- 10 Marks
Question
a) You are the Audit Manager in charge of the audit of Adepaye Ltd (Adepaye) for the year ended 30 April 2016 and you are currently planning the year-end audit. Adepaye specialises in the sale of provisions at its head office. The company has opened branches in Ofankor Barrier, Makola, Nanakrom, Kasoa, and Kanda within ten years of incorporation. During the interim audit, you noted that due to the present economic challenges in Ghana, the company has suffered increases in costs. Also, the presence of competitors is driving the sales prices of the company downward, affecting the profitability of the company.
Furthermore, the company has not recorded profit for over five years, thus threatening the going concern of the company. Due to the consistent cash flow challenges, the company has financed its operations with bank overdrafts and huge long-term loans as part of its capital structure.
In a discussion with management and those charged with governance during the interim audit, you were informed that the company plans to improve the customer relationship management of its operations to maintain its market share. The company has asked its bank for a loan to finance its working capital. This they believe would improve the liquidity of the company.
The company has prepared a cash flow forecast for five years from the end of the reporting year 30 April 2016 to support its bank loan request. The internal audit department has reported on the forecast to the board of directors. However, the bank has said it would like a report from the external auditors to confirm the reasonableness of the forecast amidst the current challenges in Ghana after their final audit.
The company has approached your firm to examine the cash flow forecast and then to report to the bank.
Required:
i) Explain TWO (2) differences in audit approach that the Audit Manager would adopt during the interim audit and the final audit.
(6 marks)
ii) Explain FIVE (5) factors you will consider before placing reliance on the work of the internal auditors of Adepaye Ltd.
(10 marks)
Answer
i) Differences in audit approach between interim audit and final audit:
- Interim audit: This is conducted before the year-end and focuses on recording systems, evaluating internal controls, and performing tests of control. It helps identify potential risks early and allows for more time to address problems before the final audit.
- Final audit: This is conducted after the year-end and includes analytical procedures, confirmation of balances, substantive testing, and reviews of subsequent events. It forms the basis for expressing the auditor’s opinion on the financial statements for the entire year.
ii) Factors to consider before placing reliance on the work of internal auditors:
- Independence: The degree of independence of the internal audit department from the company’s management, especially whether they report directly to the board or audit committee.
- Competence: The qualifications, experience, and technical skills of the internal auditors.
- Objectivity: The extent to which internal auditors apply professional skepticism and are free from bias.
- Work quality: The scope of internal audit work and the thoroughness of their procedures, including proper documentation.
- Effectiveness of communication: How well internal auditors communicate with the external audit team and share relevant findings.
- Tags: Audit Planning, Final Audit, Interim Audit, Internal Audit, Risk Assessment
- Level: Level 2
- Topic: Audit and Assurance Risk Environment
- Series: MAY 2019
- Uploader: Dotse