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  • 3 Marks

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.

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)

Matters that could be communicated to those charged with governance as per ISA 260:

  1. Selection or Changes in Significant Accounting Policies
    The selection of or changes in significant accounting policies that could have a material impact on the financial statements should be communicated. This ensures that those charged with governance are aware of any accounting policies that may affect the company’s financial position and results.
  2. Material Uncertainties Related to Going Concern
    If there are any material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, these uncertainties should be communicated. This is crucial for those charged with governance to evaluate the company’s future viability.
  3. Expected Modifications to the Audit Report
    If the auditor expects to modify the audit report, such as issuing a qualified or adverse opinion, this matter should be communicated, along with the reasons for such modifications. This provides transparency and gives governance the opportunity to address the issues before the report is finalized.

(3 points @ 1 mark each = 3 marks)

  • 15 Marks

AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

Lexon Institute provides tuition for accountancy studies writing professional examinations. You are the audit manager of DAR and Co. Chartered Accountants. The following were identified during the financial audit of Lexon. Revenue is GH¢30m, Profit before tax is GH¢10 million and total assets is GH¢25 million.

i) The regulator of the Accountancy profession has filed a lawsuit against Lexon Institute for GH¢3.9 million alleging a non-compliance with the Regulators rules and regulations for running a tuition center. This case is ongoing and will not be resolved prior to the audit report being signed. The matter is disclosed as a contingent liability.
(4 marks)

ii) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is GH¢2·5 million and the element charged to land is GH¢2 million.
(4 marks)

iii) Lexon Institute’s computerised purchases is backed up daily, however for a period of three months the purchases records and the back-ups have been corrupted, and therefore cannot be accessed. Purchases for these three months amounted to GH¢4m.
(4 marks)

Required:
Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.

(Total: 15 marks)

i)

  • Materiality: The GH¢3.9 million lawsuit represents 39% of Lexon Institute’s profit before tax (GH¢3.9 million/ GH¢10 million), making it a material issue that could influence users of the financial statements.
  • Contingent Liability Disclosure: Since the lawsuit is ongoing and the outcome is uncertain, Lexon has appropriately disclosed the matter as a contingent liability in accordance with IAS 37. However, if management fails to adequately disclose this, it would require the auditor to modify the report.
  • Audit Report Impact: If Lexon properly discloses the contingent liability but the outcome remains unresolved, the auditor may issue an unmodified opinion with an emphasis of matter paragraph to highlight the uncertainty surrounding the lawsuit and its potential impact on the financial statements.
  • Qualification: If Lexon fails to disclose the contingent liability, the auditor would issue a qualified opinion due to material misstatement, as this omission would affect the users’ understanding of the financial position of the company.

(4 marks)

ii)

  • Depreciation on Land and Buildings
    Depreciation has been provided on the land element of property, plant, and equipment, and this is contrary to IAS 16 “Property, Plant and Equipment,” as depreciation should only be charged on buildings and not land. Land typically does not have a finite useful life, and hence it should not be subject to depreciation.
  • Materiality
    The error is material, as it represents 20% of the profit before tax (GH¢2 million out of a profit before tax of GH¢10 million). Given the materiality, the financial statements are misstated if this error is not corrected, and this could mislead the users of the financial statements.
  • Audit Report Impact
    If management does not correct this error, the audit report will need to be modified. Since management has not complied with IAS 16, and the error is material but not pervasive, the auditor will issue a qualified opinion. The opinion will be “except for” the misstatement related to the depreciation charged on land.
  • Basis for Qualified Opinion
    A basis for qualified opinion paragraph will be required to explain the material misstatement related to the depreciation charged on land. The opinion paragraph will be qualified “except for” the material misstatement.

