ADVANCED AUDIT AND ASSURANCE – Page 11

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

Question

Kumasi Playthings is a prestigious toy retailer trading from a single urban retail district. The accounts and administration offices are above the shop. The company is the wholly-owned subsidiary of a prominent retail group. Kumasi Playthings is headed by its dynamic managing director, Kofi Mensah, aged 70.

At Kofi Mensah’s insistence, your firm, as local to Kumasi Playthings, has recently been appointed as the auditor. Kumasi Playthings is now the only group company not to be audited by the group auditors.

The following matters have come to light during the preliminary discussions with Kofi Mensah and those members of his staff to whom he has allowed you access:

(1) The parent company wishes Kumasi Playthings to develop operations in a number of out-of-town shopping centres. Kofi Mensah regards this as unacceptable because it would destroy the goodwill and prestige built up over 150 years of quality retailing.

(2) The company has approximately 30,000 lines of inventory. Contrary to group accounting instructions, no physical count is planned for the year end. The company intends to rely on the continuous inventory system which commenced operation in March 20X8. Two major problems have occurred with the system to date. Firstly, a trainee failed to enter all the inventory lines before the system went live. Secondly, due to a dispute with the IT provider, there has been no maintenance service for five months.

(3) Kofi Mensah has just returned from a toy fair at which he placed an order for 50,000 dolls produced by a little-known youth cooperative led by his only niece. The chief buyer is said to be fuming over the incident.

(4) In the year to 31 January 20X8, Kofi Mensah received a bonus of C2m, but you were unable to obtain any information in respect of the calculation and authorization of the bonus. No other director of Kumasi Playthings received a bonus in that year and the next highest paid director received a total emoluments package of C300,000.

(5) There is a dispute with a major supplier over the credit facilities offered to Kumasi Playthings. The supplier manufactures and supplies 30% of Kumasi Playthings’ purchases and claims that Kumasi Playthings has continually exceeded its credit period and that its accounting staff are impatient and incompetent.

(6) The company’s overdraft limit of C2.5m is due for renegotiation in April 20X5.

Required
Identify the potentially high risk areas of the audit.

Answer

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Tags: Audit Risk, Control Risk, Financial Statement Assertions, Going Concern, Inventory, Management Override, New Client, Related Party Transactions, Retail Audit, Substantive Procedures
Level: Level 3

Topic: Audit Evidence, Planning

AAA – L3 – Q25a – Audit Approaches

Outline when a substantive audit approach is appropriate versus a combined systems-based and substantive approach.

Question

(a) Outline the circumstances when it is appropriate to use only a substantive approach in an audit and when a combination of a systems-based approach and substantive procedures should be used. (b) Explain what is meant by the business risk approach to an audit and describe advantages and limitations of this approach.

Answer

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Tags: Audit Efficiency, Audit Strategy, Auditor Independence, Business Risk Approach, Financial Statement Impact
Level: Level 3

Topic: Audit Approaches

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

Question

Your firm has just been appointed the first auditor to the Lagos branch of Pinnacle Furnishings, a Nigerian manufacturer of household furniture. The branch has only been in existence for thirteen months. The branch is involved in importing and distributing the furniture through wholesalers and major retailers in Nigeria. The auditors of the Nigerian company are a medium-sized Nigerian firm. There is no legal requirement for a branch audit, but management has expressed concern about the Lagos operations.

A complex computerised accounting and inventory control system is maintained. You have ascertained that the mainframe installation is in Nigeria. The terminals in Nigeria (Lagos) are linked to the mainframe by private telecommunications lines. All input is performed in Lagos with overnight batch processing and output the following day.

The software used is a Nigerian package and all user manuals are written in Yoruba; there are nine volumes (nine manuals) in total. The IT personnel in Lagos are competent users of the system but none of the staff has a detailed knowledge of the actual software.

The Lagos branch has been expanding rapidly and problems have been experienced because its IT department has been unable to keep pace with developments.

An internal auditor is employed, and he reports directly to the manager of the branch, who has set down his programme of work. The internal auditor is not a qualified accountant and his working papers and reporting are not very formalised. He performs daily checking of certain areas and has an audit programme. The programme of work is structured in such a way that a specific area is examined each month.

Required

Identify and comment on the issues raised as they affect your planning of the audit of the Lagos branch.

Answer

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Tags: Audit Planning, Branch Audit, Computerised Systems, Control Risk, Inherent Risk, Internal Audit, Substantive Approach
Level: Level 3

Topic: Planning

AAA – L3 – Q23 – Audit Planning

Draft presentation sections on audit risk and materiality for Wonderful Stores' tender process.

Question

Your firm has been invited to tender for the audit of Marvelous Retail, a chain of twenty stores operating a sophisticated computerised inventory control and re-ordering system. Four other firms have also been invited to tender. As part of the tendering process, you have been asked to produce a written presentation.

