- 20 Marks
AA – L2 – Q4 – Evaluation and review
Question
a) Below is a summary of the financial information of Afrimax Ltd, an audit client.
Financial performance
| Item | 30 June 2025 GH¢ ‘million | 30 June 2024 GH¢’ million |
|---|---|---|
| Revenue | 231 | 506 |
| Cost of sales | (235) | (352) |
| Selling, general and admin expenses | (48) | (52) |
| Income tax expense | (3) | (12) |
Financial position
| Item | 30 June 2025 GH¢ ‘million | 30 June 2024 GH¢’ million |
|---|---|---|
| Property, plant and equipment (PPE) | 950 | 958 |
| Inventory | 39 | 42 |
| Accounts receivable | 94 | 111 |
| Cash and cash equivalents | 5 | 30 |
| Borrowings | (830) | (830) |
| Accounts payable | (244) | (238) |
| Income tax payable | (17) | (21) |
| Share capital | (50) | (50) |
| Retained earnings | 53 | (2) |
Additional information:
- 60% of PPE relates to the assets used in the provision of works under a contract with Jinex Industries Ltd while the remaining 40% relates to assets required for the provision of works under a contract with Sampax Ltd.
- The Borrowings relate to a 3-year loan facility from Drobax Area Rural Bank Ltd. The loan balance is due on 31 December 2025.
- In arriving at the carrying amount of inventory, a provision of GH¢12 million was posted.
- An expected credit loss of GH¢18 million is also included in accounts receivable.
- The decline in the revenue for the year is mainly due to a retarding level of activity for Sampax Ltd. In the previous year, this contract brought in revenue of approximately GH¢250 million.
Required: i) Explain the auditor’s responsibility with regards to going concern. ii) Identify FIVE indicators of going concern challenges at Afrimax Ltd. iii) State THREE audit procedures you would perform in determining the going concern status of Afrimax Ltd.
b) Patakex Telecommunications Ltd is an international telecom provider with operations in several African countries. You are the audit associate on the year-end audit for the financial year ended 31 March 2025.
One of the material revenue streams, international roaming charges (50% of total revenue), relies on a complex billing system. During the audit, inconsistencies were found in how revenue was recognized. The audit team planned additional substantive testing, including review of billing data, inter-operator agreements and cut-off testing. Materiality was determined using 5% of profit before tax.
Due to IT department delays and access restrictions, the team was unable to complete the planned audit procedures. Attempts to gather alternative evidence (bank receipts, usage data) were unsuccessful, as the data was incomplete. Management believes the revenue is fairly stated and insists that the audit should proceed.
Required: i) Identify and explain the type of audit issue that has arisen. ii) Evaluate whether the issue is material and/or pervasive. iii) Recommend TWO additional actions or communications the auditor should undertake before finalising the audit report. iv) Justify the appropriate type of audit opinion to be issued.
Answer
i) Going concern is an entity’s ability to continue its operations for the foreseeable future. The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern.
These responsibilities exist even if the financial reporting framework used in the preparation of the financial statements does not include an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern.
ii) Indicators of going concern challenges at Afrimax Ltd • On 30 June 2025, the company was in a net current liability position of GH¢942 million and was in a net liability position of GH¢3 million. This indicates liquidity challenges and an inability to settle its liabilities as they fall due. • The company made a gross loss of GH¢4 million and net loss of GH¢55 million during the year ended 30 June 2025. This means the business is currently not operating profitably and if continued, may mean a worsening to their balance sheet. • The company had negative operating cash flows for the year which, if continued may lead to inability to settle its debts. • The company is highly geared with a debt to total capital ratio of 100.2%. This may indicate the business is unsustainable. • The borrowing of GH¢830 million is due in 6 months and given the liquidity position, there may not be realistic prospects of renewal or repayment. • The assets used in the provision of works under contract with Sampax Ltd may be impaired given the decrease in the activity under that contract. This may especially be the case if the assets were tailor made for the provision of that service.
iii) Audit procedures to be performed in determining the going concern status of Afrimax Ltd • Analysing and discussing cash flow, profit and other relevant forecasts with management. • Analysing and discussing the entity’s latest available interim financial statements. • Evaluating the entity’s plans to settle the pending loan and creditor balances. • Confirming with creditors and lenders and extensions in facilities that management purports. • Determining the adequacy of support for any planned disposals of assets. • Obtaining letters of support received by the company.
b)
i) The audit team is facing a scope limitation due to inability to obtain sufficient appropriate audit evidence. Audit risk remains unresolved, particularly on a material revenue stream.
ii) 50% of revenue is material considering materiality is set at 5% of PBIT. Inability to test recognition could result in a material misstatement of the financial statements. Though material, the issue is not pervasive (only one stream), unless there is evidence that it also affected other areas of the financial statements.
iii) Recommended additional actions • Communicate issue to management and those charged with governance. • Consider whether report delay is possible and communicate that appropriately. • Ensure proper documentation of the limitation and judgment applied.
iv) A qualified opinion is the most likely option because the issue is material but not pervasive. But if deemed pervasive (e.g. similar system issues elsewhere), then disclaimer is more appropriate.
- Topic: Evaluation and review
- Uploader: Samuel Duah