Topic: Audit evidence

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  • 5 Marks

AAA – Nov 2024 – L3 – Q2b – Audit Procedures for Long-term Loan in Ecowud Co. LTD

Audit procedures to obtain sufficient appropriate evidence for a long-term loan.

Ecowud Co. LTD (Ecowud) is a sustainable goal-oriented company that develops, manufactures, and sells plywood made from rice husk and plastic waste. The company operates across Ghana and West Africa and has secured a GH¢3.5 million long-term loan as part of its financial restructuring. The loan agreement has bank-imposed financial conditions, including maintaining a minimum total asset level. If these conditions are breached, the loan becomes immediately repayable.

As part of the audit procedures, you are required to obtain sufficient and appropriate audit evidence regarding the GH¢3.5 million long-term loan.

Required:
Describe FIVE audit procedures you would perform to obtain sufficient appropriate evidence in relation to the long-term loan of GH¢3.5 million.

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  • 1 Marks

AAA – Nov 2013 – L3 – AII – Q3 – Audit Evidence

Explores the type of confirmation sent directly to a debtor for balance verification.

A letter addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct, and if incorrect by what amount is………………………….confirmation.

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  • 1 Marks

AAA – Nov 2013 – L3 – AII – Q2 – Audit Evidence

Audit Evidence, Balance Confirmation, Reporting Dates, Discrepancy, Fraud

A reported difference in a confirmation of balances by a debtor to a client due to different reporting date but not due to misstatement or fraud is known as………………….

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  • 30 Marks

AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

  • Provision for litigation (recognized in financial statements): ₦96 million
  • Litigation cases as defendant: 50
  • Litigation cases as plaintiff: 10
  • Claims in favor of the Bank: ₦2.7 billion
  • Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

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  • 22 Marks

AA – Nov 2023 – L2 – Q2 – Audit Evidence

Discuss requirements and methods for designing an audit sample and circumstances when sampling may be inappropriate.

ISA 530 Audit sampling states that the objective of the auditor when using audit sampling is to provide a reasonable basis to draw conclusions about the population from which the sample is drawn.

Required:

a. In accordance with ISA 530, what are the requirements the auditor should consider in designing a sample size? (6 Marks)

b. Explain FIVE sampling methods that are available for the use of the auditor. (10 Marks)

c. State FOUR circumstances where sampling may not be appropriate for use by the auditor. (4 Marks)

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  • 6 Marks

AA – May 2016 – L2 – Q7a – Audit Evidence

Identify additional information needed to determine the audit opinion for Musky Fresh Ltd following supplier difficulties.

Musky Fresh Limited has been in existence, for a number of years, importing perfume. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of perfume which is manufactured exclusively by one company. The perfume is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this agreement, Musky Fresh Limited pays a percentage of its takings to the store, with a minimum annual payment of N100,000 per store.

The audit is nearing completion, but you have just heard that the Arabian manufacturer is facing serious financial difficulties, and that supplies have ceased.

Required:

a. Set out the further information the auditor would require before reaching his audit opinion. (6 Marks)

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  • 20 Marks

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

Sweet Dreams, a limited liability company, is a new audit client and you are at the
planning meeting for the forthcoming audit. The company has grown rapidly and has
May 31 as year-end. The financial statements have not been audited in previous years
since the organization has only just converted from a partnership to a company.
The company’s bankers have requested that an audit be undertaken on the financial
statements for the year ending May 31, 2016. Higher levels of inventory required to
meet the increasing demand for its products have necessitated a request for an increase
in the bank’s overdraft facility.
The company makes beds, buying its materials directly. At the year-end, inventory
comprises raw materials, work-in-progress and finished goods. It does not undertake
continuous inventory counting but does intend to perform a full inventory count on
May 31, 2016. It uses standard costing system to value finished products and work-inprogress.

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  • 20 Marks

AA – Nov 2022 – L2 – Q4 – Audit Evidence for Engineering Assets and Liabilities

Addressing audit evidence for engineering company assets and liabilities, including procedures for confirmations and plant disposals.

You are part of an audit team engaged on the audit of an engineering company which has a substantial amount of plant and machinery in its books. While reviewing the accounts, you also observed that there were some current assets and liabilities that may require external confirmations.

