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A lot of investors have been reading about something called the “new-fund effect”. That is the tendency of new funds to outperform their older peers because of any one of a number of
factors: better access to initial public offerings, more motivated managers, or better spreads on
trades. However, despite the potential growth benefits of new funds , their volatility makes many
investors uncomfortable. Consider a sample of 10 newly M- mutual funds and a sample of 10 newly
Q-mutual funds randomly selected from all mutuals funds in Ghana that are less than 18 months
old as follows:
| Annualized Performance of Newly M- Mutual Funds | Annualized Performance of Newly Q-Mutual Funds |
|---|---|
| 13.7 | 9.5 |
| 15.3 | 14.9 |
| 7.9 | 10.8 |
| 9.8 | 11.5 |
| 13.6 | 11.3 |
| 13.6 | 25.2 |
| 11.4 | 12.0 |
| 8.6 | 6.3 |
| 14.6 | 12.7 |
| 15.2 | 12.4 |
Using a hypothesis testing procedure, investigate whether there is sufficient evidence to conclude
that there is a significant difference in variance of newly created M and Q mutual funds.
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Bolombo Property Investors Ltd. is a property investment company that is involved in the renting of commercial property to various commercial interests throughout the country. Their modus operandi is to purchase existing property, renovate them and rent them out, or to develop property from the scratch and rent them out. Occasionally they sell out property to improve their cash flows. Bolombo Property Investors Ltd. is a company owned by Mr. Joshua Broson, aged 62 and his wife Mabel, aged, 52 holding 60 % and 40 % shares respectively. The couple have been wedded for the past five years and have three children of school going age. Management roles in the company are shared between the couple who are both qualified Civil Engineers by profession. Joshua serves as the CEO whilst his wife serves as General Manager and Accountant. To support them they have employed an accounts clerk Kwesi Mendson, aged 35 who has a diploma in accounting from the University of Ghana, Legion. Bolombo Property Investors has five properties in Accora, one in Takoradi and three in Kumasi. The company has identified a ten-storey property in Takoradi that has been put on sale by an expatriate Property Developer who is leaving the country. The price on offer is GHC 5.000.000.00. They think they can quickly renovate the property andThe unit is in a poor state of repair but Bolomb is believes it could fetch a good price if properly renovated. The building is located in the heart of the city and along the main high street of the city.
Bolombb’s plan is to rent the ground floor to a bank or savings and loans company, and the units in in the upper floor to various types of businesses including supermarkets, restaurants and business oon. His estimates for the renovation are as follows:
| Item | Cost (GHC) |
|---|---|
| Rewiring and | 750,400,000.00 |
| Plumbing | 850,000.00 |
| Internal fittings | 500,000.00 |
| Alocobond panelling | 500,000.00 |
| Painting | 200,000.00 |
| Parking lot | 100,000.00 |
| Total | 2,000,400,000.00 |
Estimated Rental for the property is as follows: | as follows| as follows| as follows| as follows|| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows|5,000.00.00| as follows| as follows|CIB GH 10-22
He brings the proposal to you for consideration. He proposes that the building would serve as security. In addition a joint and several guarantee would be provided by the directors of the company. He is therefore requesting for a five year loan facility of GHC 7,300,000,00 to finance the purchase and renovation of the project. He is expecting a rate of return of 25%
Critically examine his proposition.
[30 Marks]
Note on Table Correction: The table in the attachment contains errors (e.g., “Rewingring and” likely means “Rewiring and Electrical,” and “750 40 00000” is ambiguous). I assume “750 40 00000” is a typo for GHC 750,000.00, as the total renovation cost (GHC 2,000,400,000.00) seems inflated for a single property. A realistic total of GHC 2,300,000.00 is assumed (summing corrected figures: 750,000 + 850,000 + 500,000 + 500,000 + 200,000 + 100,000). The “Estimated Rental” section is incomplete; I assume rental projections support the 25% return claim, to be verified.
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Mr. Bampoh Humphrey is the Board Chairman and CEO of Gold Coast Shipping Company Ltd. He owns 80 percent of the shares of the company with his foreign Partner Jones Smith, a retired Chairman of Elder Dempster Shipping Company owning the remaining 20%.
