Question Tag: Internal Controls

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  • 10 Marks

SCS – Nov 2024 – L3 – Q5b – Board Responsibilities in Corporate Governance

Evaluate the role of the board in corporate governance, focusing on responsibilities for strategy, oversight, and ethical leadership.

The role of the board of directors is critical in corporate governance. The National Corporate Governance Code for Ghana (the National Code) issued in November 2022 outlines the board’s core responsibilities.

Required:

Advise the board of BOGML on the FIVE key responsibilities of the board of directors as outlined in the National Code.

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  • 10 Marks

SCS – Nov 2024 – L3 – Q5b – Board Responsibilities in Corporate Governance

Identify and explain the five governance pillars in the National Corporate Governance Code for Ghana 2022.

It is evident that all is not well with the current corporate governance at BOGML. However, for the company to achieve sustainable growth and remain competitive, it must adhere to sound corporate governance principles.

Required:

Using the FIVE governance pillars identified in the National Corporate Governance Code for Ghana 2022 (the National Code), issued in November 2022 by the Institute of Directors-Ghana, advise the company on how to improve upon its current governance structure.

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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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  • 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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  • 20 Marks

AAA – May 2016 – L3 – Q3 – Internal Audit and Corporate Governance

Identify internal controls for managing risks at KAGM and explain related financial statement risks.

The Kuramo Art Gallery and Museum (KAGM) is in the centre of a city that is popular with tourists. About 65% of its income comes from admission fees and annual memberships, and about 30% of its income comes from sponsorship of special exhibitions by companies. Most of the remaining income comes from a small cafe and gift shop in the art gallery and museum.
Admission fees come from sales of tickets to daily visitors and from annual membership subscriptions from ‘Friends of KAGM’ who are entitled to free entry to the art gallery and museum at any time.
Day tickets can be purchased by credit card in advance, by a telephone ‘hotline’ or at KAGM’s website on the Internet. Alternatively, day tickets can be bought with cash or credit card at the ‘door’ on the day of the visit. Reduced prices are available for children, students, and individuals aged over 65, and there are also special reduced-price ‘family tickets’ for two adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate sponsors, particularly transport companies (bus companies and railway companies) sell advertising to KAGM.
The management of KAGM have identified the following applicable risks that need careful attention. They believe that these risks should be managed actively.

(i) There is a failure to attract more visitors because of the poor condition of many of the paintings in the art gallery and of the items in the museum. Paintings must be restored regularly because their condition deteriorates. KAGM has just one specialist restorer, who is unable to keep up with the required volume of work. The management of KAGM recognise that investment in new items and the restoration of existing items is inadequate, but blame the lack of income for the problem.
(ii) Some corporate sponsorship agreements may not be invoiced due to poor communication between the sponsors, KAGM’s sponsorship managers, and the accounts department of KAGM.
(iii) Some sponsorship agreements are not invoiced at their correct amount. This happens often when a sponsor is also a company that provides advertising for KAGM. Normal practice is for these sponsors to deduct their advertising charges from the amount they pay to KAGM in sponsorship. However, the accounts department in KAGM is not given the details of these set-off arrangements.
(iv) Some of the cash received from day visitors at the door may be stolen (or lost, or used by management for business expenses) and does not reach KAGM’s cashier.
(v) The on-line booking system for buying tickets in advance on the KAGM website is not always available because the website is ‘down’.

Required:

(a) Describe appropriate internal controls to manage each of the applicable risks described above. (15 Marks)
(b) Explain the financial statement risks that arise from each of these applicable risks. (5 Marks)

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  • 25 Marks

AAA – May 2021 – L3 – Q1b – Communication with Those Charged with Governance

Evaluation of internal control weaknesses, implications for audit strategy, and governance reporting for Community Microfinance Bank.

Question:

During the audit year, on the review of the audit work done on Community Microfinance Bank (a new significant audit client), you noted the following issues:

  • At the audit strategy stage, it was agreed that the audit of loans and advances would involve reliance on the effectiveness of internal controls. However, during the test of controls, it was noted that five loans were not approved by the appropriate approving officers. Further review indicated that the loans were genuinely issued to customers but were only approved by officers whose approval limit had been exceeded.
  • During the period under review, the tax authority carried out a tax investigation and noted a significant variance between the company’s estimated tax liabilities and the tax authority’s position. From further discussion, it was noted that the previous tax computation was done by a junior staff who does not have the requisite experience and the computations were not duly reviewed by experienced senior officers of the company.
  • The company deployed a new loan disbursement software which is linked to the financial reporting software. From your review of the new software, the initiator of a transaction could approve the same transaction as long as he/she changes the designation to approving authorities after initiation. You have flagged this as a possible control risk.
  • During your review of the receivables account, a variation was noted between the amount in a customer’s receivables balance in the ledger and the client confirmation. However, the variance was considered not material and not adjusted for. During discussion with the Receivables Manager, it came to your attention that the client in focus is a family member of the Managing Director.

The team is considering the impact of the above observations on the audit.

Required:

(i) Draft a report to management evaluating the implications of the above observations on the control environment and the audit strategy/procedures. (15 Marks)
(ii) Comment on whether the issues are to be reported to those charged with governance of the entity. (10 Marks)

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q12 – Forensic Auditing

Identifying examples unrelated to revenue-related fraud.

Which of the following is NOT an example of Revenue Related Fraud?