Required:

a. How would you establish the amount and level of audit evidence required for the current assets and liabilities? (5 Marks)

b. State which procedures will be applied to generate audit evidence in the following scenarios:

i. Confirming the accuracy of figures in the trade receivables account
ii. Confirming that the plant and machinery purchased in the year is actually in use during the year
iii. Ascertaining that the change in performance is in line with expectations
iv. Confirming the accuracy of the total receivable figures in the statement of financial position
v. Confirming contingent liability as to legal fees (5 Marks)

c. State the audit procedures you would take concerning the disposal of plant and machinery. (5 Marks)

d. State the requirements of ISA 505 concerning maintaining control over the external confirmation requests of current assets and liabilities. (5 Marks)

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  • 20 Marks

AA – Nov 2014 – L2 – Q2 – Audit Evidence

Discuss factors affecting sufficiency of audit evidence and audit procedures for current liabilities in Radcliffe Co.

Radcliffe Co.

ISA 500 Audit Evidence states that the objective of the auditor is to “design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.”

Required:

a. List and explain the factors which will influence the auditors’ judgment concerning the sufficiency of audit evidence obtained. (4 Marks)

b. You are the audit senior in charge of the audit of Radcliffe Co, a company that has been trading for over 50 years. Radcliffe Co manufactures and sells tables and chairs directly to the public. The company’s year-end is 31 December. Current liabilities are shown on Radcliffe Co’s statement of financial position as follows:

Description 2013 2012
Trade payables 884,824 816,817
Accruals 56,903 51,551
Provision for legal action 60,000 –
Total 1,001,727 868,368

The provision for legal action relates to a claim from a customer who suffered an injury while assembling a chair supplied by Radcliffe Co. The directors of Radcliffe Co dispute the claim, although they are recommending an out-of-court settlement to avoid damaging publicity.

List the substantive audit procedures that you should undertake in the audit of the current liabilities of Radcliffe Co for the year ended 31 December 2013. For each procedure, explain the purpose.

Marks are allocated as follows:

  • Trade payables (9 Marks)
  • Accruals (3 Marks)
  • The provision for legal action (4 Marks)

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  • 20 Marks

AA – May 2021 – L2 – Q5 – Audit Evidence

Explanation of sufficient and appropriate audit evidence, factors in deciding audit evidence amount, auditor actions on inadequate evidence, and audit documentation rationale.

JAK Professional Services is a member firm of James Candle International in Cayman Islands. The member firm’s practice review exercise has just been concluded. As part of the global firm, practice reviews are done yearly on selected engagement files where member firms review one another. Some of the issues included in the review notes raised on JAK Professional Services audit files are as follows:

i. Lack of sufficient and appropriate audit evidence regarding audit of cash and bank as well as inventory balances. This was partly due to the fact that no evidence existed in the file regarding physical cash and inventory count which were material;

ii. No proper documentation of confirmation replies received from banks, receivables, and solicitors;

iii. No cash flow working documentation to show how the figures on the cash flow statements in the financial statements were arrived at;

iv. Improper documentation of how expected credit loss on financial instruments in the financial statements were arrived at; and

v. Figures in the financial statements could not be traced to the respective working papers.

As an experienced auditor, some of the trainees were not impressed about the report and have approached you for clarification.

You are required to explain:

a. Meaning of ‘sufficient and appropriate audit evidence’ (5 Marks)
b. Factors to be considered when deciding amount of audit evidence needed (4 Marks)
c. What auditors should do in case of inadequate audit evidence (5 Marks)
d. Reasons for sufficient and appropriate audit documentation (6 Marks)

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  • 10 Marks

AAA – Nov 2023 – L3 – Q5a – Current Issues, Audit Evidence

Explain the stages of money laundering and audit obligations in a scenario involving suspicious transactions.

a) You have commenced the audit of Atika Ltd, a company involved in the importation and sale of plumbing materials. As part of the audit, you have noticed the following:

  1. Atika Ltd does not pay its suppliers in Germany through the bank. It relies mostly on the black market for the transfer of funds to its suppliers.
  2. Atika only sells its goods in Ghana.
  3. On 25 March within the audit year, there was a cash deposit of US$2,500,000.00 into the forex account of Atika Ltd.
  4. On 30 March the company transferred the following:
    • US$499,999.99 to an unknown account in Cameroon
    • US$399,999.99 to an unknown account in Kenya
    • US$499,999.99 to an unknown account in Niger
    • US$250,000.00 to the personal account of the Managing Director
    • US$150,000.00 to an unknown company.
  5. The company’s general ledger shows a revenue of GH¢1,560,000.00.
  6. The import documentation shows purchases of GH¢36,000,000.00. There is no evidence of payment for the goods from Atika Ltd’s bank accounts.
  7. The closing inventory amounted to GH¢2,145,200.00.

