinam Co. Ltd. On 15 November 2020, LCL acquired Esinam Co. Ltd, a company offering adventure holidays for independent travelers. Esinam Co. Ltd represents a significant acquisition, but this has not been recognised in the financial statements.
  2. Aseye Cruises One part of the company’s activities, operating under the Aseye Cruises brand, provides cruise holidays. Due to the economic recession owing to the Covid-19 pandemic, the revenue of the Aseye Cruises business segment has fallen by 25% this year, and profit before tax has fallen by 35%. Aseye Cruises contributed GH¢64 million to total revenue for the year ended 30 September 2020, and has identifiable assets of GH¢23.5 million, including several large cruise liners. The Aseye Cruises brand is not recognised as an intangible asset, as it was internally generated.
  3. Compensation Claim In July 2020, thousands of holiday-makers were left stranded abroad after the company operating the main airline chartered by LCL suffered Covid-19 restrictions. The holiday-makers were forced to wait an average of two weeks before they could be returned home using an alternative airline. They have formed a group which is claiming compensation for the time they were forced to spend abroad, with the total claim amounting to GH¢2 million. The reasons for the group claiming compensation include accommodation and subsistence costs, lost income, and distress caused by the situation. The claim has not been recognised or disclosed in the draft financial statements, as management argues that the full amount payable will be covered by LCL’s insurance cover.

Required: Comment on the matters raised and in your review of the working papers, state the audit evidence required to draw reasonable conclusions for the year ended 30 September 2020.

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