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The audit of Nkwa Ltd’s financial statements for the year ended 30 November 2022 is nearing completion, and the auditor’s report is due to be signed next week. Nkwa Ltd manufactures parts and components for the aviation industry. You are conducting an engagement quality control review on the audit of Nkwa Ltd, which is a listed entity and a significant new client of your firm. The draft financial statements recognize revenue of GH¢8.7 million, assets of GH¢15.2 million, and profit before tax of GH¢1.8 million.
You have identified the following issues as a result of your review:
a) The planned audit approach to trade payables was to place reliance on purchasing controls and keep substantive tests to a minimum. During control testing on trade payables, from a random statistical sample, the audit team identified three purchase orders that had not been authorized by the procurement manager. On review of the supporting documentation, the audit team concluded that the items were legitimate business purchases and therefore decided that no additional procedures were required. (4 marks)
b) Following a review of petty cash transactions, the audit assistant identified that the petty cashier paid for taxi fares for personal, non-business journeys with a total value of GH¢175. Following discussions with the Audit Assistant, you have ascertained that he did not report the matter as the amount is immaterial. The audit assistant also commented that the petty cashier is his brother, and that he did not want to get him into trouble. (6 marks)
c) Cut-off testing on revenue has identified two goods despatch notes, dated 2 December 2022, for items sent to Chinn Co, with a combined sales value of GH¢17,880, which had been included in revenue for the year ended 30 November 2022. The client’s financial controller, David Mount, has explained that Chinn Co does not order on a regular basis from Nkwa Ltd. In the absence of a regular payment history with Chinn Co, and in order to minimize the receivables collection period from this particular customer, the sales invoice was raised and sent to the customer on the same day that the sales order was received. The average time period between the receipt of an order and despatching the goods to the customer is approximately one to two weeks. The audit working papers have concluded that no further investigation is necessary. (6 marks)
d) The Finance Director, Leslie Gray, has not completed the tax computation for the year ended 30 November 2022. He has recently asked the audit assistant to compute the company’s tax payable for the year on the basis that as a newly qualified chartered accountant, the audit assistant was more up to date with recent changes in tax legislation. (4 marks)
Required:
Evaluate the quality control issues and the implications for the completion of the audit, including any further actions that should be taken by your audit firm. Your answer should include the matters to be communicated to management and those charged with governance in relation to the audit of Nkwa Ltd.
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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:
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.
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ISSAI 1706 (Revised) provides the requirements for an auditor who, having formed an opinion on the financial statements, has determined that it is necessary to draw users’ attention, by way of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements; or (b) As appropriate, any other matter relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
Required:
What additional guidance for public sector auditors relates to “Emphasis of Matter Paragraphs” in the Auditor’s Report? (10 marks)
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You have recently been promoted to Senior Manager of Life Matters and Associates, a firm of Chartered Accountants. As part of your job description, you are to handle two clients in a given month. Below are some issues you will be faced with during the audit of these clients. The financial year-end for each client is 30 September 2020.
You are reviewing the Audit Senior’s draft auditor’s reports for the two clients, Factory Co Ltd and Toys Co Ltd.
Toy Co Ltd
The Audit Senior suggests that Toys Co Ltd’s audit opinion should not be qualified but should include an emphasis of matter paragraph after the audit opinion to highlight the situation below:
In October 2020, a legal claim was filed against Toys Co Ltd by a toy retailer. The suit was from a customer who slipped on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability in the notes to the financial statements. Audit working papers also provided sufficient evidence that no provision is necessary as Toys Co Ltd’s lawyers have stated in writing that the likelihood of the claim succeeding is remote. The amount of the claim is fixed and is adequately covered by cash resources.