(4 marks)

iii)

  • Corruption of Purchases Records
    Lexon Institute’s purchases records and backups have been corrupted for a period of three months, and the purchases during this time amounted to GH¢4 million. This represents 40% of profit before tax (GH¢4 million out of GH¢10 million). This is a material issue, as it impacts the completeness of recorded purchases.
  • Audit Evidence
    The auditor must attempt to verify the purchases by other means, such as reviewing supplier invoices, delivery notes, or payment records. If this alternative evidence cannot be obtained, the completeness of purchases for the three-month period will not be verifiable.
  • Audit Report Impact
    If the auditor cannot obtain sufficient appropriate audit evidence for these purchases, and the amount involved is material, the auditor will need to modify the audit report. Given that the issue relates to a material but not pervasive element of purchases, the auditor will issue a qualified opinion due to limitation of scope.
  • Basis for Qualified Opinion
    A basis for qualified opinion paragraph will be required, explaining the limitation in obtaining sufficient appropriate audit evidence for purchases during the three-month period. The opinion paragraph will be qualified “except for” the limitation of scope regarding the purchases records.

(4 marks)

 

 

  • 10 Marks

AA – Nov 2020 – L2 – Q4a – Completion Procedures and Reporting

Outline reasons for obtaining a letter of representation before signing the audit report.

The audit engagement team of which you are a member, for the audit of Survival Ltd, has almost completed the audit of the financial statements for the year ended 31 October 2019. You have been told that your firm will need to obtain a letter of representation from management as part of the audit evidence needed to form an opinion on the financial statements.

Required:
i) Outline FOUR (4) reasons why your audit firm needs to obtain a letter of representation before the audit report is signed.
(6 marks)

ii) Outline TWO (2) factors you will consider determining the adequacy of management representation as audit evidence.
(4 marks)

  1. Requirement under ISA 580: The letter of representation is a requirement under ISA 580, which states that auditors must obtain a written representation from management regarding their responsibility for the preparation of the financial statements and their provision of all necessary information.
  2. Management’s Responsibility: It confirms management’s acknowledgment of their responsibility for preparing the financial statements in accordance with the applicable financial reporting framework and for the completeness of the information provided to the auditor.
  3. Audit Evidence for Management Judgements: The letter provides evidence of management’s responsibility for the financial statements and includes confirmation of the judgments and estimates made by management, which are relevant for forming an audit opinion.
  4. Supplemental Evidence: It serves as additional audit evidence that complements the other evidence obtained during the audit, particularly in cases where some items are confined to management or are matters of management judgment.

(1.5 marks for each reason – 6 marks total)

  • 6 Marks

AA – Nov 2016 – L2 – Q4b – Completion Procedures and Reporting

List and explain the basic elements of an audit report as per ISA 700.

ISA 700 “Forming an Opinion and Reporting on Financial Statements” indicates the basic elements that will ordinarily be included in the audit report.

Required:
List SIX basic elements of an auditor’s report and briefly explain why each element is included in the report. (6 marks)

  • Title: Includes the words “Independent Auditor” to distinguish the report from others prepared internally by the company.
  • Addressee: The report is addressed to the party responsible for governance (e.g., shareholders or board of directors).
  • Introductory Paragraph: Identifies the financial statements being audited and the period covered by the audit.
  • Management’s Responsibility: Outlines management’s responsibility for preparing the financial statements and maintaining internal control.
  • Auditor’s Responsibility: Explains the auditor’s responsibility to express an opinion, and describes the scope of the audit and standards followed.
  • Opinion: States whether the financial statements present a true and fair view in accordance with the applicable financial reporting framework.
  • 10 Marks

AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

ISA 706 (Revised): Emphasis of Matter Paragraphs and Other Matter(s) paragraphs in the Independent Auditor’s Report requires that an auditor’s report may include an “emphasis of matter” paragraph and/or an “other matter” paragraph.

Required:
Distinguish between Emphasis of Matter and Other Matter paragraphs, showing clearly requirements of Audit Report and communication with those charged with governance.