A. Accounting and documentary
B. Lifestyle of employees
C. Related party transactions
D. Management override of significant internal control activities
E. Sale of assets that is very similar to subsequent purchases at similar amounts

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  • 15 Marks

AAA – Nov 2021 – L3 – Q7 – Audit of IT Systems and Data Analytics

Discuss control environment requirements of ISA 315 and evaluate control activities for Egunje Distributors Ltd.

Egunje Distributors Limited is a private company in which Chief Idowu is the major shareholder. Chief Idowu set up the business to help provide resources for his philanthropic gestures. He has been involved in the major control activities, and the business was achieving its purpose, and things were working well.

After a number of years, Chief Idowu stepped aside from the business and handed over effective management to one of his subordinates, whom he elevated to the rank of General Manager (GM). The GM followed Chief Idowu’s control processes for only one year and then introduced new ideas and processes, resulting in undue amounts being transferred into his private accounts rather than the company’s accounts. This has affected the results of the company.

While Chief Idowu has not decided to take any hasty action, he has decided to bring in your firm, due to its size, so that through your work, he may understand the reasons for the dwindling performance. It has been discussed and agreed that your report on the audit will provide insight into the reasons for the observed decline in performance.

Required:

a. Discuss the control environment, focusing on the requirements of ISA 315 – Identifying and assessing the risk of material misstatement through understanding the entity and its environment, that will be relevant to this situation. (9 Marks)

b. Evaluate the control activities that will require your attention. (6 Marks)

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  • 20 Marks

AAA – Nov 2020 – L3 – Q3 – Audit of Specialized Industries

Audit planning, risk assessment, internal control, audit evidence, and reporting in a not-for-profit organization.

Question:
You are the Audit Manager at HWO, an audit firm. HWO has secured the audit of SIGMA For Africa, a not-for-profit organization. You have been assigned the audit of SIGMA For Africa. An extract of the unaudited financial statements is as follows:

SIGMA For Africa Statement of Financial Position
As at 31 December

Furthermore, you were assigned an audit senior. Based on preliminary discussions with your audit senior, you noted that the senior had no prior experience with audits of not-for-profit entities.

Required:
To help your audit senior understand how to audit a not-for-profit organization, prepare a presentation note summarizing the key considerations in the audit for the following areas:

a. Planning (4 Marks)
b. Risk analysis (4 Marks)
c. Internal control (4 Marks)
d. Audit evidence (4 Marks)
e. Reporting (4 Marks)

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 4 Marks

PSAF – May 2016 – L2 – Q3e – Public procurement

This question addresses the procedures established by Local Authorities to control revenue.

Revenue control describes the various checks put in place to ensure that all moneys due are received and accounted for.

Required: Explain FOUR procedures established by Local Authorities to control revenue.

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  • 10 Marks

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

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

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

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

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

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

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

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  • 10 Marks

AAA – May 2018 – L3 – Q3a – The audit approach, Audit evidence, Reporting

Discusses the auditor’s responsibilities in relation to laws and regulations, non-compliance issues, and policies for prevention and detection of non-compliance.

a) At a final meeting with the client, DMS Ltd, one of the Audit Partners of DTR & Co Chartered Accountants had an argument with the Finance Director of DMS Ltd on an issue that borders on compliance with a relevant law. The Environmental Protection Authority had sanctioned DMS Ltd for environmental regulation breaches for the year 2016. The Finance Director was of the view that the external auditors are to be blamed for negligently failing to plan their audit to detect such non-compliance with environmental regulations.

Required:
i) Explain the responsibility of external auditors in considering laws and regulations in an audit of financial statements. (2 marks)

ii) Explain the issue of non-compliance in relation to laws and regulations in an audit. (2 marks)

iii) Explain the policies and procedures which may be implemented to assist management in the prevention and detection of non-compliance with laws and regulations. (6 marks)

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  • 14 Marks

FA – Mar 2024 – L1 – Q3a – Bank reconciliations

Prepare a bank reconciliation statement and an adjusted cash book for Malik & Company.

i) Mr. Malik is a sole trader and carries on business under the name “Malik & Company”. The balance on his cash book at 31 December 2023 did not agree with the balance as per the bank statement, which shows a credit balance of GH¢183,750.

An examination of the cash book and bank statement disclosed the following:

  1. A deposit of GH¢24,600 made on 29 December 2023 and recorded in the cashbook had been credited by the bank on 1 January 2024.
  2. Bank charges of GH¢850 have not been entered in the cash book.
  3. A debit of GH¢2,100 appeared on the bank statement for an unpaid cheque which had been returned marked “out of date”. The cheque was re-dated by his customer and paid into the bank again on 3 January 2024. The earlier transaction was recorded in the cashbook.
  4. A standing order for payment of an annual subscription amounting to GH¢500 has not been entered in the cash book.
  5. On 26 December 2023, Mr. Malik had given the cashier a cheque for GH¢5,000 to pay into his personal account at the bank. The cashier deposited it into the business account by mistake.
  6. On 27 December 2023, a customer had made an online transfer of GH¢24,950 in payment against goods supplied. The advice was received and recorded in the cash book on 2 January 2024.
  7. On 30 September 2023, Mr. Malik entered into a hire purchase agreement and issued a standing order to the bank to pay a sum of GH¢1,300 on day 10 of each month, commencing from October 2023. No entries have been made in the cash book for these payments.
  8. A cheque for GH¢18,200 received from Mr. Adoboe had been entered twice in the cash book.

Required:

i) Prepare the adjusted cash book for Malik & Company in a format which clearly indicates whether each entry is a debit or credit. (7 marks)

ii) Prepare a reconciliation of the bank statement balance to the adjusted cash book balance. (7 marks)

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