The Audit Manager has raised the issue of money laundering considering the nature of the transactions above.

Required:

i) Explain to the team members the various stages of money laundering and show how the above transactions confirm the client’s engagement in money laundering. (6 marks)

ii) What are the obligations on the firm for money laundering? (4 marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – Q2 – Audit Evidence, Evaluation and Review

Discuss the need for financial statement amendments and audit procedures for three subsequent events: a lawsuit, a warehouse flood, and a receivable.

Omega Ltd was incorporated to engage in the production, supply and retail of sachet water. The final audit for the Financial Statements ending 31 December 2022 is nearly complete and it is proposed that the Financial Statements and Audit Report will be signed in March 2023. Revenue for the year is GH¢78 million and profit before tax is GH¢7.5 million. The following events have occurred subsequent to the end of the reporting year of the company.

  1. Lawsuit:
    A key supplier of Omega Ltd is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by the supplier is GH¢1 million. This has been disclosed as a contingent liability in the Notes to the Financial Statements. However, correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Omega Ltd of GH¢0.6 million. It is likely that the company will agree to this.
    (7 marks)
  2. Warehouse:
    Omega Ltd has three warehouses sited in different locations. Following extensive rain on 20 February, 2023, one of the warehouses was completely flooded and as a result, all inventory in the warehouse valued at GH¢1 million was damaged and has been disposed off. The insurance company has already been contacted. No amendments or disclosures have been made in the financial statements.
    (7 marks)
  3. Account Receivables:
    A customer of Omega Ltd has been experiencing cash flow problems and its year-end balance is GH¢0.3 million. The company has just become aware that its customer is experiencing significant going concern difficulties. Omega Ltd believes that as the company has been trading for many years, they will receive some, if not full payment from the customer, hence the receivables balance has not been adjusted.
    (6 marks)

Required:
Using the three issues above: a) Discuss whether the financial statements require amendment;
b) Describe audit procedures that should be performed in order to form a conclusion on the amendment; and
c) Explain the impact on the audit report should the issues remain unresolved.

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  • 5 Marks

AAA – Aug 2022 – L3 – Q5b – Audit evidence

Explain the relevance of CAATs in evaluating audit evidence.

Computer-Assisted Audit Techniques (CAATs) is a growing field within the IT audit profession. CAATs is the practice of using computers to automate the IT audit processes.

Required:
Explain THREE (3) relevance of CAATs in evaluating audit evidence.

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  • 20 Marks

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

You are the Senior Manager of Posterity Chartered Accountants. Security-Watch Ltd is an audit client of your firm, and the audit for the financial year ended 31 December 2021 is at the completion stage. The company installs and maintains security systems for businesses and residential customers.

Materiality for the audit of the company’s financial statements has been determined to be GH¢600,000. You are reviewing the audit working papers, and have gathered the following information:

Fraud
The Company’s Finance Director has informed the audit team that during the year, a fraud was suspected to have been committed by a Finance Officer, Ama Fofie, in the procurement department of the company. The Finance Officer is alleged to have raised fictitious supplier invoices and paid the invoiced amounts into her personal bank account. When questioned by the company’s Finance Director, Ama Fofie is alleged to have confessed that she had stolen GH¢50,000 from the company. The Finance Director asked the audit team not to perform any procedures in relation to the alleged fraudulent act, as the amount is immaterial. The Finance Director also stated that the financial statements would not be adjusted in relation to the fraud.
The only audit evidence on file is a written representation from management acknowledging the existence of the fraud, and a list of the fictitious invoices which is alleged to have been raised by Ama Fofie, provided by the Finance Director. The audit working papers conclude that the fraud is immaterial and that no further work is needed.
(6 marks)

Development Costs
In July 2021, the company commenced the development of a new security system, and incurred expenditure of GH¢1,000,000 up to the financial year end, which has been capitalised as an intangible non‑current asset. The only audit evidence obtained in relation to this balance is as follows:

  • Attachment of a sample of the costs included in the GH¢1,000,000 capitalised to supporting documentation such as supplier invoices.
  • Cash flow projection for the project, which indicates that a positive cash flow will be generated by 2022. The projection has been arithmetically checked.
  • A written representation from management stating that ‘management considers that the development of this new product will be successful’.

