Topic: Professional responsibility and liability

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AAA – Nov 2024 – L3 – Q1a – Ethical Issues in Audit Engagements

Ethical issues and professional conduct in an audit engagement involving conflict of interest.

Question

You are the Audit Partner of a mid-sized audit firm, Amoah Sonko and Associates. One of your major clients, Kudi LTD (Kudi), has approached you for a significant audit engagement. Kudi has been experiencing rapid growth and plans to get listed on the Ghana Alternative Market within the next year. During preliminary discussions, the Managing Director of Kudi, a friend, promised you a bonus if the audit report is completed quickly and is favourable, highlighting the company’s strengths.

In the course of the audit of Kudi, you came across a series of unusual financial transactions. These included large intercompany loans with its sister companies, other significant related-party transactions with the directors, and an unusually high volume of sales recorded a few days before the end of the financial year. Upon further investigation, your team found discrepancies in inventory records and evidence of potential non-compliance with revenue recognition standards. The Finance Manager insists these transactions are legitimate and necessary for the company’s rapid growth.

Additionally, you noticed that Kudi was involved in a high-profile legal battle with a major competitor, which was not fully disclosed in the financial statements. The lawyer for Kudi insists that you omit this information from the audit report, arguing it would damage the company’s reputation and its plans to get listed on the Ghana Alternative Market.

Required:
i) Identify TWO potential ethical issues in the scenario and explain the potential impact on your professional conduct. ii) Identify the steps you should take to address the conflict of interest presented by the Managing Director’s offer.
iii) Discuss the potential sanctions for accepting the Managing Director’s offer and providing a favourable audit report without proper verification.
iv) Evaluate the impact of the undisclosed legal battle on Kudi LTD’s financial statements and the upcoming initial public offer.

Answer

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Tags: Auditor Independence, Conflict of Interest, Ethics, Professional Conduct
Level: Level 3

Topic: Professional responsibility and liability, Rules of professional conduct
Series: Nov 2024

AAA – July 2023 – L3 – Q4a – The meaning of audit and assurance | Professional responsibility and liability

Discuss issues to consider in professional skepticism assessment and circumstances that can hinder professional skepticism during a performance audit.

Question

Audit engagement rests on mutual understanding and respect between the auditor and the auditee. The Auditor, while not viewing the auditee as dishonest, must also have at the back of his mind that to err is human and must therefore not accept evidence from the auditee without further cross-checking the facts. The attitude should be that the auditor must have an enquiring mind. This is known as professional skepticism; while trusting, he must verify.

Required:

i) What FOUR (4) issues should be considered in Professional Skepticism assessment during performance audit? (5 marks)

ii) State FIVE (5) circumstances that can hinder Professional Skepticism at the engagement level. (5 marks)

Answer

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Tags: Audit quality, Performance Audit, Professional Skepticism
Level: Level 3

Topic: Professional responsibility and liability, The meaning of audit and assurance
Series: JULY 2023

AAA – July 2023 – L3 – Q1b – Rules of professional conduct | Professional responsibility and liability | Reporting

Assess ethical and professional implications in scenarios involving audit team members and client requests.

Question

You are the Audit Manager at Ndaa & Associates whose client portfolio includes ABC Credit Plc, a listed financial institution offering loans and credit facilities to both commercial and retail customers. You have received an email from the Audit Supervisor who is currently supervising interim testing on systems and controls in relation to the audit of ABC Credit Plc for the year ending 31 October 2022. The email gives the following details for your consideration:

One of the audit team members, Obiba JK, has provisionally agreed to apply for a loan from ABC Credit Plc to finance the purchase of a domestic residence. The loan will be secured on a property, and the client’s business manager has promised Obiba JK that he will ensure that she gets ‘the very best deal which the bank can offer.’ (5 marks)
The payroll manager at ABC Credit Plc has asked the audit supervisor if it would be possible for Ndaa & Associates to provide a member of staff on secondment to work in the payroll department. The payroll manager has struggled to recruit a new supervisor for the organisation’s main payroll system and wants to assign a qualified member of the audit firm’s staff for an initial period of six months. (5 marks)

Required:
Assess the ethical and professional implications of the issues raised in respect of the audit of ABC Credit Plc and recommend actions to be taken in each case by the audit firm.

