You are a manager in the audit department of Yao Asaglo & Co, a firm of Chartered Certified Accountants, and you have just been assigned to the audit of TechNova Limited, a new audit client of your firm, with a financial year ended 31 May 2015. TechNova Limited has just been listed on the Accra Stock Exchange (ASE). It is an e-commerce facility and has grown rapidly in the last few years.
TechNova Limited was formed ten years ago by Ms. Esi Mensah, a graduate in e-commerce from Kofi University. The company designs, develops software for e-commerce with high security features which have won industry awards. In the last two years, the company invested AC₵400m in creating new software to appeal to a large number of multi-national companies, and sales are now made in over 10 countries. The software is developed in this country, but the manufacture of the security features, for obvious reasons, takes place overseas.
The software is largely sold through retail outlets, but approximately 30% of TechNova Limited’s revenue is generated through sales made on the company’s website.
In some countries, TechNova Limited’s products are distributed under a franchise agreement which gives the franchise holder the exclusive right to sell the products in that country. The cost of each franchise to the distributor depends on the estimated sales in the country to which it relates, and the franchise lasts for an average of five years. The revenue which TechNova Limited receives from the sale of a franchise is deferred over the period of the franchise. At 31 May 2015, the total amount of deferred revenue recognised in TechNova Limited’s statement of financial position is AC₵72 million.
As part of a five-year strategic plan, TechNova Limited obtained an ASE listing in December 2014. The listing and related share issue raised a significant amount of finance, and many shares are held by institutional investors. Esi Mensah retains a 20% equity shareholding, and a further 10% of the company’s shares are held by her family members.
Despite being listed, the company does not have an internal audit function, and there is only one non-executive director on the board.
(a) Comment on the matters that you should consider specific to initial audit engagement when developing the audit strategy for TechNova Limited. (b) Evaluate the audit risks to be considered in planning the audit of TechNova Limited.