Factory Co Ltd
Factory Co Ltd, a listed company, permanently closed several branches in May 2020, with all closure costs finalised and paid in August 2020. The said branches all produced the same items, which contributed 10% of Factory Co Ltd’s total revenue for the year ended 30 September 2020 (2019 – 23%). The closure has been discussed accurately and fully in the Chairman’s statement and Directors’ Report. However, the closure was not stated in the notes to the financial statements nor separately disclosed on the financial statements.
The audit senior has proposed an unmodified audit opinion for Factory Co Ltd as the matter has been fully addressed in the Chairman’s statement and Directors’ Report.
Required:
a) Evaluate whether the Audit Senior’s draft auditor’s report is appropriate, and where you disagree, recommend the amendment necessary to the draft auditor’s report of:
i) Toy Co Ltd (4 marks)
ii) Factory Co Ltd (6 marks)
b) Assuming the auditors of Life Matters and Associates are contemplating whether to use an emphasis of matter paragraph and other matter paragraph in the audit report, explain both options and the situations when each is relevant. (10 marks)
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You are an audit senior in Patampa and Associates, and nearing the end of the audit of Duakor Ltd. for the year ended 30 June 2016. Duakor Ltd owns a chain of clothing stores and also has a manufacturing division where it makes its own label brand “Dumas.” Own label clothing represents 50% of the inventory and sales of Duakor Ltd. The financial statements show a profit before tax of GH¢14m (2015 GH¢6m) and a statement of financial position total of GH¢46m (2015 GH¢30m). The following points have arisen on the audit:
i) Duakor Ltd. values its inventory at the lower of cost and net realizable value. Cost is determined by deducting a suitable estimated profit margin from the selling price. Inventory in the statement of financial position as at 30 June 2016 was GH¢2,530,000.
ii) Duakor Ltd. has a refund policy which states that a customer who is not satisfied with their purchase may return their goods within 28 days of purchase and obtain an exchange or a cash refund. Experience has shown that exchanges and refunds are common, as Duakor Ltd’s shops do not provide fitting rooms, space being at a premium. Duakor Ltd. does not make any provision in the financial statements for refunds.
Required:
Comment on the matters you will consider in relation to the implications of the above points on the audit report of Duakor Ltd. (10 marks)
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Stevens and Associates have completed the audit of the accounts of Eno Serwah & Co. Ltd for the year ended 31 December 2015. The auditor’s opinion on the financial statement has been favorable to Eno Serwah & Co Ltd. Internal check procedures after the audit revealed a shortage of cash of Two Million Ghana cedis (GH¢2m). The Directors of Eno Serwah & Co Ltd. put a freeze on the payment of the audit fees on the grounds that the audit could not detect the shortage.
Required:
Discuss the stand taken by the Directors of the company.
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c) On 1 July 2022, Obidi Ltd introduced a ten-year warranty on all sales of its cooking equipment. Total sales of the cooking equipment for the year ended 31 March 2023 amounted to GH¢2.5 million. The draft Auditor’s Report for the year ended 31 March 2023 showed revenue of GH¢5.6 million.
The notes to the financial statements disclosed that since the introduction of the warranty, Obidi Ltd’s cooking equipment has been guaranteed to be free from defects under normal household use. As a result, no provision was recognised, as the amount of the obligation cannot be measured with sufficient reliability.
The draft report on the Financial Statements of Obidi Ltd for the year ended 31 March 2023 was unmodified.
Required: As the Managing Partner, comment on the draft report before you. (5 marks)
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b) After a scrutiny of previous performance audit reports, the Auditor-General has become incensed with the contents of the reports and has tasked you, a Director of Audit at the Ghana Audit Service, to recommend factors governing the contents of a performance audit report, the mode, and merits of follow-ups.
Required: Write a memo to the Auditor-General on your recommendations. (10 marks)
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ISA 701: Communicating Key Audit Matters (KAM) in the Independent Auditor’s Report is a new ISA introduced as part of the International Audit and Assurance Standards Board’s (IAASB) extensive revisions to International Standards on Auditing (ISAs) relating to audit reporting. The objective of the IAASB’s revisions was to make the auditor’s report more detailed and useful for the intended users. ISA 701 applies to audits of complete sets of general purpose financial statements of listed entities.
