Topic: Completion Procedures and Reporting

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AA – July 2023 – L2 – Q4a – Completion Procedures and Reporting, Planning and Approach for Audit and Assurance Engagements

Explanation of going concern indicators for Kitchenhub Ltd and the stages when analytical procedures can be used.

Question

a) You are an Audit Assistant of Abinchi & Associate and your firm is planning the audit of a client. You have been provided with draft financial statements extracts and the following information is about your client, Kitchenhub Ltd, who is a kitchen equipment manufacturer. The company’s year-end is 30 April 2022.

Kitchenhub Ltd has recently been experiencing trading difficulties, as its major customer who owes GH¢0.6 million to Kitchenhub Ltd has ceased trading, and it is unlikely any of this will be received. However, the balance is included in the financial statements extracts below. The sales director has recently left Kitchenhub Ltd and is yet to be replaced.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year. As a result of this, the company is unable to settle suppliers whose payments are due, and some are threatening legal action to recover the sums owing.

Due to its financial difficulties, Kitchenhub Ltd defaulted on a loan repayment, and as a result of this breach in the loan contract, the bank has asked that the loan of GH¢4.8 million be repaid in full within six months. In view of this, the directors have decided not to pay dividends for the period.

Below is the Financial Statement extract for Kitchenhub Ltd for the year ended 30 April:

	Draft 2022 (GH¢)	Actual 2021 (GH¢)
Current assets
Inventory	3.4	1.6
Receivables	1.4	2.2
Cash	–	1.2
Current liabilities
Trade payables	1.9	0.9
Overdraft	0.8	–
Loans	4.8	0.2

Required:
i) Explain SEVEN (7) factors that indicate that Kitchenhub Ltd may not be operating as a going concern entity. (7 marks)
ii) Identify THREE (3) stages of an audit when analytical procedures can be used by Abinchi & Associate. (3 marks)

Answer

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Tags: Analytical procedures, Audit Planning, Financial difficulties, Going Concern
Level: Level 2

Topic: Completion Procedures and Reporting, Planning and Approach for Audit and Assurance Engagements
Series: JULY 2023

AA – Nov 2023 – L2 – Q4c – Completion Procedures and Reporting, Audit and Assurance Evidence

This question explains the auditor's actions if management refuses to provide representations.

Question

ISA 580: Written Representations guides the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting management representations, and the action to be taken if management refuses to provide appropriate representations.

Required:
Explain the action to be taken by the auditor if management refuses to provide representations.
(3 marks)

Answer

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Tags: ISA 580, Qualified Opinion, Scope Limitation, Written representations
Level: Level 2

Topic: Audit and Assurance Evidence, Completion Procedures and Reporting
Series: NOV 2023

AA – Nov 2019 – L2 – Q5b – Completion Procedures and Reporting

Discusses authoritative sources for the auditor’s report and explains the importance of management and auditor responsibility paragraphs.

Question

The basic objective of an audit is to form and express an opinion on the financial statements. The tangible means by which the auditor achieves this objective is the Auditors Report that is issued to members of the company after the completion of the audit.

Required:
i) Discuss TWO (2) authoritative sources which govern the form and content of the auditor’s report to members. (4 marks)
ii) Explain the essence or importance of Management Responsibility and Auditor’s Responsibility paragraphs in the auditor’s report. (6 marks)

Answer

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Tags: Audit opinion, Auditor Responsibility, Auditor's Report, ISA 700, ISA 701, Management Responsibility
Level: Level 2

Topic: Completion Procedures and Reporting
Series: NOV 2019

AA – Mar 2023 – L2 – Q5c – Completion Procedures and Reporting

Explain the objectives of communicating with those charged with governance and list matters to be communicated by an auditor.

Question

In addition to the Auditor’s Report, the auditor communicates with those charged with governance and audit committees of their clients.

Required:
i) What are the objectives of an auditor communicating with those charged with governance or audit committees? (3 marks)
ii) State SEVEN (7) matters to be communicated with those charged with governance or audit committees of a non-listed company by an auditor. (7 marks)

Answer

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Tags: Audit Committees, Auditor's Report, Communication, Governance
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAR 2023

AA – Mar 2023 – L2 – Q5b – Completion Procedures and Reporting

List the responsibilities of an auditor in auditing historical financial statements under ISA 700.

Question

Your manager is presenting to the Engagement Partner the draft opinion on the financial statements of a recently audited client. Your manager has tasked you to research into the responsibilities of an external auditor for auditing historical financial statements in line with ISA 700 (Revised): Forming an Opinion and Reporting on Financial Statements.