Given the complex systems within its business, Marvelous Retail is particularly anxious to establish the ability of your audit procedures to deal with the business risks and has asked you to set out as part of your presentation, your approach concerning the following:

(1) Audit risk, and how your procedures would seek to address it to their business.

(2) Materiality, and how this might be applied.

Required

Draft the sections of the presentation to Marvelous Retail which deal with these two aspects of the audit approach.

Answer

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Tags: Audit Risk, Computerised Systems, Internal controls, Inventory Management, Materiality, Retail Audit
Level: Level 3

Topic: Planning

AAA – L3 – Q22 – Planning

Identify circumstances affecting audit planning for a new small recruitment company and explain their relevance.

Question

Your firm has recently been appointed auditor of Zebra Recruitment, a small company set up two years ago by the managing director, Daniel Zebra, who was previously an investment banker. The initial capital was provided equally by Daniel and the bank. The bank loan and the current overdraft facility are secured on the company’s assets. The overdraft is running just under its limit.
The company places highly qualified personnel in management positions. Daniel employs the following staff:

A senior recruitment consultant, Laura Leopard.
Three other recruitment consultants.
An office manager, Jacob Antelope.
A bookkeeper, Sarah Slug.
Laura places clients in employment and supervises and trains the other recruitment consultants.
Jacob is in charge of all office administration. He raises invoices for fees when Daniel instructs him to do so and pays invoices when Daniel tells him to. Daniel is the sole cheque signatory.
Sarah maintains the accounting records on a PC located in the general office. The PC is regularly backed up and copies retained in a drawer under the desk on which the PC stands.
Required
Identify, from the situation outlined above, circumstances that should be taken into account when planning the audit. Explain why these matters should be taken into account.

Answer

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Tags: Audit Planning, Financial Risk, Internal controls, IT Controls, New Audit Client, Risk Assessment, Small Business
Level: Level 3

Topic: Planning an Audit

AAA – L3 – Q21- Planning

Identify principal control risks for SkyWing Aviation and suggest internal controls to mitigate them.

Question

You are the manager in charge of the audit of SkyWing Aviation, a small airfield which provides fuel, maintenance services, long and short term tie down, hangar facilities and flying tuition in the company’s five light aircraft.

SkyWing Aviation is a family owned company. The two principal shareholders/directors are mainly involved in flying tuition. Other employees are a part-time bookkeeper, a receptionist, two full-time mechanics and other part-time flying instructors.

Required:

(a) Set out the principal control risks for SkyWing Aviation and suggest internal controls which would mitigate those risks. (b) Justify an appropriate audit strategy.

Answer

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Tags: Audit Planning, Aviation Industry, Control Risks, Internal controls, Small Business
Level: Level 3

Topic: Planning an Audit

AAA – L3 – Q20 – Professional responsibility and liability

Discuss ethical and professional issues for MM & Co regarding client Pen Co's tax fraud investigation and Scot family's transactions.

Question

You are senior manager in MM & Co, a firm of Chartered Accountants. Recently, you have been assigned specific responsibility for undertaking annual reviews of existing clients. The following situations have arisen in connection with two clients.

(i) MM & Co was appointed auditor of Pen Co last year, and has recently issued an unmodified opinion on the financial statements for the year ended 31 March 2013. To your surprise, the tax authorities have just launched an investigation into the affairs of Pen Co on suspicion of under-declaring revenue. (7 marks)

(ii) Your firm has provided financial advice to the Scot family for many years and this has sometimes involved your firm carrying out transactions on their behalf. The eldest son, Gino, is to take up a position as a senior government official in a foreign country next month. (3 marks)

Required:
Identify and comment on the ethical and other professional issues raised by each of these matters and state what action, if any, MM & Co should now take.

Answer

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Tags: Audit firm responsibilities, Client Acceptance, Confidentiality, Ethics, Money laundering, Politically exposed persons, Professional conduct
Level: Level 3

Topic: Professional responsibility and liability

AAA – L3 – Q19 – Professional Responsibility and Liability

Evaluate factors in deciding whether to contest or settle a negligence claim by Adom Bank against KT Ampofo & Co. for audit errors.

Question

Adom Bank Limited gave a loan to Kintampo Limited on 15 October 2015 and a review of the first six months of operation in May 2016 of the new shops revealed that the company was not doing well and could not pay the first instalment for the loan from Adom Bank Limited. Further investigation revealed that the audited financial statements signed by KT Ampofo & Co. which showed a profit of GH¢20.2M should have been of a loss of GH¢4.3M.
Adom Bank Limited has indicated its intention to sue your firm for negligence on the basis that it placed reliance on the financial statements audited by your firm.
Required:
Comment on the matters that you should consider in deciding whether your firm will contest the matter in court or seek an out of court settlement with the bank.

Answer

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Tags: Audit Standards, Auditor Liability, Duty of care, Financial Loss, Litigation, Negligence, Out-of-Court Settlement, Professional Ethics
Level: Level 3

Topic: Professional responsibility and liability

AAA – L3 – Q18 – Internal Audit

Comment on the appointment and reporting lines of Ms Ama Asantewaa as Internal Auditor at Asante Akyem District Assembly.

