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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 audit manager of Ashiyie Ltd, a private indigenous company that manufactures and retails furniture. Summary draft and audited results show the following:
| 2018 (Draft) | 2018 (Audited) | |
|---|---|---|
| Revenue (for the year to 30 June) | GH¢54.0m | GH¢51.6m |
| Profit before taxation (for the year to 30 June) | GH¢2.4m | GH¢1.8m |
| Total assets (as at 30 June) | GH¢37.2m | GH¢28.8m |
The following points should be considered in the drafting of the Audit Report.
i) Ashiyie Ltd leases one of its main retail facilities from a partnership controlled by its Chief Executive Officer (CEO). Your review of the lease indicates that it costs Ashiyie about GH¢60,000 more per annum than would normally be expected in an ‘arm’s length’ transaction. Ashiyie refuses to disclose this related-party transaction in the notes to the financial statements for the year ended 30 June 2018.
ii) Ashiyie has one small subsidiary in Rwanda. Restrictions on the repatriation of earnings from this country were introduced in July 2018 and remain in place. As a result, Ashiyie has decided to account for the subsidiary on an equity basis this year. You are satisfied as to the appropriateness of this change and it is fully disclosed in the financial statements.
iii) During the audit, you discovered that inventory valued approximately GH¢1.2 million had been excluded from the financial statements of the company. After discussing this with management, you are satisfied that it was an unintentional oversight. The error was corrected prior to the conclusion of the audit.
Required:
Evaluate the implications of matters (i), (ii), and (iii) for the Audit Report for the year ended 30 June 2018. (10 marks)
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Recent cases of bank failures have called into question the professional competence and integrity of external auditors. Some have explained that an auditor might be misled about the existence of account balances that do not exist. Companies being audited might have furnished the auditor with a document confirming the account’s existence and balance as at the reporting date. Unfortunately, according to allegations, such balances turn out to be either an overstatement or an understatement and the auditor failed to detect a material overstatement of both assets and revenues. Such cases undermine the credibility of auditors and external audit generally in the eyes of users of audited financial statements.
Required:
Explain whether you believe it is possible for such events as the one described above to completely undermine the credibility of external audit. Your explanation should consider the responses that the accountancy profession can put in place in response to such criticisms. (10 marks)
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a) At a final meeting with the client, DMS Ltd, one of the Audit Partners of DTR & Co Chartered Accountants had an argument with the Finance Director of DMS Ltd on an issue that borders on compliance with a relevant law. The Environmental Protection Authority had sanctioned DMS Ltd for environmental regulation breaches for the year 2016. The Finance Director was of the view that the external auditors are to be blamed for negligently failing to plan their audit to detect such non-compliance with environmental regulations.
Required:
i) Explain the responsibility of external auditors in considering laws and regulations in an audit of financial statements. (2 marks)
ii) Explain the issue of non-compliance in relation to laws and regulations in an audit. (2 marks)
iii) Explain the policies and procedures which may be implemented to assist management in the prevention and detection of non-compliance with laws and regulations. (6 marks)
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Abuakwa acquired a property in April 2018 at a cost of GH¢2.64 million. The property was not in a good state of repair, but Abuakwa needed an office space for critical administration functions in a central location and moved some staff in immediately. In January 2019, more suitable accommodation became available for the staff who were quickly relocated. A decision was taken to sell the property. Hence, it was decided not to provide any depreciation on the property in respect of the year under review.
However, significant remedial work was needed before the sale could be completed. This was commenced in early February 2019. The cost of this work is being expensed as ‘Repairs and Maintenance’ as incurred.
The property has a reserve price of at least GH¢4.2 million at a public auction scheduled for 30 June 2019. The property is classified as ‘Held for Sale’ at the year-end under IFRS 5: Non-current Assets held for Sale and Discontinued Operations at a value of GH¢4.2 million, and a gain of GH¢1.56 million has been recognised in the draft Consolidated Statement of Profit or Loss and Other Comprehensive Income.
(8 marks)
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Abuakwa Ltd (Abuakwa) is a multinational mining group that is involved in different operations. The draft financial statements for the year ended 31 March 2019 show the following:
| Financial Statement Extracts | 2019 (draft) | 2018 (audited) |
|---|---|---|
| Revenue | GH¢30.60 million | GH¢28.08 million |
| Profit before tax | GH¢3.12 million | GH¢3.00 million |
| Total net assets | GH¢29.76 million | GH¢27.24 million |
You are the manager responsible for the audit for the year ended 31 March 2019. You have just visited the client’s premises to review the audit team’s work to date. The audit senior has drafted the following “points for the attention of the manager”.
a) On 12 March 2019, an explosion occurred in one of Abuakwa’s premises, destroying about one quarter of the premises. Luckily, the explosion happened at night when the premises were empty, and there were no injuries to any persons. Structural engineers and surveyors are currently assessing the stability of the remainder of the premises, and it is, as yet, unclear whether they can be repaired or will need to be demolished and rebuilt in their entirety.
In the last few days, notifications have been received from the owners of four nearby businesses claiming that the structural integrity of their premises may have been compromised by the impact of the explosion.
They also advised that structural engineers are currently assessing their premises to ensure they are still safe. These business owners have formally notified Abuakwa that if their premises were adversely affected by the explosion, they will claim an “appropriate and justifiable” level of compensation from Abuakwa.
Abuakwa’s insurers have been informed but at this point are refusing to comment on the situation until, they say, all the facts are clear in relation to the explosion and its effects.
(8 marks)
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