- 20 Marks
Question
In order to assist businesses during the COVID-19 period, the Government of Ghana has announced various packages including financial assistance to various companies and other Small and Medium Enterprises. Your firm, Prosper & Co has been approached to perform an assurance engagement for God’s Time Ltd; the engagement will be a review of prospective financial information which is needed to support the company’s application for financial assistance provided under COVID-19 facilities. God’s Time Ltd had its financial year ended 31st December each year.
The operating profit forecast for the two years to 31st December 2020 prepared by a member of the accounting team of God’s Time Ltd is shown below, along with some accompanying notes.
| Six months to 30th June 2019 | Six months to 31st Dec. 2019 | Six months to 30 June. 2020 | Six months to 31st Dec. 2020 | |
|---|---|---|---|---|
| GH¢ | GH¢ | GH¢ | GH¢ | |
| Earnings | 2,801,597 | 3,088,680 | 4,210,265 | 4,429,728 |
| Direct costs | 2,135,938 | 2,315,746 | 3,413,711 | 3,618,584 |
| Gross Profit | 665,659 | 772,934 | 796,554 | 811,144 |
| Operating Exp. | ||||
| Wages & Salaries | 168,452 | 184,864 | 209,546 | 218,762 |
| Advertising | 13,840 | 20,542 | 28,548 | 31,540 |
| Design costs | 21,580 | 32,456 | 50,452 | 43,546 |
| Marketing | 10,896 | 12,458 | 16,520 | 34,450 |
| Interest on Loan | 45,543 | 48,620 | 51,654 | 60,542 |
| Other Operating Exp | 266,264 | 309,173 | 318,622 | 324,458 |
| Net Profit | 139,084 | 164,821 | 121,212 | 97,846 |
Additional Notes: i. God’s Time Ltd is a producer of greetings cards and giftware; the demand for which is seasonal in nature.
ii. Design costs are mostly payroll costs of the staff working in the company’s design team, and the costs relate to the design and development of new product ranges.
iii. The total ‘Other expenses’ is calculated based on 40% of the projected revenue for the six-month period.
iv. In 2019, the company was granted a loan facility to complete the ongoing factory project.
Required:
Recommend the examination procedures which should be used in the review of the profit forecast. (B)
You are the supervisor in-charge of the audit of Titi bidi Construction Company Limited. The audit of the company is near completion, and you are finalizing the audit report. As part of your final review, you want a confirmation that, the tax liability as reported is accurate and as such there is no liability that has not been captured.
Required:
Outline the audit steps to verify that, all tax payments and tax credits has been captured and the liability as reported is accurate.
Answer
(A)
Examination procedures on the operating profit forecast of God’s Time Ltd
General procedures:
(i) Enquire as to the identity of the preparer of the operating profit forecast, and assess their competence, especially given that interest costs have been included as part of operating expenses which is incorrect.
(ii) Obtain an understanding as to the procedures and controls which have been followed in the preparation of the forecast, for example, has the forecast been approved by a senior member of the company’s accounting team.
(iii) Confirm that the accounting policies applied in God’s Time Ltd.’s financial statements have been consistently applied in the preparation of the operating profit forecast, for example, that design costs are expensed rather than capitalized as a development cost.
(iv) Confirm that the assumptions underpinning the forecast are in line with knowledge of the business obtained from performing the company’s audit, for example, the seasonality of the sales can be confirmed by looking at the audit evidence obtained in the audit of revenue.
Specific procedures:
i. Request for the details of the cost of sales figure for each six-month period, any unusually high or low forecast costs with management.
ii. Recalculate the gross profit figures given in the forecast.
iii. Compare this to gross profit margins in the prior year audited financial statements and investigate any anomalies.
iv. The interest cost should be capitalized rather than expensed.
v. Re-cast the forecast to ensure it is arithmetically correct.
vi. Perform analytical review to confirm that the forecast costs appear to be in line with expectations, and discuss
vii. Review any marketing plans and discuss with an appropriate senior member of staff, for example, the sales director, to establish the rationale for forecasting a significant increase in revenue, for example, there may be plans to introduce new product lines
viii. Confirm costs to appropriate supporting documentation
ix. Discuss with management the rationale for using 40% of revenue as a basis for determining the amount of other expenses.
(B) Audit Programmer–Additional taxes and penalties
Check whether taxpayer has paid the installment tax due under section 46 of Revenue Administration Act, 2016 Act 915 by due date. If not, check whether penalty has been imposed on taxpayer under section 71 of the same Act.
Check whether taxpayer has paid the admitted tax liability along with the return by due date. If not, check whether penalty has been imposed on taxpayer under section 71 of Act 915.
Check whether the taxpayer has filed its returns or statement within due date. If not, check whether penalty imposed under section 73 of Act 915.
a) Check whether any demand notice had been issued. If yes check whether taxpayer has complied with the notices, and if no check whether penalty has been imposed. b) Check that evidence gathered support the tax liability assessed. In finalizing the report and the assessment raised, all additional taxes including PAYE, VAT etc. has been captured and there is enough evidence to support it. c) The calculation of interest and penalties are in line with the law.
d) The total liability has been cross-checked and the final figure agreed with the assessment.
- Uploader: Salamat Hamid