i)African Designs Co. Ltd (ADCL)
ADCL’s sales ledger has been corrupted by a computer virus; hence no detailed testing has been performed on revenue and receivables. The audit team will need to see if they can confirm revenue and receivables in an alternative manner. If they are unable to do this, then two significant balances in the financial statements will not have been confirmed. Revenue and receivables are both higher than the total profit before tax (PBT) of GH¢2 million; receivables are 170% of PBT and revenue is nearly eight times the PBT; hence this is a very material issue.

The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation to two material and pervasive areas, being receivables and revenue. Therefore a disclaimer of opinion will be required. A basis for disclaimer of opinion paragraph will be required to explain the limitation in relation to the lack of evidence over revenue and receivables. The opinion paragraph will be a disclaimer of opinion and will state that we are unable to form an opinion on the financial statements.
(3 marks)

Ghana Design Co. Ltd (GDCL)
GDCL is facing going concern problems as it has experienced difficult trading conditions and it has a negative cash outflow. However, the financial statements have been prepared on a going concern basis, even though it is possible that the company is not a going concern. The prior year’s financial statements showed a profit of GH¢1.2 million and the current financial statements show a loss before tax of GH¢4.4 million, the net cash outflow of GH¢3.2 million represents 73% of this loss (3.2/4.4 million) and hence is a material issue. The auditor will issue a qualified opinion.
(2 marks)

ii) Procedures to be adopted include:

African Design Company Limited

• Discuss with management whether they have any alternative records which detail revenue and receivables for the year.
• Attempt to perform analytical procedures, such as proof in total or monthly comparison to last year, to gain comfort in total for revenue and for receivables. (2 points @ 1 mark each = 2 marks)

Ghana Design Company Limited

• Discussion with management: Management should be asked to explain the reasons why they consider the going concern assumption to be valid. They should be asked about their future plans for the business since they anticipated a loss for next year, the possible implications of these for the going concern assumption should be discussed extensively with management.
• Cash flow Forecast: The cash flow should be discussed with management. The assumptions in the forecast should be checked and if appropriate challenged. Since there is a forecast of cash shortage, the auditors should discuss with management their plans for obtaining the additional financing that will be required.
• Review of sales order book: If this indicates a decline in sales order, the issue should be discussed with management.
• Review ageing receivables: Check a list of ageing receivables and assess the average
• Time to pay. If customers are taking longer to pay this may have adverse implication for operational cash flow.
• Information on the funding source: Discuss with management the source of funding expected and determine whether it is feasible and reliable
• Letters of Representation: After discussing the issue with management, the auditor should obtain letter of representation from management confirming their opinion that the entity is a going concern. (3 points @ 1 mark each =3 marks)