Answer

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Tags: Auditor Independence, Ethics, Loan Arrangements, Professional Conduct, Staff Assignments
Level: Level 3

Topic: Professional responsibility and liability, Reporting, Rules of professional conduct
Series: JULY 2023

AAA – Dec 2023 – L3 – Q1a – The Meaning of Audit and Assurance | Professional Responsibility and Liability

Explain the concept of professional skepticism and identify areas where it is important in auditing complex, subjective, or judgmental issues.

Question

“Professional Skepticism is an essential concept in auditing practice and theory. It has been identified in almost all existing auditing standards. However, the way it should be characterised is still unclear” according to Maciej Ciolek (2017).

Required:

i) Explain the term Professional Skepticism within the context of the auditing profession. (2.5 marks)

ii) Discuss THREE (3) areas of audit that are complex, subjective or highly judgmental where Professional Skepticism may be important. (7.5 marks)

Answer

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Tags: Audit Judgments, Audit Procedures, Complex Areas, Professional Skepticism
Level: Level 3

Topic: Professional responsibility and liability, The meaning of audit and assurance
Series: DEC 2023

AAA – Nov 2020 – L3 – Q5a – The Regulatory Environment | Professional Responsibility and Liability

Identify and discuss the roles of three regulatory authorities in Ghana that may impact the conduct of an audit.

Question

In the audit of financial statements, auditors consider the regulatory requirements. These cover professional standards promulgated by the International Federation of Accountants (IFAC) in the form of International Standards on Auditing (ISAs), International Standards on Quality Control (ISQC) as well as the International Ethics Standards Board for Accountants (IESBA). The other consideration involves legal requirements.

Required:
Identify THREE (3) regulatory authorities in Ghana whose requirements may be taken into account in the conduct of an audit and discuss their roles. (10 marks)

Answer

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Tags: Audits in Ghana, Bank of Ghana, Insurance Commission, Regulatory Authorities, Securities and Exchange Commission
Level: Level 3

Topic: Professional responsibility and liability, The regulatory environment
Series: NOV 2020

AAA – Nov 2020 – L3 – Q1b – The audit approach | Practice management | Professional responsibility and liability

Evaluate five risk considerations and issues before accepting an engagement from Phobia Foods Ltd, focusing on financial position, client expectations, and fee structure.

Question

You have been recently promoted as the Ethics Partner in Famous Chartered Accountants, a licensed audit firm. At your first visit to the Managing Partner, he informs you of an appointment by Phobia Foods Ltd (PFL), and gives you a file to go through. You open the file and find a copy of an e-mail from the Managing Director of PFL, extracts which read as follows:

From: Managing Director, Phobia Foods Ltd.
To: Managing Partner, Famous Chartered Accountants
Subject: Evaluation of Business Expansion Plan and Associated Items

Congratulations on your offer of appointment as auditor cum advisor of our company. As discussed in our earlier meeting, Phobia Foods Ltd (PFL) would like to open three more outlets, two in Sunyani and one in Sogakope. The necessary financing will be obtained through a new bank loan and the rescheduling of the payments of the existing loan, which is technically in default.

Your appointment and fees
Your audit fee will be GH¢16,000 for the year ended 30 June 2018.Your fee for evaluation of our expansion plan and advisory services in relation to obtaining a bank loan will be GH¢9,000. For advisory services and business efficiency and strategic decisions, your fee will be GH¢3,400 per month for the next two years.

Shareholders and key management issues
Five founding directors, each with equal shares, incorporated PFL which commenced trading in 2009. I still maintain my original 20% holding.

Audit and accounts 2016-2018
Ofosu-Mensah & Associates., a firm of licensed auditors audited the accounts for the years ended 30 June 2016 to 30 June 2018 inclusive. The audit of PFL for the year ended 30 June 2018 was signed off on 16 November 2018 with an unqualified opinion, notwithstanding that qualified opinions had been published on the previous two years’ accounts. The shareholders of PFL approved your firm’s appointment at the annual general meeting held on 15 April 2019 for the year ended 30 June 2019.

The funds raised by the new bank loan will be used for expansion of the business. Your firm is also expected to advise the company on the application for the new bank loan and the rescheduling of repayments of the existing loan in default.

