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  • 15 Marks

AA – Nov 2019 – L2 – Q1b – Planning and Approach for Audit and Assurance Engagements

Explaining the difference between audit strategy and audit plan, along with identifying the contents of both.

ISA 200: Overall Objectives of Independent Auditor and the Conduct of an Audit and ISA 300 – Planning an Audit of Financial Statements requires that auditors should plan in order to conduct the audit in an effective, efficient, and timely manner. The plan should include an overall audit strategy and a detailed audit plan.

Required:
i) Distinguish between audit strategy and audit plan. (5 marks)
ii) Identify the contents of audit strategy and audit plan. (10 marks)

i) Distinction between audit strategy and audit plan:

  • Audit strategy sets the overall scope, timing, and direction of an audit and guides the development of the more detailed audit plan.
  • Audit plan is a more detailed process that sets out the work to be done in order to achieve the audit strategy.

(2.5 marks)

While audit strategy entails high-level assessments done by senior audit personnel to determine the overall audit approach and risk nature of the audit, the audit plan consists of a set of instructions to the audit team specifying the audit procedures that should be performed in each area of the audit.

(2.5 marks)

ii) Contents of Audit Strategy:

  • Determines the characteristics of the engagement that define its scope, such as:
    • The reporting standards applying to the audit
    • Industry-specific reporting requirements
    • Reporting objectives of the engagement
    • Reporting deadlines
    • Nature of communications and reports required
    • Factors that will determine the focus of the audit
    • Materiality
    • Risk assessment
    • The audit approach – whether relying on internal control, extent of test, etc.
    • Any recent developments in relation to the entity, the industry, or financial reporting requirements
  • Determining the nature, the extent, and timing of the resources from the results of the above
    • Which staff and how many to use
    • Which areas of the audit to use them
    • How they are to be managed, supervised, and directed

(5 points for 5 marks)

Contents of Audit Plan:

  • Procedures to be used in order to assess the risk of misstatement in the entity’s records and financial statements.
  • Materiality assessment
  • Preliminary analytical procedures
  • Detailed risk assessment
  • Audit procedures in response to assessed risks
  • Audit plan is set in a series of instructions to the audit team to address the concerns of the audit strategy.

(5 points for 5 marks)

(Total: 15 marks)

  • 5 Marks

AA – Nov 2016 – L2 – Q3c – Planning and Approach for Audit and Assurance Engagements

Explain the role of preliminary analytical review in audit planning.

Demonstrate the use of preliminary analytical review as a planning tool in an audit.

Preliminary Analytical Review is used during the planning phase to help auditors gain an understanding of the client’s financial situation. It involves analyzing financial ratios and trends, such as gross profit percentages or liquidity ratios, to identify potential risk areas. For example, a decrease in gross profit percentage may indicate the company is heading towards losses, while an increase in debt collection periods may suggest uncollectible receivables. This helps auditors decide the nature, timing, and extent of audit procedures needed to address the identified risks.

  • 14 Marks

MA – Nov 2016 – L2 – Q1a – Introduction to management accounting

Discuss the importance of Management Accounting in a modern business environment and compare it with Financial Accounting.

The Management Accountant plays an important role in the modern business environment, and his/her activities may be categorized as providing information under the key headings of planning, control, and decision making.

You have just been appointed to a new role as Management Accountant in Akwaba Ltd, a large engineering company producing a wide range of parts for the automobile industry. This new role has been created following a majority decision of the Board of Directors based on the advice of the company’s auditors. However, the Managing Director comes from a marketing background and does not understand why the company needs another accountant as there is already a Financial Accountant employed on a full-time basis. She voted against the creation of the new position and considers the cost of your remuneration to be an unwelcome burden which will only serve to reduce the company’s reported profits. According to her, the equation Y = a – bx which management accountants always use is not relevant in the modern-day business environment.

You are aware of the strong opinion of the Managing Director, and as your first task, you decide to attempt to convince her of the importance of Management Accounting in the modern business environment and also suggest some ways that you can ensure your future role in Akwaba Ltd is financially viable.