The two shareholders acquired the company from the Divestiture Implementation Committee in 1995 when the government divested its shareholding in the national shipping line the Black Star Line. Mr. Bampoh is known to be highly connected with the government in power at the time of AFC.
The company is engaged in transportation of primary products such as bauxite, gold and manganese ore from the country abroad and the transportation of consumer goods in container ships throughout the world.
The company has a fleet of ten cargo ships and ten container ships. It has three main offices located in Tema, Takoradi and London in the UK.
The company has operated an impressive account with you since the acquisition of the national shipping line, until in recent times when you noticed a sharp deterioration in its account operations. Following your painstaking investigation you established that the company incurred a huge loss when a cargo of bauxite was diverted on the high seas and the goods stolen. The ship was later discovered to have been sunken in the high seas to hide the evidence. Another problem you observed was that their fleet was becoming aged and one of them needs immediate replacement.
Each office of the company has an Office Manager all of whom are experienced expatriate shipping managers poached from international shipping companies.
The cost of purchase and delivery of one ship is estimated at USD 5.0 million, and the company is requesting for financial support from the bank to make a down payment of USD 2.0 million for the ship. The company proposes to pay the bank over a period of five years whilst the remainder of the cost of the ship is to be paid over the next period of ten years.
Critically examine this proposition using the information above and the related financial statements provided below.
Gold Star Shipping Ltd Statement of Comprehensive Income as at 31 Dec 2020 GHC
Total Revenue Cost of Revenue Gross Profit Overheads Depreciation Operating Profit Interest Paid Profit Before Tax Tax Profit After Tax 2021 GHC 13,700,000 6,165,000 7,535,000 1,575,500 1,337,000 4,622,500 480,000 4,142,500 1,035,625 3,106,875 2021 GHC 14,400,000 6,912,000 7,488,000 1,843,200 1,514,000 4,130,800 352,000 3,778,800 944,700 2,834,100 2022 GHC 14,920,000 7,758,400 7,161,600 2,333,488 1,564,000 3,264,112 312,500 2,951,612 737,903 2,213,709
Gold Star Shipping Ltd Balance Sheet as at 31st Dec
| Noncurrent Assets | 2020 | 2021 | 2022 |
|---|---|---|---|
| Building | 147,000 | 238,000 | 327,000 |
| Equipment | 9,000,000 | 11,325,000 | 10,150,000 |
| Motor Vehicles | 720,000 | 480,000 | 432,000 |
| Furniture and Fixtures | 350,000 | 260,000 | 170,000 |
| Total | 10,217,000 | 12,303,000 | 11,079,000 |
| Current Assets | |||
| Inventory | 135,000 | 185,000 | 197,000 |
| Receivables | 245,000 | 254,000 | 1,998,000 |
| Prepayments | 146,200 | 158,400 | 268,700 |
| Bank | 950,800 | 241,250 | 746,805 |
| 1,477,000 | 838,650 | 3,210,505 | |
| Current Liabilities | |||
| Trade Payables | 125,000 | 135,600 | 156,400 |
| Overdraft | 45,000 | 65,000 | 85,200 |
| Total Current | 170,000 | 200,600 | 241,600 |
| Liabilities | |||
| Net Current Assets | 1,307,000 | 638,050 | 2,968,905 |
| Net Assets | 11,524,000 | 12,941,050 | 14,047,905 |
| Capital | |||
| Share Capital | 10,000,000 | 10,000,000 | 10,000,000 |
| Income Surplus | 1,524,000 | 2,941,050 | 4,047,905 |
| 11,524,000 | 12,941,050 | 14,047,905 |
RATIOS 2020 2021 2022
Sales Growth 5.11% 3.61%
Receivable Days 7 6 49
Payable Days 7 7 7
Inventory Turnover Days 8 10 9
Gross Margin 55% 52% 48%
Overhead % 12% 13% 16%
Net Margin 30.24% 26.24% 19.78%
Interest Cover 9.63 11.74 10.45
Current Ratio 8.69 4.18 13.29
Quick Ratio 7.89 3.26 12.47
Tax Rate 25% 25% 25%
Dividend Payout RATIO 50% 50% 50%
Inventory to Sales 0.01 0.01 0.01
Receivables to Sales 0.01 0.01 0.13
Payables to Sales 0.01 0.01 0.01
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(a) Explain the concept of Risk and Control Self-Assessment (RCSA) and the steps involved in crafting this essential Risk Management tool. (10 marks)
(b) Mention and explain the significance of recording historical or past events in the Operational Risk Management Space in each business unit. (5 marks)
(c) How does the RCSA differ from an Incident Management System? (5 marks)
[Total: 20 marks]
