- 20 Marks
AAA – L3 – Q2 – Audit Evidence and Evaluation
Question
You are the manager responsible for the audit of Gyamfin LTD (Gyamfin). The company’s principal activity is wholesaling frozen fish.
The draft consolidated financial statements for the year ended 31 March is as follows:
| 2025 | 2024 | |
|---|---|---|
| GH¢’million | GH¢’million | |
| Revenue | 100.5 | 93.45 |
| Profit Before Tax | 17.85 | 21.3 |
| Total Assets | 72.00 | 54.6 |
Issues arising during the audit have been noted below for your attention:
Chemical Leakage
Early in 2025, some of Gyamfin’s property became contaminated due to a chemical leak from refrigeration units. Gyamfin has paid a fine of GH¢45,000 to a regulatory body, GH¢0.45 million for cleanup expenses and GH¢0.9 million for unit modernisation to stop future leaks. These expenses have been capitalised as improvements, with the exception of the fine, which has been expensed.
Inventory
Gyamfin contracted with Nubari Warehousing (Nubari) to handle all of its cold storage needs while the refrigeration systems were being modernised. As of March 31, 2025, health and safety regulations prohibiting unauthorised access to cold storage spaces made it impossible to physically inspect Gyamfin’s inventory with Nubari. Management of Gyamfin has stated in writing that the inventory as of March 31, 2025, was GH¢15.15 million (2024 – GH¢10.05 million). This amount has been agreed to a costing of Nubari’s monthly return of quantities held at 31 March 2025.
Residential Apartment
Gyamfin owns a residential apartment above its head office. Until 31 December 2024 it was let for GH¢4,500 a month. Since 1 January 2025 it has been occupied rent-free by the senior sales executive.
Required:
For each of the above issues:
i) Comment on THREE matters that you should consider; and
ii) State FOUR audit evidence that should be appropriate for the audit.
Answer
Chemical Leakage
i) Matters to consider
• The clean-up costs of GH¢0.45m should not have been capitalised as an asset but should have been written-off to the statement of profit or loss. This amount represents 0.6% of total assets and 2.5% of profit before tax so is not material but should be adjusted for in the financial statements.
• The modernisation costs of GH¢0.9m represent 1.2% of total assets and 5% of profit before tax and are therefore material to the accounts. Their capitalisation would be correct in accordance with IAS 16 Property, Plant and Equipment if the expenditure restores the economic benefits of the refrigeration units.
• The fine of GH¢45,000 incurred by Gyamfin is immaterial but has been correctly written-off to the statement of profit or loss.
ii) Audit evidence
• Invoices to support the clean-up costs and modernisation costs
• Correspondence from the regulatory agency to confirm the amount of the fine
• Bank statement and cash book extracts to show payment of the amounts involved
• Board minutes referring to the chemical leakage
• Physical inspection of the refrigeration units to confirm the modernisation costs incurred
Inventory held by Nubari Warehousing
i) Matters to consider
• Inventory is material to the statement of financial position, comprising 21% of total assets, therefore the auditors need to obtain sufficient, appropriate audit evidence of its valuation at the year end.
• Inventory has increased from the year before by 51% which is very high – the reason for this increase needs to be investigated further.
• A written representation from management with a point on the value of inventory held at the year-end is not sufficient audit evidence as there should be other more reliable audit evidence available to confirm the GH¢15.15m figure.
• If the inventory figure cannot be adequately verified, this may result in a limitation on the scope of the audit, and a modification of the auditor’s opinion on the grounds of an inability to obtain sufficient appropriate audit evidence.
• Although the quantity of inventory held by Nubari Warehousing can be provided, this does not provide evidence of its valuation at the year-end date. Given that inventory comprises fish, it may be that some of the inventory might be damaged and therefore its value would be less. Inventory may therefore be overstated in the financial statements.
ii) Audit evidence
• Written representation from management referring to the value of year-end inventory
• Correspondence between Gyamfin and Nubari Warehousing regarding the inventory held by Nubari Warehousing on behalf of Gyamfin
• Nubari’s monthly returns of quantities held
• Correspondence relating to the health and safety issues preventing access to cold storage area
• Analytical procedures on inventory, such as month by month comparisons to the previous year, to try to ascertain why the value of inventory has increased so much this year
Residential apartment
i) Matters to consider
• The senior sales executive is a related party in accordance with IAS 24 Related party disclosures as he would be a member of key management.
• A related party transaction has therefore occurred by virtue of the senior sales executive using the residential apartment of the company even though no money has exchanged hands.
• IAS 24 defines a related party transaction as ‘a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.
• IAS 24 requires related party transactions to be disclosed in the financial statements as they are material by their nature. The standard details what is required for disclosure, but it includes the names of the related parties, the relationships, the amounts involved and a description of the transactions.
ii) Audit evidence
• Rental agreement to confirm charge of GH¢4,500 per month and identification of the other party
• Deeds to confirm ownership of the apartment by Gyamfin
• Physical inspection of the apartment to confirm its existence and that it is being occupied
• A written representation from the directors of Gyamfin to confirm all related parties and related party transactions have been disclosed and appropriately accounted for in line with the applicable framework
• A written representation from the senior sales executive stating that he is occupying the apartment rent-free
- Topic: Audit Evidence, Evaluation and review
- Uploader: Samuel Duah