Question

The Asante Akyem District Assembly has appointed Ms Ama Asantewaa as the Internal Auditor. She was appointed by the District Chief Executive (DCE) after he attended a seminar at KIMPA for newly appointed DCEs where the importance of pre-auditing of all payments by Internal Auditors for expenditures incurred by all Government Ministries, Departments Municipal, and District Assemblies (MMDAs) was stressed.
Ms Asantewaa has just completed National Service at the Internal Audit Agency, holds an HND in Accounting and is a native of the same village as the DCE of Asante Akyem District. Ms Asantewaa will report to the District Finance Officer.
At the first meeting after the appointment of the DCE, the District Assembly had set up its standing committees and one of them was the Audit and Finance Sub-Committee. The first meeting of the sub-committee requested Ms Asantewaa to prepare briefing notes to show her vision and approach to the Internal Audit function at the District Assembly and to discuss how she will maintain her independence as well as her knowledge and understanding of Internal Audit Practices recommended by the Institute of Internal Auditors (IIA) as in the IIA’s International Professional Practices Framework (IPPF).
You are an Auditor in Public Practice and the Auditor General of Ghana has appointed you to perform the statutory audit of the Asante Akyem District Assembly. The Audit and Finance Sub-Committee of the District Assembly has requested that you attend the meeting at which the Internal Auditor will brief them and help them in assessing the Internal Auditor’s briefing.
Required:
(a) Comment on the matters that you will consider on the appointment of Ms Asantewaa and her reporting lines as discussed above. (b) State the issues that you should expect Ms Asantewaa to discuss in her briefing to Audit and Finance Sub-Committee of the District Assembly.

Answer

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Tags: Audit committee, Corporate Governance, IIA Standards, Independence, Internal Audit, Public Sector Audit
Level: Level 3

Topic: Internal Audit and Outsourcing

AAA – L3 – Q17 – Professional responsibility and liability

Explain five methods to reduce an audit firm's exposure to litigation claims for negligence.

Question

You are responsible for providing direction to more junior members of the audit department of your firm on technical matters. Several recent recruits have asked for guidance in the area of auditor’s liability. They are keen to understand how an audit firm can reduce its exposure to claims of negligence. They have also heard that in some countries, it is possible to restrict liability by making a liability limitation agreement with an audit client.

Required:

Explain five methods that may be used by an audit firm to reduce exposure to litigation claims.

Answer

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Tags: Auditor Liability, Litigation risk, Negligence claims, Professional standards, Quality management
Level: Level 3

Topic: Professional responsibility and liability

Subject (SQ): ADVANCED AUDIT AND ASSURANCE

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AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

AAA – L3 – Q25a – Audit Approaches

Outline when a substantive audit approach is appropriate versus a combined systems-based and substantive approach.

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

AAA – L3 – Q23 – Audit Planning

Draft presentation sections on audit risk and materiality for Wonderful Stores' tender process.

AAA – L3 – Q22 – Planning

Identify circumstances affecting audit planning for a new small recruitment company and explain their relevance.

AAA – L3 – Q21- Planning

Identify principal control risks for SkyWing Aviation and suggest internal controls to mitigate them.

AAA – L3 – Q20 – Professional responsibility and liability

Discuss ethical and professional issues for MM & Co regarding client Pen Co's tax fraud investigation and Scot family's transactions.

AAA – L3 – Q19 – Professional Responsibility and Liability

Evaluate factors in deciding whether to contest or settle a negligence claim by Adom Bank against KT Ampofo & Co. for audit errors.

AAA – L3 – Q18 – Internal Audit

Comment on the appointment and reporting lines of Ms Ama Asantewaa as Internal Auditor at Asante Akyem District Assembly.

AAA – L3 – Q17 – Professional responsibility and liability

Explain five methods to reduce an audit firm's exposure to litigation claims for negligence.

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Subject (SQ): ADVANCED AUDIT AND ASSURANCE

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Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

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Outline when a substantive audit approach is appropriate versus a combined systems-based and substantive approach.

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Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

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Draft presentation sections on audit risk and materiality for Wonderful Stores' tender process.

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Identify circumstances affecting audit planning for a new small recruitment company and explain their relevance.

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Identify principal control risks for SkyWing Aviation and suggest internal controls to mitigate them.

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Discuss ethical and professional issues for MM & Co regarding client Pen Co's tax fraud investigation and Scot family's transactions.

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Evaluate factors in deciding whether to contest or settle a negligence claim by Adom Bank against KT Ampofo & Co. for audit errors.

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Comment on the appointment and reporting lines of Ms Ama Asantewaa as Internal Auditor at Asante Akyem District Assembly.

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Explain five methods to reduce an audit firm's exposure to litigation claims for negligence.

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