Emphasis of Matter Paragraph:
An Emphasis of Matter paragraph is used to draw the attention of users of the financial statements to matters that are presented or disclosed in the financial statements that are fundamental to understanding them. The key points regarding an Emphasis of Matter paragraph are:

  1. Inclusion in the Audit Report:
    The paragraph is included in a separate section with the heading “Emphasis of Matter.”
  2. Reference to Disclosures:
    The auditor must refer to specific notes in the financial statements that explain the matter in detail.
  3. No Modification to Opinion:
    The inclusion of an Emphasis of Matter paragraph does not modify the auditor’s opinion on the financial statements.
    (5 marks)

Other Matter Paragraph:
An Other Matter paragraph is used to communicate matters that are not presented or disclosed in the financial statements but are relevant to users’ understanding of the audit, the auditor’s responsibilities, or the audit report. The key points regarding an Other Matter paragraph are:

  1. Inclusion in the Audit Report:
    The paragraph is included in a separate section with the heading “Other Matter.”
  2. Matters Relevant to the Audit:
    The paragraph is used to communicate additional information that is necessary for users to understand the audit process or auditor’s responsibilities, such as restrictions on the audit scope or legal obligations.
  3. Not Related to the Financial Statements:
    Unlike an Emphasis of Matter paragraph, this paragraph refers to matters not already disclosed in the financial statements.
    (4 marks)

Communication with Those Charged with Governance:
If the auditor expects to include an Emphasis of Matter or Other Matter paragraph in the audit report, they must communicate this to those charged with governance, discussing the nature of the paragraph and the reasons for its inclusion.

  • 10 Marks

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.

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.

i) Redundancy Provision:
Under IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets), if the economic outflow to discharge an obligation is probable, a provision must be recognized. Logistics Ltd has under-declared the provision for employee redundancy by GH¢230,000, which represents 8.5% of profit before tax (GH¢230,000/ GH¢2.6 million). This is material but not pervasive.

Impact on Auditor’s Report:
According to ISA 705 (Revised), the Auditor should inform those charged with governance about the Finance Director’s refusal to adjust the provision. If management does not amend the financial statements, the Auditor should issue a qualified opinion due to the material misstatement in the financial statements. The basis for the opinion should include the description and quantification of the financial effects of the under-declared provision. (5 marks)

ii) Contingent Liability:
The wrongful dismissal lawsuit for GH¢1.2 million represents 46% of profit before tax (GH¢1.2 million / GH¢2.6 million), making it a material issue. Under IAS 37, contingent liabilities must be disclosed if the economic outflow is possible. Logistics Ltd has disclosed this matter as a contingent liability.

Impact on Auditor’s Report:
If the matter remains unresolved, the Auditor should issue a qualified opinion based on materiality. The basis for the qualified opinion should explain the disclosure of the contingent liability and its potential impact. Since the outcome of the lawsuit is uncertain, it should be disclosed in the contingent liability note in the financial statements. (5 marks)

  • 10 Marks

AA – May 2018 – L2 – Q3b – Audit and Assurance Risk Environment, Completion Procedures and Reporting

Explains the importance of professional skepticism and audit procedures for subsequent events in the audit process.

ii) Auditors are required to plan and perform an audit with professional skepticism, to exercise professional judgment, and to comply with ethical standards.

Required:
Explain what is meant by ‘professional skepticism’ and why it is so important that the auditor maintains professional skepticism throughout the audit. (5 marks)

b)
i) International Standard on Auditing (ISA) 560: Subsequent Events deals with the auditor’s responsibility towards events that occur after the reporting date and especially before the auditor’s report is issued.

Required:
Explain FIVE audit procedures to test subsequent events. (5 marks)

(ii) Professional Skepticism:
Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and critically assessing audit evidence. Auditors should not simply accept the information provided by management at face value, but instead, should seek corroborative evidence.

Professional skepticism is crucial because:

  • Risk of Misstatement: It helps reduce the risk of overlooking unusual transactions or anomalies, which could be signs of material misstatement.
  • Fraud Detection: It ensures that the auditor remains vigilant to potential fraud or deliberate misstatements, particularly in areas where management judgment or estimates are involved.
  • Independence: Maintaining skepticism supports auditor independence, as it ensures that evidence is objectively evaluated, rather than relying solely on management representations.
  • Judgment: It ensures that professional judgment is applied rigorously in determining the nature, timing, and extent of audit procedures and in evaluating their results.