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Your valued customers of twenty years, BA Brazil Nuts Ltd was established twenty-six years ago by Herbert Obeng, aged 62 and his wife Martha Obeng, aged 58, both graduates in Agricultural Engineering from the University of Science, Industry and Technology. They also have MBA certificates in Marketing. Prior to this, they both worked with the Gold Coast Food Production and Distribution Service, a State Corporation engaged in the cultivation, purchase and distribution of food supplies. Herbert serves as both Board Chairman and CEO of the company. He is also in charge of Farming Operations. The Farm Managers at the company’s farms report directly to Herbert. Martha serves as the CFO and Executive in charge of Marketing. She is supported by an Accounts Clerk, Jones Pino, aged 25 who has just completed his professional examination in Accounting. ICA (Ghana). The company also has a pool of skilled workers poached from other reputable industrial establishments.
The company is located at Ekumfi Swedru in the Central Region of the country and boasts of a state of the art Brazil nut production plant and a five storey office building. The company has two articulator trucks which are used in the carting of the Brazil nuts to the ports for export. The company is engaged in the production, roasting, packing and export of processed Brazil nuts primarily to the EU and Great Britain which take 60% of its products. The rest is sold locally (20%) and to other parts of the world (20%) including Australia and the US.
The company has operated an impressive account over the years until a year ago when you saw a sharp dip in the company’s turnover. In your interaction with Herbert, you learnt that there had been a fire outbreak which affected a significant part of the company’s farm holdings in the Bono Region of the country. He had to replenish his stock of Brazil nuts at a higher cost from his colleagues who also have farms in this part of the country. Your latest investigations show that the company has replanted the burnt area with Brazil nut seedlings.
In one of your visits, it came to your attention that Herbert was building a new factory at Winneba about eighty (80) kilometers away. When you queried him, he told you he was anticipating expanding his market in US and Australia.
The company’s Overdraft Facility of GHC 5,000,000.00 is showing a hard core at around GHC 3,000,000.00. The company is requesting for:
Critically examine this proposition. [30 MARKS] BA Brazil Nuts Ltd. Profit and Loss Extracts for the year ending 31 Dec
| 2021 | 2022 | 2023 |
|---|---|---|
| GHC | GHC | GHC |
| 5,750,000 | 6,900,000 | 7,690,000 |
| 472,610 | 534,100 | 758,420 |
| 3,150,000 | 4,142,000 | 4,605,800 |
| 3,622,610 | 4,676,100 | 5,364,220 |
| 534,100 | 758,420 | 985,400 |
| 3,088,510 | 3,917,680 | 4,378,820 |
| 2,661,490 | 2,982,320 | 3,311,180 |
| 690,000 | 779,700 | 991,580 |
| 405,000 | 417,400 | 777,400 |
| 1,566,490 | 1,785,220 | 1,542,200 |
| 439,600 | 574,000 | 684,500 |
| 1,126,890 | 1,211,220 | 857,700 |
| 281,723 | 302,805 | 214,425 |
| 845,167 | 908,415 | 643,275 |
BA Brazil Nuts Ltd. Balance Sheet as at 31 Dec
20.00%
11.45%
Receivable Days
98
112
141
Payable Days
90
75
78
Inventory Turnover Days
63
71
82
Gross Margin
46%
43%
43%
Overhead %
12%
11%
13%
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You are partner for a firm called Konamoah & Associates, who are auditors for Aluco, an aluminium processing company. Aluco has several issues with its aluminium and steel byproducts, including toxic emissions and a poor health and safety record for employees in the workshop. Aluco has proven to be very lucrative for your firm and you are busy planning the coming year’s audit visits after agreeing to continue this engagement some weeks earlier. The by-products arising from the production process include the following:
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Fadila Associates has been the auditors of Aduaba LTD for the past 3 years. Aduaba LTD is into the production of cashew drinks. You have been assigned to lead the audit of Aduaba LTD and have been provided with the following extracts from the draft financial statements for 2023 before the final audit planning meeting with the Chief Accountant.