Yours sincerely,
Managing Director.

Required:

Evaluate FIVE (5) risk considerations and issues for Famous Chartered Accountants that should be identified prior to accepting this engagement. (10 marks)

Answer

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Tags: Audit Risk, Auditor Independence, Client Engagement, Ethical Issues, Risk Consideration
Level: Level 3

Topic: Practice management, Professional responsibility and liability, The audit approach
Series: NOV 2020

AAA – Nov 2020 – L3 – Q1a – Rules of professional conduct | Professional responsibility and liability

Evaluate ethical issues in providing audit and advisory services, and assess auditor liability to a bank if the audit is negligently performed.

Question

You are an audit manager with AA & Co. Chartered Accountants and Business Consultants. You have been assigned to the audit of Western Decors Ltd (WD), a long-established firm of event planning service in the city where your practice is located. The audit of the financial statements for the year ended 31 March 2019 is due to commence shortly. The audit firm is aware that the client has received a loan from the bank in April 2018 and that the bank will rely on the audited financial statements as part of the terms and conditions in the loan agreement.

The partner in charge of AA & Co. has just visited the client and made the following notes during his trip:

The firm has a number of individual and corporate clients outside Accra and has invested heavily in recording and broadcasting equipment to allow some events to be broadcasted over the internet. This facility is now available at all events conducted in WD’s premises and is proving to be very popular. To date, no specific extra charge has been levied for this service but the Chief Executive Officer (CEO) of WD has asked us to prepare a report for him advising on whether it would be practical to charge separately for it; and, if so, the level at which the charge should be set.
Unfortunately, WD’s main supplier of chairs went into liquidation during the year. The Partner said that they were fortunate to be able to find an alternative supplier with whom they entered into a three-year contract for the supply of chairs. At the time of signing the contract, WD considered the contract to be on very favourable terms. However, the supplier is based in Nigeria and the contract was denominated in Naira. Movements in the exchange rate now make the contract look far less attractive and the CEO has requested that we examine the contract to see if there is any way he can legally set it aside.

Required:

i) Critically evaluate any possible ethical issues arising from the client’s requests. (4 marks)

ii) Discuss whether the auditors may be liable to the bank in case the audit was negligently done. (6 marks)

Answer

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Tags: Advisory Services, Audit, Competence, Ethical Issues, Independence
Level: Level 3

Topic: Professional responsibility and liability, Rules of professional conduct
Series: NOV 2020

AAA – May 2021 – L3 – Q5a – Current issues | Professional responsibility and liability

Assess the global threat of money laundering and discuss Ghana’s efforts to combat money laundering.

Question

a) Money laundering has become a significant threat to the world’s political and economic order. World leaders are collaborating and cooperating in fighting money laundering. However, criminals are maliciously clever and, in some cases, ahead of law enforcement agencies. Every human being has to contribute to the fight against money laundering.

Required:

i) Assess why money laundering poses a big threat to the world’s political and economic order. (5 marks)

ii) Discuss FIVE (5) ways in which Ghana is contributing towards fighting money laundering globally. (5 marks)

Answer

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Tags: Anti-Money Laundering, Economic Impact, Ghana, Global Threat, Money laundering, Political Impact, Terrorism Financing
Level: Level 3

Topic: Current issues, Professional responsibility and liability
Series: MAY 2021

AAA – May 2021 – L3 – Q1a – Rules of professional conduct | Professional responsibility and liability

Discuss the impact of independence issues on the public perception of a multinational accounting firm based on a real-life scenario involving a conflict of interest.

Question

Fundamental principles require that a member of a professional accountancy body behave with integrity in all professional, business, and financial relationships and strive for objectivity in all professional and business judgments. Objectivity can only be assured if the member is and is seen to be independent. Conflicts of interest have an essential bearing on independence and the public’s perception of the accounting profession’s integrity, objectivity, and independence.

The following scenario is a press report on a multinational firm of accountants:

The regulatory body directed a partner in a firm that he must resign because he was in breach of the regulatory body’s independence rules. His brother-in-law was the Financial Controller of an audit client. He was informed that the alternative was for him to move his home and place of work at least 400 miles from the client’s office, even though he was not the reporting partner. This made his job untenable. The accounting firm saw the regulatory body as ‘taking its rules to absurd lengths’. Shortly after this comment, the multinational firm announced proposals to split the firm into the following areas: audit, tax and business advisory services; management consultancy; and investment advisory services.

