Tag (SQ): Profitability issues

a) Below is a summary of the financial information of Afrimax Ltd, an audit client.

Financial performance

Financial position

Additional information:

1. 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.
2. The Borrowings relate to a 3-year loan facility from Drobax Area Rural Bank Ltd. The loan balance is due on 31 December 2025.
3. In arriving at the carrying amount of inventory, a provision of GH¢12 million was posted.
4. An expected credit loss of GH¢18 million is also included in accounts receivable.
5. 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.