Required:
State FIVE (5) responsibilities of an auditor in line with the above standard.

Answer

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Tags: Auditors' responsibilities, Financial Statements, ISA 700, Material Misstatement

Topic: Completion Procedures and Reporting
Series: MAR 2023

AA – Mar 2023 – L2 – Q4a – Completion Procedures and Reporting

Explain the auditor's responsibilities regarding subsequent events and how a legal claim should be reported in financial statements.

Question

You are an audit assistant for an audit client with a year-end of 31 December 2021. A major customer has instituted a legal action against the company for faulty goods supplied after the year-end. A recently recruited intern who was part of your team was of the opinion that because of the cut-off assertion, any event after 31 December 2021 should not affect the financial statements and therefore the auditor should have no responsibility for issues occurring after the reporting year.

Following your audit of the client, you have concluded that there is a possibility, but not a probability, that the claim will be successful. However, management has decided not to make a provision or disclosure in the financial statements for this matter.

Required:
In reference to the preamble:
i) Describe the auditor’s responsibility for subsequent events occurring between:

The year-end date and the date the auditor’s report is signed; and
The date the auditor’s report is signed and the date the financial statements are issued. (6 marks)

ii) Explain how the matter should be reported in the financial statements. (4 marks)

Answer

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Tags: Auditors' responsibilities, Financial Statements, IAS 37, Legal claims, Subsequent Events
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAR 2023

AA – Nov 2017 – L2 – Q5b – Completion Procedures and Reporting

Explain three matters that should be communicated to those charged with governance as per ISA 260.

Question

ISA 260 Communication with those charged with governance requires that certain issues are communicated to those charged with governance. You are an audit manager of Adiepena and Co. Chartered Accountants, and one of the junior staff has asked you about concerns that can be communicated to those charged with governance.

Required:
Explain three matters that could be communicated to those charged with governance.
(3 marks)

Answer

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Tags: Audit Matters, Audit report, Communication, Going Concern, Governance, ISA 260, Significant Accounting Policies
Level: Level 2

Topic: Completion Procedures and Reporting
Series: NOV 2017

AA – Nov 2015 – L2 – Q5 – Completion Procedures and Reporting, Audit and Assurance Evidence

Discussing financial statement amendments for inventory valuation, depreciation, and contingent liabilities, and their impact on the auditor’s report.

Question

Big Build is a listed construction company with an annual revenue of GHS350m. Big Build’s draft statement of profit or loss shows a profit before tax for the year ended December 31, 2008, of GHS40m.

Big Build’s audit firm is conducting an audit. This is the first audit of Big Build that this audit firm has conducted. An enquiry to the previous audit firm revealed no reasons for concern. On completing audit work at the company’s premises, the audit senior drafts a memo, extracts from which are reproduced below:

(a) Inventory valuation:
Inventories include GHS7m, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country’s Highways Agency, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review, and Big Build speculated on a favourable outcome of this review and purchased the material. In February 2009, shortly before the financial statements were approved by the directors, the Highways Agency reported that it would not, currently, accept the use of this material. If used on non-Highways Agency contracts, the material’s net realisable value would not exceed GHS2m.

The finance director maintains that the issue of the Highways Agency report was a non-adjusting event after the reporting period. The write-down of the inventory should, therefore, be reflected in the next period’s financial statements.

(b) Depreciation:
During the year ended December 31, 2005, the company purchased two computer-controlled earth movers at a cost of GHS2,500,000 each and a further two at the same price during the year ended December 31, 2006. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 2008, the company has decided that improvements in technology made it worthwhile scrapping their first two computer-controlled earth movers and replacing them with the latest model at a cost of GHS6,000,000 each. The company provides a full year’s depreciation charge in the year of acquisition and none in the year of disposal.

The company’s chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this, the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He urges that continued improvements in technology cannot be foreseen, and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence.

(c) Contingent liability:
The company is being sued for GHS50m by the Highways Agency for defective work on a recently completed road. The company maintains that it met the Highways Agency’s specification and it is the Agency’s engineers who are at fault in drawing up the specification. Big Build maintains that it has no case to answer, that the possibility of loss is remote, and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company’s road building techniques are under investigation by the Highways Agency. If the company were to lose the case, its future going concern would be threatened. No disclosure has been made in the financial statements.