You are aware that when the Finance Director was asked about the cash flow projection which he had prepared, he was reluctant to answer questions, simply saying that ‘the assumptions underlying the projection have been agreed to be assumptions contained in the company’s business plan’. He provided a spreadsheet showing the projection, but the underlying information could not be accessed as the file was password protected and the Finance Director would not provide the password to the audit team.

Required:
a) Discuss the implications of the fraud for the completion of the audit, and the actions to be taken by Posterity Chartered Accountants.
(6 marks)

b) In respect of the development costs:
i) Comment on the sufficiency and appropriateness of the audit evidence obtained.
(10 marks)
ii) Recommend TWO (2) ways Posterity Chartered Accountants could obtain further evidence about the new security system.
(4 marks)

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  • 20 Marks

AAA – Aug 2022 – L3 – Q2 – Audit evidence | Professional responsibility and liability

Evaluate audit risks for Pato Plc and discuss the impact of management's refusal to provide written representation.

a) Pato Plc offers internet streaming services for films and TV programs and subscription services. You are the recently appointed Senior Manager of Tinka Partners responsible for the audit of Pato Plc. You are planning the audit as required by ISA 300: Planning an audit of financial statements and have come across these two issues following a discussion between the audit engagement partner and a representative of the client’s management:

Legal Case:
In January 2022, a legal case was initiated against Pato Plc by Filmco Plc, a film production company. Filmco Plc claims that Pato Plc has infringed on its copyright by streaming a film in specific countries for which a license has not been acquired. Pato Plc insists that the film is covered by a general license which was acquired several years ago. Pato Plc’s Finance Director is not willing to recognize the legal claim within the financial statements as he is confident that the claim against the company will not be successful, and he does not want to discuss it further with the audit team, emphasizing that there is no relevant documentation available for evaluation at this time.
(7 marks)

Annual Incentive Scheme:
For several years, Pato Plc has operated an annual incentive scheme for staff, under the terms of which employees are eligible to receive an annual incentive payment linked to the achievement of selected targets. The scheme operates for all employees, with some employees’ targets linked to profitability, while others are aligned to non-financial measures including customer satisfaction, customer loyalty, and customer complaints, among others. Participants in the scheme are entitled to earn a maximum annual incentive payment of 5% of their salary. Approximately 6,590 employees, including the senior executive directors, are entitled to participate in the annual incentive scheme. Last year the average bonus payment was GH¢1,250 per participant.
(7 marks)

Required:
Evaluate the principal audit risk(s) in planning the audit of Pato Plc.

b) The Management of Pato Plc has decided not to provide the audit firm with the written representation for the legal case as they feel that it is unnecessary. The potential provision for the legal case is 6% of profit before tax.
Required:
As the Auditors of Pato Plc, discuss the steps you should take and the impact on the audit report in relation to the refusal to provide the written representation.
(6 marks)

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  • 10 Marks

AAA – Nov 2016 – L3 – Q5b – Assurance Services | Audit Evidence

Evaluate the environmental issues that could lead to misstatements and recommend audit actions for J & K Mining Company.

J & K Mining Company operates in the Abuakwa Community of the Eastern Region as a Sand Wining Company. The youth of the area had been opposing the activities of the company of late. Sasana, the Managing Director of J & K Mining Company, approached Kaku & Associates, a Chartered Accounting firm, to accept an attest engagement to examine and report on the environmental issues of J & K Mining Company Ltd. for the year ended 31 December 2013.

Required:
i) Evaluate the environmental issues that may lead to the risk of misstatements in the Financial Statements. (3 marks)

ii) Recommend the actions and the audit procedures that Kaku and Associates should undertake when they realize that J & K Mining Company Ltd. has environmental issues that may affect the Financial Statements. (7 marks)

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  • 10 Marks

Nov 2016 – L3 – Q5a – Reporting | Audit Evidence

Analyze the reluctance of Racific Co.’s directors to disclose going concern issues and the implications for the auditors.

You are the manager responsible for performing hot reviews on audit files where there is a potential disagreement between your firm and the client regarding a material issue. You are reviewing the going concern section of the audit file of Racific Co, a client with considerable cash flow difficulties, and other, less significant operational indicators of going concern problems. The working papers indicate that Racific Co is currently trying to raise finance to fund operating cash flows, and state that if the finance is not received, there is significant doubt over the going concern status of the company. The working papers concluded that the going concern assumption is appropriate, but it is recommended that the financial statements should contain a note to explain the cash flow problems faced by the company, along with a description of the finance being sought, and an evaluation of the going concern status of the company. The directors do not wish to include the note in the financial statements.