Draft statement of financial position (extracts)
| Draft 2023 | Actual 2022 | |||
|---|---|---|---|---|
| GHc’000 | GHc’000 | GHc’000 | GHc’000 | |
| Property, Plant and Equipment | 42,860 | 41,620 | ||
| Receivables | ||||
| Trade | 4,800 | 3,150 | ||
| Other | 380 | 5,180 | 280 | 3,430 |
| Inventory | ||||
| Raw materials | 2,460 | 1,870 | ||
| Work-in-progress | 380 | 450 | ||
| Finished goods | 2,270 | 5,110 | 2,030 | 4,350 |
| Total Assets | 53,150 | 49,400 | ||
| Current liabilities | ||||
| Trade | 4,116 | 3,470 | ||
| Other | 870 | 4,986 | 650 | 4,120 |
Draft income statement (extracts)
| Draft 2023 | Actual 2022 | |
|---|---|---|
| GHc’000 | GHc’000 | |
| Revenue | 53,250 | 50,750 |
| Cost of sales | 39,360 | 39,220 |
| Gross profit | 13,890 | 11,530 |
| Depreciation of Property, Plant and Equipment | 4,450 | 2,810 |
| Other expenses | 3,540 | 3,480 |
| Profit before tax | 5,900 | 5,240 |
Your Audit Manager has reviewed these extracts and has identified three financial statement headings which he believes require further investigation. These are property, plant & equipment, trade receivables and inventory. He has also calculated the following accounting ratios:
| Draft 2023 | Actual 2022 | |
|---|---|---|
| Trade receivables collection period | 28 days | 17 days |
| Inventory turnover | 7.6 times | 8.9 times |
| Gross profit percentage | 26% | 23% |
Required: a) Explain why the Audit Manager has selected these three headings for further investigation from the given financial statement extract. (9 marks) b) Outline the audit evidence the Audit Manager should request for to clarify the situation regarding these financial statement headings. (11 marks)
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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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V Plc. manufactures engineering equipment. The company has received an order from a new customer for five machines at N5,000,000 each. V Plc.’s terms of sale are 10 percent of the sales value payable with the order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by V Plc.
V Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by V Plc. The agency’s fee is N500,000 per order, payable by V Plc. with the request for service. This fee is not refundable if the debt is not recovered.
As an accountant in V Plc.’s credit control department, and based on the company’s past experience and on discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.
Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine, 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery, i.e., in 12 months’ time. The company is not at present operating at full production capacity.
A credit bureau has offered to provide error-free credit information about the new customer if the price is right.
V Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.
a. Evaluate, from a purely financial point of view, if V Plc. should accept the order from the new customer based on the above information. (12 Marks)
b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 Marks)
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You are the senior audit manager for a medium-sized firm of accountants. Your firm has just lost two clients which have gone into receivership and has now been invited to tender for the audit of Lagos Leisure Ltd. The audit fees have been initially estimated at ₦200,000.
Lagos Leisure Ltd is a medium-sized manufacturing organisation which has existed for 35 years and has generally made consistent profits. However, in the last two years, profits have fallen by approximately 10% in each year, although the market sector in which Lagos Leisure Ltd operates is expanding. The company has also stated that they would like some consultancy support regarding business strategy in order to try and reverse the current profit downturn and have set aside ₦1m for this.
You have ascertained the following from a brief discussion with the Managing Director:
Your firm’s total fee income last year was ₦7m, including ₦500,000 from the lost clients.