Required:

In relation to integrity, objectivity and independence, discuss the impact the above events may have on the public perception of the multinational firm of accountants. (10 marks)

Answer

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Tags: Independence, Integrity, Multinational Firm, Objectivity, Public Perception
Level: Level 3

Topic: Professional responsibility and liability, Rules of professional conduct
Series: MAY 2021

AAA – May 2017 – L3 – Q4b – Internal audit and outsourcing | Professional responsibility and liability

Assess the importance of recommendations by the IIA to ensure the independence of internal auditors within an organization.

Question

The Institute of Internal Auditors (IIA) defines Internal Auditing as:

“An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

Required:

Assess the importance of THREE recommendations the IIA has made to ensure that internal auditors remain independent even though they are employees of the company. (4 marks)

Answer

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Level: Level 3

Topic: Internal audit and outsourcing, Professional responsibility and liability
Series: MAY 2017

AAA – April 2022 – L3 – Q5a – Professional responsibility and liability

Discuss non-audit services that could lead to a conflict of interest or impair the independence of an auditor.

Question

Companies Act, 2019 (Act 992) section 143 (2) states among others that a company, person, or firm that carries out duties of an auditor should ensure that the personal judgment of the auditor is not impaired by reason of any relationship with a client that will result in a conflict of interest.

Some governance experts consider the provision of non-audit services to audit clients as an example of conflict of interest and could impair the firm’s independence.

Required: In reference to the above concern, discuss FOUR (4) non-audit services that could lead to conflict of interest or impair the independence of an Auditor. (10 marks)

Answer

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Tags: Auditor Independence, Conflict of Interest, Ethical Standards, Non-Audit Services, Sarbanes-Oxley Act
Level: Level 3

Topic: Professional responsibility and liability
Series: APR 2022

AAA – April 2022 – L3 – Q1b – Professional responsibility and liability

Explain parties not allowed to own financial interest in a client and identify relevant safeguards.

Question

Where an audit firm owns shares or is a trustee of a trust that holds shares in a client, there is said to be a financial interest in the client’s affairs. According to the IESBA, some selected parties are not allowed to own direct or indirect material financial interest in a client.

Required: i) Explain THREE (3) parties that are not allowed to own direct or indirect financial interest in a client. (3 marks)

ii) Identify THREE (3) safeguards that may be relevant in relation to direct or indirect financial interest in a client. (3 marks)

Answer

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Tags: Auditor Independence, Conflict of Interest, Ethical Conduct, Financial Interest, IESBA Guidelines
Level: Level 3

Topic: Professional responsibility and liability
Series: APR 2022

: AAA – Nov 2015 – L3 – Q5b – Professional Responsibility and Liability

Identify and comment on the ethical and professional issues related to client engagements for Pen Co and the Scot family, and suggest actions MM & Co should take.

Question

b) 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 situation has arisen in connection with two clients.

i) MM & Co, was appointed auditor for 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 on suspicion of under-declaring income. (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: Auditor Responsibility, Client Engagement, Ethical Issues, Professional Conduct
Level: Level 3

Topic: Professional responsibility and liability
Series: NOV 2015

AAA – Nov 2015 – L3 – Q4 – The audit approach, Audit evidence, Planning, Professional responsibility and liability

his question addresses the specific considerations for initial audit engagements and evaluates the audit risks in planning the audit of a newly listed company.

Question

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 High-Tec Limited, a new audit client of your firm, with a financial year ended 31 May 2015. High-Tec Limited, has just been listed on the Ghana Stock Exchange (GSE). It is an e-commerce facilitator and has grown rapidly in the last few years.

High-Tec Limited was formed ten years ago by Ms. Ama Tawiah, a graduate in e-commerce from Ashesi 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 GHS400m in creating new software to appeal to a large number of multinational 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 the obvious reason, takes place overseas.

The software is largely sold through retail outlets, but approximately 30% of High-Tec Limited’s revenue is generated through sales made on the company’s website.