Subsequently, the Institute of Chartered Accountants, Ghana (ICAG) as the regulator of accountancy profession and practice in Ghana, issued a notice to practitioners and the public which directed that auditor’s report issued on financial statements for periods ending on or after 31 December, 2017 for Public Interest Entities (PIEs) to include a communication on Key Audit Matters as required by ISA 701.
You are the Partner in charge of training with Preko and Associates. An audit team member informed you that one of the clients being audited has an issue which is being contemplated as to whether to report the issue as key audit matter, emphasis of matter paragraph, other matter paragraph, or to modify the audit opinion.
Required: Prepare briefing notes for the staff of your firm regarding the following:
a) KAMs and state TWO (2) categories of entities in Ghana which ISA 701 is applicable as adopted by ICAG. (5 marks)
b) Factors to be considered in determining KAMs.
(3 marks)
c) Interaction between: i) KAMs and ISA 705 (revised): Modifications to the Opinion in the Independent Auditor’s Report
ii) KAMs and ISA 570 (revised): Going Concern
iii) KAMs and Emphasis of Matter
iv) KAMs and Other Matters (12 marks)
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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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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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a)
Upon the completion of the audit of Zealow Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following:
Required:
i) For each of the items, recommend the type of audit opinion to be issued. (8 marks)
ii) Consider what action the auditors should take in view of management’s refusal to accept the recommendations and/or allow the auditor to carry out the necessary audit procedures. (2 marks)
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Your firm, Atinalp Consulting, is the Auditor of Ghana Kitchen Utensils Limited, a company that was incorporated in the 1960s, as part of Ghana’s industrial revolution after the Republic had attained independence. It manufactures and distributes kitchenware in the local and the West African markets. It has seen good old days but has suffered from the effects of cheap imports in the past few years.
The financial statements for the year ended 31 December 2015 have the following note:
Going Concern
The Company incurred a net loss for the year ended 31 December 2015 of GH¢24.8 million (2014: GH¢14.4 million) and as of that date its current liabilities exceeded its current assets by GH¢37.8 million (2014: GH¢24.9 million). The Company continues to incur losses.
The directors are engaging with strategic investors to help turn the fortunes of the Company around. A strategic investor has shown substantial interest in the Company and has approached the directors of the Company with the intent of acquiring a controlling interest in the Company. In September 2015, the shareholders passed a resolution authorizing the directors to enter into discussion with this strategic investor. If discussions are successful, this strategic investor will become a major shareholder. Based on preliminary discussions, the strategic investor is expected to further invest into the operations of the Company in addition to financing the necessary acquisition of shares directly from the company.
The investments and expertise of this strategic investor are expected to ensure a change of the Company to one that is profit-making. In pursuance of this transaction, the company has completed a professional revaluation of its assets and equipment.
The financial statements are prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realization of assets and settlement of liabilities will occur in the ordinary course of business.
The ability of the Company to continue as a going concern largely depends on the successful conclusion of the takeover by the strategic investor and its ability to execute plans to turn around the fortunes of the Company.
The opinion section of the audit report issued by your firm was as follows:
Opinion
In our opinion, the financial statements give a true and fair view of the financial position of Ghana Kitchen Utensils Limited as at 31 December 2015, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act, 1963 (Act 179).
Required:
Comment on the suitability of the report issued and recommend some improvement, if any, you believe would be necessary under the circumstances.
(8 marks)
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An auditor’s report may include an ‘emphasis of matter’ paragraph and/or an ‘other matter’ paragraph. These types of paragraph are the subject of ISA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The purpose of these paragraphs is to provide additional communication in the auditor’s report.