Required:
For each of the following three issues, discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
a) Inventory valuation.
(6 marks)
b) Depreciation.
(7 marks)
c) Contingent liability.
(7 marks)

Total: 20 marks

Answer

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Tags: Audit opinion, Contingent Liabilities, Depreciation, Financial Statement Amendments, Inventory Valuation
Level: Level 2

Topic: Audit and Assurance Evidence, Completion Procedures and Reporting
Series: NOV 2015

AA – Nov 2015 – L2 – Q2a and b – Audit and Assurance Risk Environment, Completion Procedures and Reporting

This question covers auditors’ responsibilities for subsequent events and going concern assessments, as well as internal control reporting.

Question

You are an audit senior for an audit firm and are currently working on the audit of Technolab, a company that produces sophisticated electronic laboratory equipment. The company imports a high proportion of the components it uses from China. The equipment is used by some laboratories dealing with hazardous chemicals.

As the audit draws to a close, the partner in charge has asked you to ensure that all procedures relating to subsequent events and going concern are properly performed. You are to consider the audit work to be performed in relation to ISA 560 Subsequent Events and ISA 570 Going Concern.

Required:

a) Describe the auditor’s responsibilities for subsequent events occurring between:
i. The year-end date and the date the auditor’s report is signed.
ii. The date the auditor’s report is signed and the date the financial statements are issued.
(6 marks)

b) Going concern relates to the judgment that an entity will continue to trade for the foreseeable future.
i. Explain the responsibilities of directors and auditors in relation to going concern.
(3 marks)
ii. Explain the audit procedures that the auditor could carry out when conducting the going concern review of Technolab.
(4 marks)

c) Technolab has an internal audit department. The partner in charge of the audit is seeking clarification regarding how any deficiencies in internal control should be identified and communicated to management. The partner feels the report produced by the external auditors may duplicate the report produced by the internal audit function.

Required:
Explain how the purpose and content of an internal auditor’s report on internal control deficiencies differ from one prepared by the external auditor.
(7 marks)

Total: 20 marks

Answer

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Tags: Audit Responsibilities, Going Concern, ISA 560, ISA 570, Subsequent Events
Level: Level 2

Topic: Audit and Assurance Risk Environment, Completion Procedures and Reporting
Series: NOV 2015

AA – Nov 2015 – L2 – Q1b – Audit and Assurance Evidence, Completion Procedures and Reporting

This question covers the audit procedures to confirm inventory existence, completeness, and valuation at the year-end.

Question

Describe the audit procedures that the auditor should perform at the year-end to confirm each of the following:
i. The existence of inventory.
ii. The completeness of inventory.
iii. The valuation of inventory.
(8 marks)

Answer

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Tags: Audit Procedures, Completeness, Evidence, Existence, Inventory, Valuation
Level: Level 2

Topic: Audit and Assurance Evidence, Completion Procedures and Reporting
Series: NOV 2015

AA – May 2017 – L2 – Q5b – Completion Procedures and Reporting

Explanation of audit procedures in reviewing the overall financial statements.

Question

Auditors go through a checklist of procedures before expressing an opinion on the financial statements.

Required:
Explain the audit procedure in relation to the review of the overall financial statements.

Answer

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Tags: Analytical review, Audit Procedures, Compliance, Financial Statement Review
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2017

AA – May 2017 – L2 – Q5a – Completion Procedures and Reporting

Explanation of the audit objectives and procedures for opening balances in an initial audit engagement.

Question

ISA 510 Initial Audit Engagements provides guidance to auditors on the audit of opening balances when conducting an initial audit engagement.

Required:
Explain the audit objective and the audit procedures in relation to opening balances.

Answer

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Tags: Audit Procedures, Initial audit engagement, ISA 510, Opening Balances
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2017

AA – Nov 2016 – L2 – Q5d – Completion Procedures and Reporting

List circumstances under which an auditor may issue a qualified opinion.

Question

State with details TWO circumstances under which an auditor may issue a qualified opinion. (3 marks)

Answer

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Tags: Audit Scope Limitations, Misstatements, Qualified Opinion
Level: Level 2

Topic: Completion Procedures and Reporting
Series: NOV 2016

AA – Nov 2016 – L2 – Q5c – Completion Procedures and Reporting

List and describe the three types of modified opinions that an auditor may issue.

Question

Distinguish the three types of modified opinions that the auditor may issue on financial statements audited by him.

Answer

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Tags: Adverse Opinion, Disclaimer of Opinion, Modified Opinions, Qualified Opinion
Level: Level 2

Topic: Completion Procedures and Reporting
Series: NOV 2016

AA – Aug 2022 – L2 – Q5a – Completion Procedures and Reporting

Identifies the responsibilities of those charged with governance and matters communicated by auditors.

Question

ISA 260 (Revised and Redrafted): Communication with Those Charged with Governance deals with the auditor’s responsibility to communicate with those charged with governance in relation to an audit of financial statements.

