- 10 Marks
Question
You are a Partner in Green & Co., a firm of Chartered Accountants, with specific responsibility for the quality of audits. Green & Co. was appointed auditor of Cleanup Co, a provider of waste management services, in July 2019. You have just visited the audit team at the head office of Cleanup Co. The audit team comprises an audit manager, an audit senior, and two audit trainees.
During your visit, a review of the audit working papers revealed the following:
i) On the audit planning checklist, the audit senior has crossed through the analytical procedures section and written ‘not applicable – new client’. The audit planning checklist has not been signed off as having been reviewed.
ii) The audit manager last visited Cleanup Co.’s office when the final audit commenced two weeks ago on 1 August. The audit senior has since completed the audit of tangible non-current assets (including property and service equipment) which amount to GH¢ 600,000 as at 30 June 2019 (2018 – GH¢ 600,000). The audit manager spends most of his time working from Green & Co’s office and is currently allocated to three other assignments as well as Cleanup Co.’s audit.
iii) At 30 June 2019, trade receivables amounted to GH¢ 2.1 million (2018 – GH¢ 900,000). One of the trainees has just finished sending out requests for direct confirmation of customers’ balances as at the end of the reporting period.
iv) The other trainee has been assigned the audit of the consumable supplies, which includes inventory amounting to GH¢ 88,000 (2018 – GH¢ 53,000). The trainee has carried out tests of controls over the perpetual inventory records and confirmed the ‘roll-back’ of a sample of current quantities to book quantities as at the year end.
v) The audit manager has noted the following matter for your attention. The financial statements as at 30 June 2018 disclosed, as unquantifiable, a contingent liability for pending litigation. However, the audit manager has seen a letter confirming that the matter was settled out of court for GH¢ 450,000 on 14 September 2018. The auditor’s report on the financial statements for the year ended 30 June 2018 was unmodified and signed on 19 September 2018. The audit manager believes that management of Cleanup Co. is not aware of the error and has not brought it to their attention.
Required:
Identify and comment on the implications of these findings for Green & Co’s quality control policies and procedures. (10 marks)
Answer
- Analytical Procedures:
- Implication: The audit senior’s decision to omit analytical procedures because Cleanup Co. is a new client is inappropriate. ISA 315 requires that analytical procedures be applied at the planning stage to assist in understanding the business and identifying areas of potential risk. Failure to perform these procedures may result in unidentified risks and an inadequate audit approach.
- Action: The audit planning checklist should be reviewed, and the analytical procedures should be performed and documented to ensure compliance with auditing standards.
- Audit Manager’s Supervision:
- Implication: The audit manager’s limited involvement in the audit process, given that Cleanup Co.’s audit is only one of several assignments, raises concerns about inadequate supervision. ISA 220 emphasizes the need for adequate supervision, particularly when complex or significant areas are being audited.
- Action: The audit manager should increase their involvement in the audit, especially in high-risk areas such as trade receivables, to ensure that the audit is conducted effectively and efficiently.
- Direct Confirmation of Receivables:
- Implication: While it is appropriate to obtain direct confirmations for material balances, the timing of the requests (six weeks after the year-end) may reduce their effectiveness. Additionally, alternative procedures, such as reviewing post-year-end payments, could have been more efficient.
- Action: Consideration should be given to using more timely and effective audit procedures in future audits to obtain sufficient and appropriate evidence regarding receivables.
- Audit of Consumable Supplies:
- Implication: The focus on testing controls and ‘roll-back’ procedures for a relatively immaterial inventory balance (less than 2.4% of total assets) indicates inefficiency in the audit approach. The time and resources spent on this area could have been allocated to more significant audit risks.
- Action: Future audits should prioritize significant areas and ensure that audit effort is proportionate to the risk and materiality of the balances being tested.
- Prior Period Error:
- Implication: The discovery of an unrecognized liability from the prior period (GH¢ 450,000) that was not disclosed or adjusted in the financial statements suggests a serious oversight in the prior year’s audit. This misstatement is material, representing 18% of total assets, and should have been corrected.
- Action: The matter should be brought to the attention of Cleanup Co.’s management immediately, and a prior period adjustment should be made in the current year’s financial statements. If not corrected, this could lead to a modified audit opinion.
Conclusion:
- The findings indicate significant weaknesses in Green & Co.’s quality control policies and procedures, particularly in the areas of planning, supervision, and audit efficiency. These weaknesses could compromise the effectiveness of the audit and increase audit risk. Green & Co. should review and strengthen its quality control processes to ensure compliance with ISAs and to maintain the integrity of its audits.
- Topic: The audit approach
- Series: NOV 2020
- Uploader: Kwame Aikins