(Total: 5 marks)

(i) Audit Procedures for Subsequent Events (ISA 560):

  1. Inquiries of Management:
    Auditors should inquire with management about any significant post-balance-sheet events, new commitments, borrowings, or any unusual transactions after the reporting period.
  2. Review of Board Minutes:
    The auditor should review minutes of meetings held by the board of directors, shareholders, and relevant committees to identify any major events or decisions that occurred after the reporting date.
  3. Examination of Interim Financial Statements:
    Reviewing the client’s interim financial statements prepared after the year-end helps identify significant events that might impact the financial statements under audit.
  4. Lawyer’s Letters:
    Auditors should obtain confirmations from the company’s legal counsel concerning litigation and claims that may have arisen after the balance sheet date.
  5. Subsequent Receipts and Payments:
    Auditors should test transactions that occur after the reporting date, such as payments received from customers or payments made to suppliers, to confirm the completeness and accuracy of year-end balances.

(Total: 5 marks)

  • 15 Marks

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

Evaluates the use of an adverse opinion and the inclusion of an emphasis of matter paragraph in audit reports.

The auditors of ABC Ltd issued an adverse opinion on the financial statements of the company for the year ended 31 December 2017. This was due to the fact that management could not make available the cash book, general ledger, and debtors ledger to the auditors for examination.

Some of the engagement team members may not agree to the issue of an adverse opinion and are suggesting an unmodified report with an emphasis of matter paragraph.

Required:
a. Comment on the action of the auditors to issue an adverse opinion. (10 marks)
b. Explain to your team members the circumstances that will make auditors include an emphasis of matter paragraph in the Independent Auditor’s report. (5 marks)

(Total: 15 marks)

a. Comment on the Auditors’ Action to Issue an Adverse Opinion:

  1. Justification for Adverse Opinion: An adverse opinion is issued when the financial statements are materially misstated and do not provide a true and fair view of the company’s financial position. In this case, management’s failure to provide key documents, such as the cash book, general ledger, and debtors ledger, severely limits the auditor’s ability to gather sufficient appropriate audit evidence.
  2. Impact on Financial Statements: The absence of these key records means that the financial statements cannot be substantiated, and the figures provided by management could be materially misstated. This makes it impossible for the auditor to conclude that the financial statements are free from material misstatement, justifying the adverse opinion.
  3. Pervasive Effect: The issue is pervasive as it affects multiple areas of the financial statements, including cash, revenue, receivables, and possibly other balances. A pervasive issue affects the overall reliability of the financial statements, making the adverse opinion the appropriate course of action.
  4. Limitation of Scope vs Adverse Opinion: Although some team members suggest issuing a modified opinion with an emphasis of matter paragraph, the situation represents a significant limitation in the scope of the audit. An emphasis of matter paragraph would be inappropriate in this case because it is typically used when highlighting matters already disclosed in the financial statements, not when there is an inability to obtain sufficient audit evidence.
  5. Conclusion: The adverse opinion issued by the auditors is appropriate and justified under the circumstances, as the lack of essential financial records makes it impossible to verify the accuracy of the financial statements. (10 marks)

b. Circumstances for Including an Emphasis of Matter Paragraph:

  1. Definition of Emphasis of Matter: An emphasis of matter paragraph is included in the audit report to draw users’ attention to a matter that is appropriately disclosed in the financial statements but is of such importance that it is fundamental to users’ understanding of the financial statements.
  2. Uncertainty or Significant Event: An emphasis of matter paragraph may be included if there is an uncertainty relating to the outcome of significant litigation, regulatory actions, or major events such as natural disasters that have a significant impact on the company’s financial position but are properly disclosed.
  3. Application of New Accounting Standard: If a company applies a new accounting standard early, and the application has a material impact on the financial statements, the auditor may include an emphasis of matter paragraph to highlight this fact to users of the financial statements.
  4. Going Concern: If there is material uncertainty about the entity’s ability to continue as a going concern, and this uncertainty is appropriately disclosed in the financial statements, the auditor may include an emphasis of matter paragraph to highlight this to the users.
  5. Importance of Disclosure: It is important to note that the inclusion of an emphasis of matter paragraph does not modify the audit opinion. It is included to highlight key matters already presented in the financial statements. (5 marks)

(Total: 15 marks)

  • 10 Marks

AAA – Nov 2020 – L3 – Q3b – Audit Evidence | Evaluation and Review

Describe the auditor’s responsibility for subsequent events that occur before and after the auditor's report is signed.