Required:
i) Identify TWO (2) specific responsibilities of those charged with governance.
(2 marks)

ii) Explain FOUR (4) examples of matters that might be communicated to them by the auditor.
(4 marks)

Answer

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Tags: Communication with auditors, Governance responsibilities, ISA 260
Level: Level 2

Topic: Completion Procedures and Reporting
Series: AUG 2022

AA – Aug 2022 – L2 – Q4a – Completion Procedures and Reporting

Defines going concern and discusses the auditor's responsibilities and procedures in relation to going concern.

Question

Pinto Ltd (Pinto) provides analytical services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.

The annual audit is nearly complete. As Audit Senior, you have reported to the Engagement Partner that Pinto is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where Pinto’s services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for Pinto, but a number of clients did not renew their contracts. A senior employee then left Pinto, stating lack of investment in new analysis machines thus increasing the risk of incorrect information being provided by the company.

A cash flow forecast prepared internally showed Pinto requiring significant additional cash within the next 12 months to maintain even the current level of services and operations. Pinto’s auditors have been asked to provide a negative assurance report on this forecast.

Required:
i) Define going concern and discuss the auditor’s responsibilities in respect of going concern.
(4 marks)

ii) State FIVE (5) audit procedures that may be carried out to determine whether or not Pinto is a going concern.
(6 marks)

Answer

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Tags: Audit Procedures, Financial difficulties, Going Concern, ISA 570
Level: Level 2

Topic: Completion Procedures and Reporting
Series: AUG 2022

AA – Aug 2022 – L2 – Q3b – Completion Procedures and Reporting

Lists items that could be included in a management representation letter as part of audit evidence.

Question

ISA 580: Management Representations provides guidance on the use of management representations as audit evidence.

Required:
List FIVE (5) items that could be included in a management representation letter.

Answer

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Tags: Audit evidence, ISA 580, Management representation letter
Level: Level 2

Topic: Completion Procedures and Reporting
Series: AUG 2022

AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

Question

Logistics Ltd is a logistics and freight forwarding company based in the port city of Takoradi, and you are the Audit Manager in charge of the year-end audit. The draft financial statements show a profit before tax of GH¢2.6 million and total assets of GH¢18 million.

In your discussion with management, the following issues came up:

i) Management informed you that due to the ongoing coronavirus pandemic, shipping from China has slowed down considerably, and as a result, many employees have been laid off. A redundancy provision of GH¢220,000 is included in the draft financial statements. The audit review and calculations confirmed that the redundancy provision should be GH¢450,000. The Finance Director is, however, not willing to adjust the draft financial statements. (5 marks)

ii) An employee has filed a wrongful dismissal lawsuit against Logistics Ltd for GH¢1.2 million. This case is ongoing and will not be resolved before the Auditor’s report is signed. The matter is disclosed as a contingent liability. (5 marks)

Required:
Discuss each of the issues and describe their impact on the Auditor’s report, if any, should these issues remain unresolved in terms of ISA 705 (revised); Modification of the Auditor’s Opinion.

Answer

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Tags: Audit report, Contingent Liability, IAS 37, ISA 705, Redundancy Provision
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2021

AA – May 2021 – L2 – Q2b – udit and Assurance Risk Environment, Completion Procedures and Reporting

State audit tests necessary to determine if an entity is a going concern.

Question

ISA 570: Going Concern guides auditors to ensure that an entity can continue to operate into the foreseeable future.

Required:
State TWO (2) audit tests necessary to ascertain whether an entity is a going concern. (5 marks)

Answer

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Tags: Audit Tests, Financial Statements, Going Concern, ISA 570, Risk Assessment
Level: Level 2

Topic: Audit and Assurance Risk Environment, Completion Procedures and Reporting
Series: MAY 2021

AA – May 2018 – L2 – Q5 – Completion Procedures and Reporting

Explains key audit matters under ISA 701, objectives of ISA 701, and the requirements for determining and communicating KAM.

Question

In January 2015, the IAASB issued ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. This standard is required to be applied to the audit of all listed entities.

Required:
a) Explain the term Key Audit Matters as defined in ISA 701. (2 marks)
b) State TWO objectives of ISA 701. (2 marks)
c) What are the THREE matters that ISA 701 requires the auditor to take into account when making a determination of Key Audit Matters? (6 marks)
d) How should the auditor communicate Key Audit Matters? (5 marks)

Answer

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Tags: Audit opinion, Audit Reporting, ISA 701, Key Audit Matters, Listed entities
Level: Level 2