Required:
i) Consider and comment on the possible reasons why the directors of Racific Co. are reluctant to provide the note to the financial statements. (5 marks)

ii) Discuss the implications for the auditors if the directors refuse to include the disclosure note. (5 marks)

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  • 20 Marks

AAA – Nov 2019 – L3 – Q3 – Reporting, Evaluation and Review, Audit evidence

Identify purposes of audit findings communication and matters to report to governance.

You are the manager responsible for the audit of CGL, a public interest entity, for the year ended 31 December 2018. Your firm was appointed as auditors of CGL in September 2017. The audit work has been completed, and you are reviewing the working papers in order to draft a report to those charged with governance. The statement of financial position (balance sheet) shows total assets of GH¢ 78 million (2017 – GH¢ 66 million). The main business activity of CGL is the manufacture of farm machinery.

During the audit of property, plant, and equipment it was discovered that controls over capital expenditure transactions had deteriorated during the year. Authorisation had not been granted for the purchase of office equipment with a cost of GH¢ 225,000. No material errors in the financial statements were revealed by audit procedures performed on property, plant, and equipment.

An internally generated brand name has been included in the statement of financial position (balance sheet) at a fair value of GH¢ 10 million. Audit working papers show that the matter was discussed with the financial controller, who stated that the GH¢ 10 million represents the present value of future cash flows estimated to be generated by the brand name. The member of the audit team who completed the work programme on intangible assets has noted that this treatment appears to be in breach of IAS 38 Intangible Assets, and that the management refuses to derecognise the asset.

Problems were experienced in the audit of inventories. Due to an oversight by the internal auditors of CGL, the external audit team did not receive a copy of inventory counting procedures prior to attending the count. This caused a delay at the beginning of the inventory count, when the audit team had to quickly familiarise themselves with the procedures. In addition, on the final audit, when the audit senior requested documentation to support the final inventory valuation, it took two weeks for the information to be received because the accountant who had prepared the schedules had mislaid them.

Required:

a) Identify FIVE (5) purposes of including ‘findings from the audit’ (management letter points) in a report to those charged with governance. (5 marks)

b) From the information provided above, identify the matters which should be included as ‘findings from the audit’ in your report to those charged with governance, and explain the reason for their inclusion. (15 marks)

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  • 20 Marks

AAA – Nov 2019 – L3 – Q2 – The audit approach, Planning, Audit evidence

Evaluate five business risks facing Retail Specialist Co. Ltd (RSCL) during audit planning.

Retail Specialist Co. Ltd (RSCL) is a large company, operating in the retail industry, with a year ended 31 December 2018. You are a manager in Jen & Co, responsible for the audit of Retail Specialist Co. Ltd (RSCL), and you have recently attended a planning meeting with Olivia Danso, the finance director of the company. As this is the first year that your firm will be acting as auditor for Retail Specialist Co. Ltd (RSCL), you need to gain an understanding of the business risks facing the new client. Notes from your meeting are as follows:

Retail Specialist Co. Ltd (RSCL) sells clothing, with a strategy of selling high fashion items under the RSCL brand name. New ranges of clothes are introduced to stores every eight weeks. The company relies on a team of highly skilled designers to develop new fashion ranges. The designers must be able to anticipate and quickly respond to changes in consumer preferences. There is a high staff turnover in the design team.

Most sales are made in-store, but there is also a very popular catalogue, from which customers can place an order online, or over the phone. The company has recently upgraded the computer system and improved the website, at significant cost, in order to integrate the website sales directly into the general ledger, and to provide an easier interface for customers to use when ordering and entering their credit card details. The new online sales system has allowed overseas sales for the first time.

The system for phone ordering has recently been outsourced. The contract for outsourcing went out to tender and Retail Specialist Co. Ltd (RSCL) awarded the contract to the company offering the least cost. The company providing the service uses an overseas phone call centre where staff costs are very low.

Retail Specialist Co. Ltd (RSCL) has recently joined the Ethical Trading Initiative. This is a ‘fair-trade’ initiative, which means that any products bearing the RSCL brand name must have been produced in a manner which is clean and safe for employees, and minimises the environmental impact of the manufacturing process. A significant advertising campaign promoting Retail Specialist Co. Ltd (RSCL)’s involvement with this initiative has recently taken place. The RSCL brand name was purchased a number of years ago and is recognised at cost as an intangible asset, which is not amortised. The brand represents 12% of the total assets recognised on the statement of financial position.