Required:
Differentiate between the ‘emphasis of matter’ paragraph and ‘other matter’ paragraph citing ONE (1) circumstance in each case. (4 marks)
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Your firm, Lardi & Associates, has asked you to perform an independent review of the working papers of Adorko Plc which is a listed entity and has been an audit client of your firm for the last ten years. The audit fieldwork is almost complete and as part of your review, you have been asked to advise the audit team on the drafting of their report to those charged with governance. Adorko Plc is a discount food retailer which operates 85 stores nationwide.
Below is an extract of the financial statements for the period:
| 2022 | 2021 | |
|---|---|---|
| Revenue | GH¢247m | GH¢242m |
| Profit before tax | GH¢14.6m | GH¢14.1m |
| Total Assets | GH¢535m | GH¢321m |
After a period of rapid expansion, 2022 has been a year in which Adorko Plc has strengthened its existing position within the market and has not acquired any additional stores or businesses. The company’s draft statement of financial position for 2022 includes a property portfolio of GH¢315 million all of which are legally owned by the entity. In the current year, the company has chosen to adopt a policy of revaluing its property portfolio for the first time and this is reflected in the draft figures for 2022. The audit work on property, plant and equipment included testing a sample of the revaluations. Lardi & Associates requested at the planning stage that independent, external valuation reports should be made available to the audit team at the start of the final audit visit. A number of these documents were not available when requested and it took three weeks for them to be received by the audit team. The audit working papers also identified that on review of the non-current asset register, there were four properties with a total carrying amount of GH¢11.1 million which had not yet been revalued and were still recorded at depreciated historic cost.
The audit supervisor’s review of Adorko Plc’s board minutes identified that the company has renovated seventeen car parking facilities at of its stores which has resulted in a significant increase in customer numbers and revenue at each of these locations. The total cost of the renovation work was GH¢13.2 million and has been included in operating expenses for the current year. The audit file includes a working paper recording discussions with management which confirms that capital expenditure authorization forms had not been completed for this expenditure.
You are aware that your firm had intended to replace the current engagement partner, Mr. Kunta, with Mr. Barima who is Lardi & Associates’s other specialist in food retail. Unfortunately, Mr. Barima was taken ill earlier in the year and will not now be available until next year’s audit engagement. As a result, 2022 is the eighth consecutive year in which Mr. Kunta has acted as engagement partner.
Required:
From the information provided above, recommend the matters which should be included in Lardi & Associates’s report to those charged with governance, and explain the reason for their inclusion. (10 marks)
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You are the audit manager of Onipa Hia & Co., a local firm of Chartered Accountants located in Adabraka in the Greater Accra Region. You are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The Audit Senior has raised the following issues:
African Designs Co. Ltd (ADCL)
ADCL’s year-end is 30 September; however, subsequent to the year-end, the company’s sales ledger has been corrupted by a computer virus. ADCL’s Finance Director was able to produce the financial statements prior to this occurring; however, the audit team has been unable to access the sales ledger to undertake detailed testing of revenue or year-end receivables. All other accounting records are unaffected, and there are no backups available for the sales ledger. ADCL’s revenue is GH¢15.6 million, its receivables are GH¢3.4 million, and profit before tax is GH¢2 million.
Ghana Design Co. Ltd (GDCL)
GDCL has experienced difficult trading conditions, and as a result, it has lost significant market share. The cash flow forecast has been reviewed during the audit fieldwork, and it shows a significant net cash outflow. Management is confident that further funding can be obtained and so have prepared the financial statements on a going concern basis with no additional disclosures; the Audit Senior is highly skeptical about this. The prior year’s financial statements showed a profit before tax of GH¢1.2 million; however, the current year’s loss before tax is GH¢4.4 million, and the forecast net cash outflow for the next 12 months is GH¢3.2 million.
Required:
For each of the two issues:
i) Describe the impact on the audit report if the issues remain unresolved. (5 marks)
ii) Recommend procedures the audit team should undertake at the completion stage to try to resolve the issue. (5 marks)
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You have just audited the financial statements of Yawa Company Ltd for the year ended 31 December 2017. You discovered during the audit that inventories were not stated at the lower of cost and net realizable value but stated solely at cost on the statement of financial position.