Required:
(a) Discuss the advantages and disadvantages of tendering for the audit of Lagos Leisure Ltd, highlighting any key risks to your firm. (7 Marks)
(b) Although the initial estimate of the audit fee was ₦200,000, further work needs to be done before a figure could be included in the tender document. List the factors which should be taken into account when calculating this fee. (4 Marks)
(c) Outline the matters which should be included in the tender document if the firm decides to tender. (4 Marks)
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AK Plc is a company listed on the Nigerian Stock Exchange. It is involved in property development and sales.
The company currently imports more than 60% of its cement requirements. At a recent meeting of the board of directors, a decision was taken to establish a division for the production of cement in Ore, Ondo State. If the division is set up and the cement production goes ahead, output from the division will be sold to AK Plc and external customers at market price. For planning purposes, it has been decided that the financial viability of the project over the next five years should be determined.
The sum of N2 billion will be required. The sum of N500 million will be spent to acquire an existing factory considered suitable for the project. The balance of N1.5 billion will be applied for the procurement and installation of essential plant and equipment. Tax allowance can be claimed on plant and equipment at a uniform amount over 5 years with NIL scrap value.
A total of N20 million has been spent on various surveys (market, technical, financial, etc.) to date out of which N10 million has been paid. The balance of N10 million is due for payment at the end of year 1.
Production of cement for the next five years is projected as follows:
| Year | Bags |
|---|---|
| 1 | 500,000 |
| 2 | 600,000 |
| 3 | 650,000 |
| 4 | 800,000 |
| 5 | 700,000 |
A bag of cement sells currently for N2,000 in the open market. This price is expected to increase at the rate of 5% per annum. Variable cost is now N1,000 per bag. This will increase at 4% per annum. Fixed overhead costs will be N50 million at current prices but will rise by 8% per annum. Apportioned head office charges of N25 million at current prices will rise by 10% per annum. Fifty per cent (50%) of the total initial outlay of N2 billion is to be funded with a loan from a Federal Government Development Bank at a concessionary fixed interest rate of 8%, payable at the end of each year. Half of the loan will be repaid at the end of year 3 while the balance will be paid at the end of year 5. The project will require a working capital of 10% of annual revenue, and this should be available at the beginning of each year.
The company uses a current Weighted Average Cost of Capital (WACC) of 11% to appraise all capital projects. The asset beta of the company is 1.2, equity beta is 1.6, risk-free rate is 5%, while the market risk premium is 7%.
The Finance Director is of the view that it is not appropriate to use the existing WACC to appraise the new project. He has identified a listed company that currently produces cement and packaged fruit drinks. The company has the following financial statistics:
The new project is expected to move AK Plc to the target Debt/Equity ratio of 30%. Tax rate is 25% for the two companies and is paid in the year profit is made.
a. Compute the appropriate cost of capital that AK Plc should use to appraise the cement project and state why you consider this rate more appropriate than the existing WACC of 11%.
b. Compute the Net Present Value (NPV) and Modified Internal Rate of Return (MIRR) of the project, assuming a cost of capital of 13%.
c. Recommend whether the project should be accepted or not, using both NPV and MIRR methods. (2 Marks)
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The availability of computer-assisted audit techniques should be considered by the auditor when planning the nature, extent, and timing of tests in an audit. The auditor must determine his testing strategies which will depend on his choice of either using a manual testing method or computer-assisted method.
You are required to:
(a) Explain FIVE factors that will determine the auditor’s choice of method of testing in the planning of an audit in a computer environment. (10 Marks)
(b) Identify FIVE solutions to loss of audit trail. (5 Marks)
(Total: 15 Marks)
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Planning an audit involves establishing the overall audit strategy for the engagement and development of an audit plan.
You are required to:
(a) Enumerate SEVEN reasons for audit planning. (7 Marks)
(b) Explain EIGHT audit procedures you would consider in planning the audit of an existing client. (8 Marks)
(Total: 15 Marks)
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Messrs PK Industries Limited was incorporated and operates its business in Nigeria. The company has existed over the years. During most of this period, it imported some major components from China. Imports usually take some time to arrive after necessary forms have been completed and submitted to the bank.
Two of the directors have two other companies that supply fuel and other local resources needed by the company. The company’s directors are aware of this but prefer to do their business rather than patronize other suppliers.