The company owns numerous distribution centres, some of which operate close to residential areas. A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm. The authority also monitors the noise level of each centre, and can revoke the operating licence if a certain noise limit is breached. Two licences were revoked for a period of three months during the year.

To help your business understanding, Olivia Danso has e-mailed to you extracts from the draft statement of comprehensive income, and the relevant comparative figures, which are shown below.

Extract from draft Statement of Comprehensive Income
Year ending 31 December

Revenue: Retail outlets 2018 Draft (GH¢ million) 2017 Actual (GH¢ million)
Phone and on-line sales 1,030 1,140
Total revenue 425 395
Operating profit 1,455 1,535
Finance costs 245 275
Profit before tax (25) (22)
Profit before tax 220 253

Additional Information:

Number of stores 2018 Draft 2017 Actual
Number of stores 210 208
Average revenue per store GH¢ 4·905 mn GH¢ 5·77 mn
Number of phone orders 680,000 790,000
Number of on-line orders 1,020,000 526,667
Average spend per order GH¢ 250 GH¢ 300

Required:

a) Prepare briefing notes to be used at a planning meeting with your audit team, in which you evaluate FIVE (5) business risks facing Retail Specialist Co. Ltd (RSCL) to be considered when planning the final audit for the year ended 31 December 2018.

(10 marks)

b) Using the information provided, identify and explain FIVE (5) risks of material misstatements that may affect the financial statements you are going to audit. (10 marks)

 

 

 

 

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  • 20 Marks

AAA – Nov 2016 – L3 – Q3 – Planning | Audit Evidence

Identify and explain audit risks, procedures, and evidence related to Kpandu Sika Ltd. for the year ended 31 December 2015.

You are a manager in Amable & Co, a firm of Chartered Accountants, responsible for the audit of Kpandu Sika Limited for the year ended 31 December 2015. Kpandu Sika Limited is a company listed on the Ghana Stock Exchange (GSE) which has been a client of your firm in the past three years. The company manufactures consumer electronic appliances which are then sold to major retail organizations. You are aware that during the last year, Kpandu Sika Limited lost several customer contracts due to cheap imports. However, a new division has been created to sell its products directly to individual customers in Ghana and worldwide via a new website, which was launched on 1 December 2015.

Financial information provided by the Finance Manager is shown below:

STATEMENT OF PROFIT OR LOSS

 

STATEMENT OF FINANCIAL POSITION AS AT

 

EQUITY AND LIABILITIES

NOTES:
i) Kpandu Sika Limited established an equity-settled share-based payment plan for its executives on 1 January 2015. 250 executives and senior managers have received 100 share options each, which vest on 31 December 2015 if the executive remains in employment at that date and if Kpandu Sika Limited’s share price increases by 10% per annum. No expense has been recognized this year as Kpandu Sika Limited’s share price has fallen by 5% in the last six months, and so it is felt that the condition relating to the share price will not be met this year-end.
ii) On 1 July 2015, Kpandu Sika Limited entered into a lease which has been accounted for as a finance lease and capitalized at GH¢19 million. The leased property is used as the head office for Kpandu Sika Limited’s new website development and sales division. The lease term is for five years and the fair value of the property at the inception of the lease was GH¢76 million.
iii) On 30 June 2015 Kpandu Sika Limited’s properties were revalued by an independent expert.
iv) A significant amount has been invested in the new website, which is seen as a major strategic development for the company. The website has generated minimal sales since its launch last month, and advertising campaigns are currently being conducted to promote the site.
v) The long-term borrowings are due to be repaid in two equal installments on 30 September 2016 and 2017. Kpandu Sika Limited is in the process of renegotiating the loan, to extend the repayment dates, and to increase the amount of the loan.
vi) The provision relates to product warranties offered by the company.
vii) The overdraft limit agreed with Kpandu Sika Limited’s bank is GH¢5.7 million.

Required:
a) Using the information provided by the Finance Manager, identify and explain the principal audit risks to be considered in planning the final audit.
(10 marks)

b) State the principal audit procedures which should be performed in respect of the provision for the product warranties offered by the company.
(6 marks)

c) State the principal audit evidence which you would expect to find in respect of the classification of the new lease in terms of IAS 17 Leases (Do not consider the application of the new leasing standard IFRS 16 Leases).
(4 marks)

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