Describe your responsibility for subsequent events;
i) Assuming the events occurred before your report is signed (5 marks)

ii) Assuming the events occurred after signing your report but before the report was issued. (5 marks)

i) Events Occurring Before the Auditor’s Report is Signed:

    • The auditor has an active duty to perform audit procedures to identify subsequent events up to the date of the auditor’s report. These procedures should provide sufficient and appropriate evidence that all events requiring adjustment or disclosure have been identified.
    • Audit procedures include:
      • Reviewing management procedures for identifying subsequent events.
      • Reading board minutes and inquiries to management.
      • Reviewing correspondence with legal counsel regarding pending litigation.
    • The auditor should ensure all relevant events are properly accounted for or disclosed in the financial statements.

ii) Events Occurring After the Auditor’s Report is Signed but Before It Is Issued:

    • The auditor does not have a responsibility to perform audit procedures or make any inquiries about the financial statements or subsequent events after the report date. However, if the auditor becomes aware of a fact that could materially affect the financial statements, they should:
      • Discuss the matter with management.
      • Determine whether the financial statements need amendment.
      • Consider the implications for the audit report if management refuses to amend.
    • If the financial statements are amended, the auditor should perform additional procedures and issue a new report. If not amended, the auditor might need to modify their opinion.
  • 10 Marks

AAA – Nov 2020 – L3 – Q3a – Audit Evidence | Evaluation and Review

Discuss whether financial statements require amendment for specific events and describe related audit procedures and audit report implications.

a) For each of the three events below:
i) Discuss whether the financial statements require amendment. (3 marks)
ii) Describe audit procedures that should be performed in order to form a conclusion on the amendment. (4 marks)
iii) Explain the impact on the audit report should the issues remain unresolved. (3 marks)

  • Warehouse Flood:
    • Amendment: The flood event occurred after the year-end, making it a non-adjusting event under IAS 10. The financial statements should not be adjusted, but if the impact is material, a disclosure note should be made.
    • Audit Procedures:
      • Discuss the event with management.
      • Review the insurance claim and correspondence with insurers.
      • Obtain a written representation confirming that the company’s going concern status is not impacted.
      • Review other warehouses’ inventory levels for reasonableness.
    • Audit Report Impact: If management refuses to disclose the event and it is material, a qualified opinion would be required with an ‘except for’ paragraph regarding the lack of disclosure.
  • Lawsuit Settlement:
    • Amendment: The lawsuit settlement amount agreed after year-end provides evidence of the condition that existed at the balance sheet date, so the financial statements should be adjusted to reflect a provision of GHS 0.9 million instead of a contingent liability.
    • Audit Procedures:
      • Contact the company’s legal counsel for confirmation of the settlement likelihood and amount.
      • Review the correspondence from the supplier confirming the settlement amount.
      • Discuss the provision with management and obtain written representation.
    • Audit Report Impact: If management refuses to adjust the provision, a qualified opinion would be required due to non-compliance with IAS 37.
  • Receivable with Going Concern Issues:
    • Amendment: The event provides evidence about conditions existing at the balance sheet date, indicating that the receivable may not be collectible. An allowance for doubtful debts should be considered, but as the amount is immaterial, no adjustment may be necessary.
    • Audit Procedures:
      • Review correspondence with the customer regarding their financial difficulties.
      • Discuss with management why no allowance has been made.
      • Check post-year-end payments from the customer.
    • Audit Report Impact: As the receivable is immaterial, the lack of adjustment does not warrant a modification to the audit opinion.

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