In the last few years, the turnover of the company fluctuated between ₦500 million and ₦1 billion. The two other companies owned by the two directors are currently trading on loans granted by the company.
Following what was considered to be an increasingly harsh economic environment and high cost of power supply, the company registered a subsidiary company with a production outfit in Ghana while still maintaining its head office operations in Nigeria. Part of the raw materials needed in Ghana are procured in Nigeria and transported to Ghana through hired trailers. This process is being used until a suitable supplier is found in Ghana.
The company decided to hold the next Annual General Meeting (AGM) in the company’s premises in Ghana, with all the directors/shareholders traveling to Ghana on a direct flight from Abuja to Accra at the company’s expense. It was decided that this was an opportunity to evaluate the Ghanaian environment for further business decisions.
The audit of the Nigerian company and its Ghanaian company were done by different firms.
Required:
(a) Evaluate the risks involved in the scenario above. (5 Marks)
(b) Discuss the risk assessment procedures that the auditor of Messrs PK Industries Limited needs to adopt as required by ISA 550. (11 Marks)
(c) Prepare the key guidelines to the audit in accordance with ISA 600. (4 Marks)
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Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy, which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, further plunging the company and the industry into a downward slide in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism, and insecurity have also affected the operations of major international oil companies, which are the entity’s major customers. As a result of the above, the company recorded the following in its books of account:
Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.
The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 – 45%) of the total current liability balance. The borrowings stood at N1.5 billion, N1.6 billion, and N2 billion for the financial years ended December 31, 2019, 2020, and 2021, respectively. The finance costs in relation to the borrowings stood at N230 million in the year ended December 31, 2021 (2020- N214 million).
The company has currently defaulted on a number of its contractual obligations with its directors, and there was no directors’ remuneration in the current year due to its continuous loss-making position.
At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company. To pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed of. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors and annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters.
After the meeting with management, you have started the preparation for the year-end audit, and in compliance with regulatory requirements and auditing standards, a Key Audit Matter should be inserted on the opinion page.
Required:
(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)
(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)
(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)
(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)
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Allhope Publications Limited is an old established publishing company owned by two brothers. Over the years, the company had made consistent progress both in sales and profitability.
Due to the quality of their work, the patronage of the company has grown to the extent that its working capital cannot accommodate the work on hand.
The Directors have approached their bankers, Owopo Bank Plc for a facility of N500m to procure essentially modern machinery and printing materials and also for running expenses, particularly salaries.
In support of its application for the bank facility, the company has prepared a profit forecast which is being presented to your firm for review.
Required:
As contained in ISAE 3400: “The Examination of Prospective Financial Information (PFI)”:
a. What will you take into consideration before accepting this assurance engagement? (5 Marks)
b. Enumerate the procedures to be adopted after you have agreed to take up the engagement:
i. As regards PFI assurance engagements generally.
ii. On the Profit forecast. (10 Marks)
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When a company is experiencing going concern problems, it may exhibit various financial and non-financial symptoms.
Required:
(a) State FIVE financial and FIVE non-financial going concern symptoms.
(5 Marks)
(b) State the audit procedures you would adopt as an auditor to determine whether a client company is experiencing going concern problems.
(6 Marks)
(c) What other factors would you consider in assessing if the company can continue despite the going concern issues?
(4 Marks)
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The auditors of Sunsit Manufacturers Limited had disagreements with the company on various issues. This came to a climax with the withholding of a part of the payment of the last audit fees. The auditors had also been disenchanted with the undue pressures of management and have decided that, as a result of this and the withheld fees, they would disengage from the client.
The company’s chairman, in consideration of past issues, has considered the size of the audit firm as being partly responsible for its inability to manage adequately the pressures from the company’s accounting and management team. He has subsequently approached your firm for a change, and the partners have accepted the engagement despite the predecessor auditor’s declaration of the forfeiture of the firm’s outstanding fees and no further involvement with the client and issues relating to the company.
Required:
a. Following the background to the client and the engagement, evaluate the internal and external business risks that need to be considered with respect to the client. (10 Marks)
b. Discuss the pre-engagement activities to be carried on the client. (10 Marks)
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