In some countries, High-Tec 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 income which High-Tec 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 income recognized in High-Tec Limited’s statement of financial position is GHS72 million.

As part of a five-year strategic plan, High-Tec Limited obtained a GSE listing in December 2014. The listing and related share issue raised a significant amount of finance, and many shares are held by institutional investors. Ama Tawiah 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 department, 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 High-Tec Limited. (6 marks)

b) Evaluate the audit risks to be considered in planning the audit of High-Tec Limited. (14 marks)

Answer

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Tags: Audit risks, Audit strategy, Corporate Governance, Initial audit engagement, Internal Control
Level: Level 3

Topic: Audit evidence, Planning, Professional responsibility and liability, The audit approach
Series: NOV 2015

AAA – Nov 2015 – L3 – Q3 – Assurance services

This question addresses the considerations before accepting an engagement to review prospective financial information and the reporting requirements thereafter.

Question

You are a manager in BS Cipax, a medium-sized firm which offers a range of services to audit and non-audit clients. You have been asked to consider a potential engagement to review and provide a report on the prospective financial information of Filtane Limited, a company which has been an audit client of BS Cipax for six years. The audit of the financial statements for the year ended 31 August 2015 has been completed and your firm issued an unmodified report. Filtane Limited operates a chain of fashion stores across the country.

Currently its merchandise are out of date and it sells clothing which do not reflect the latest and in mode fashion labels which are becoming more popular especially with the youth. Management is planning to revamp its image and stock the latest fashion in Africa and across the other continents. It also intends to invest in the latest technologies to include online real time trading on the internet order to attract more customers, especially the up-and-coming youth, trendy middle-aged persons and even those far from its shops by attracting them to shop over the internet. The company has sufficient cash to fund half of the necessary capital expenditure, and has approached its bank, Boafo Bank Limited, with a loan application of GHS32 million for the remainder of the funds required. Most of the cash will be used to invest in acquiring inventory and the technology for ensuring secure and safe online trading. The remaining cash will be used for refurbishment of the shops. Management had informed the Audit team, in the invitation to start the audit, of its intention to use the audited financial statements as the basis for preparing the prospective financial information to be used to seek for the loan from Boafo Bank Limited. The draft forecast statements of profit or loss for the years ending 31 August 2016 and 2017 are shown below, along with the key assumptions which have been used in their preparation. The audited statement of profit or loss for the year ended 31 August 2015 is also shown below.

The forecast has been prepared for use by the bank in making its lending decision, and was to be accompanied by other prospective financial information including a forecast statement of cash flows. Note 1: The forecast increase in revenue is based on the following assumptions:
(i) All shops will be stocked with new modern and in mode fashion to attract new customers to the shops and many persons who don’t live in the vicinity of the shops will also be attracted through online shopping by December, 2015.
(ii) Prices will increase by an average of 25% in December 2015.
Note 2: Operating expenses include mainly staff costs, depreciation of property and fittings, and repairs and maintenance to the shop fittings and equipment as well as ensuring continuous safe and secure on-line shopping.

Required:

a) i) Explain the matters to be considered by BS Cipax before accepting the engagement to review and report on the prospective financial information of Filtane Limited. (5 marks)

ii) Assuming the engagement is accepted, and the results of the examination procedures show that the prospective financial information have been prepared in accordance with the assumptions and appear reasonable, discuss the issues that will be in the report your firm will issue in respect of the forecast statement of profit or loss. (8 marks)

b) Boafo Bank Limited gave the loan to Filtane 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 installment for the loan from Boafo Bank Limited. Further investigation revealed that the audited financial statements signed by BS Cipax, which showed a profit of GHS20.2M, should have been of a loss of GHS4.3M.

Boafo 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. (7 marks)

Answer

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Tags: Assurance engagements, Ethical considerations, Prospective financial information, Reporting
Level: Level 3

Topic: Assurance services, Professional responsibility and liability
Series: NOV 2015

AAA – Nov 2015 – L3 – Q1b – Professional responsibility and liability

Methods that an audit firm can use to reduce exposure to litigation claims.

Question

b) You are also 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. (5 marks)

Answer

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Tags: Auditor Liability, Litigation Risk, Professional Responsibility
Level: Level 3