Records of the company indicated the cost of the inventories to be GH¢600,000, of which the net realizable value was GH¢400,000. Management is not prepared to adopt the lower of cost and net realizable principle in their inventory valuation.
Required:
i) Identify and justify the type of opinion you will issue. (2 marks)
ii) Prepare the appropriate paragraphs under management responsibility, auditor’s responsibility, and the auditor’s opinion for inclusion in the audit report of Yawa Company Limited. (8 marks)
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You are a manager in the Quality Control Review department of Integritas & Co, and are currently responsible for reviewing the appropriateness of your firm’s proposed auditor’s reports on financial statements. The draft financial statements of Lamptey Group for the year to 30 June 2017 disclose the following notes.
Notes
i) Significant event
During the year, Lamptey Group sold a significant amount of its business and certain assets (plant and equipment and inventory) and commenced a systematic winding down of its operations. The Group’s remaining assets (including property, trade receivables, and cash) were sufficient to meet the group’s liabilities, as at 30 June 2017.
ii) Accounting policies
The consolidated financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards. As described in Note (i), the group has commenced the winding down of its operations and remaining assets have been restated to their net realizable values.
There are no other disclosures relating to the going concern basis although the ‘significant event’ is referred to in the directors’ report under the heading ‘principal activities and business review.’ Lamptey Group ceased to trade in October 2017. The auditor’s report on Lamptey Group’s financial statements for the year ended 30 June 2016 was unmodified.
Required:
Comment on the suitability or otherwise of an unmodified auditor’s report for Lamptey Group for the year ended 30 June 2017. Your answer should discuss the appropriateness of alternative audit opinions.(10 marks)
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AAA – March 2023 – L3 – Q3a – Reporting, Current issues
Comment on the issues raised in the draft auditor’s report for Alpha Ltd.
You are the manager responsible for the audit of Alpha Ltd, a listed company specializing in the manufacture and installation of sound-proof partitions for domestic and industrial buildings. You are currently reviewing the draft auditor’s report on the company’s financial statements for the year ended 31 March 2022. Extracts from the draft auditor’s report are shown below:
Independent auditor’s report to the shareholders and directors of Alpha Ltd
Basis for opinion
We conducted our audit of Alpha Ltd (the Company) in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Company in accordance with the ethical requirements which are relevant to our audit of the financial statements in the jurisdiction in which the Company operates, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
We have audited the financial statements of Alpha Ltd, which comprises the statement of financial position as at 31 March 2022, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at 31 March 2022, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Material uncertainty regarding going concern
The Company is financed by a long-term loan from its bankers which is due for redemption in August 2022. At the date of this auditor’s report, the Company is in the process of renegotiating the loan but has not yet reached a final agreement with its bankers. It is our view that the loan finance is essential to the continued survival of the Company and that at the time of reporting, therefore, the absence of a finalized agreement represents a material uncertainty regarding going concern. The financial statements have been prepared on a going concern basis but do not make any reference to the loan redemption or the ongoing negotiations with the bank. As the external auditor, therefore, we are fulfilling our duty by bringing the matter to the attention of users of the financial statements.
Other information
The Company’s principal activity is the manufacture and installation of sound-proof partitions for domestic and industrial buildings. The Company, therefore, engages in long-term contracts which are incomplete at the reporting date and which are material to its revenue figure. The installation process is complex and significant judgment is applied in assessing the percentage of completeness which is applied to calculate the revenue for the year. The significance of this judgment requires us to disclose the issue as other information which is relevant to the users of the financial statements.
Required:
Comment on the issues raised in the extract from the draft auditor’s report for the year ended 31 March 2022. (Note: You are NOT required to re-draft the extracts from the auditor’s report.)
(10 marks)
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