Required:

Prepare a Memorandum to the Managing Director in which you address her concerns using the following guidelines:

i) Distinguish clearly between Financial Accounting and Management Accounting under any FOUR different headings. (6 marks)

ii) For each of the THREE key headings of planning, control, and decision making, outline one Management Accounting technique and how it would lead to stronger commercial success for the company. (6 marks)

iii) Identify any THREE qualitative (non-financial) issues that you should consider as a Management Accountant when providing information for decision making in Akwaba Ltd. (2 marks)

MEMORANDUM
To: Managing Director, Akwaba Ltd
From: New Management Accountant
Subject: Role of Management Accounting
Date: 8th November 2016

Further to my recent appointment as Management Accountant at Akwaba Ltd, the following is a brief outline of the role and importance of management accounting to companies like Akwaba Ltd, the meaning of the question and also some brief suggestions as to how my appointment may prove beneficial to you and the company from both a financial and non-financial viewpoint.

Financial Vs Management Accounting
Despite the fact that the word “Accountant” is common to both job titles, they are in fact very different roles. The financial accountant is primarily concerned with stewardship and compliance activities whereas the management accountant is concerned with information gathering, analysis, and dissemination. The roles can be further differentiated using the following headings:

  • Users: Financial Accountant aims to report the company’s affairs and transactions to external audiences such as shareholders, debt providers, government bodies, etc. Management Accountants aim to report information exclusively to internal audiences such as Directors, department managers, project managers, etc.
  • Time Horizon: Financial accounts are usually based on historic data and are often reported some time (months) after the event to which they relate. Hence they are said to be backward-looking. Management accounting information can often be more forward-looking and may use historic data but will usually try to use it predictively to make decisions about the future direction of the company.
  • Regulatory Compliance: Financial accounts are used for stewardship purposes and as a basis for other calculations such as taxation liabilities. Hence there are expectations of precision and accuracy to give a “true and fair view.” Therefore they must comply with detailed legislation and generally accepted accounting practice (GAAP). Management accounts and reports do not have to suffer the same restrictions of legislation and GAAP and may not have the same level of accuracy. The emphasis is on timely production of information rather than accuracy and compliance.
  • Objective: The main objectives of financial accounting are to disclose the end results of the business, and the financial condition of the business on a particular date. Whereas the main objective of managerial accounting is to help management by providing information that is used to plan, set goals, and evaluate these goals.

Suggested Management Accounting Techniques:

  • Planning: Management accountants will be heavily involved in producing the budgets within a company. These range from long-term strategic plans (3 to 5 years) to short-term operational level plans (quarterly or monthly). Producing plans helps ensure the company grows in a structured and organized way and can ensure that adequate resources are put in place, for example, to help prepare for expansion into new markets.
  • Control: Management accountants often use variance analysis to monitor actual results and compare them to expected norms (standards) for all the different facets of business activities. This technique helps identify positive and negative trends/changes to ensure the company can adapt quickly when results are different from original expectations and thus optimize the company’s commercial performance.
  • Decision Making: Management accountants use techniques such as break-even analysis, limiting factor, linear programming to help predict the activity levels required to ensure a profit or a target return on capital is achieved. This can help inform production quotas and scheduling and will help ensure optimal resource utilization.

Non-financial Considerations:
Accountants are often criticized for concentrating too much on the financial outcome of activities – profit focused. Management accountants are encouraged to look at other aspects that contribute to business success such as:

  • Customer satisfaction
  • Corporate governance and ethical responsibilities
  • Good labor relations
  • Market penetration/expansion
  • Environmental protection
  • Number of complaints
  • Idle times
  • Number of defects
  • 10 Marks

AAA – Nov 2015 – L3 – Q5a – Audit Evidence

Discuss why the audit of financial instruments is particularly challenging and explain the matters to be considered in planning the audit of Tap Co’s forward exchange contracts.

a) You are the manager in Dee Kay Company, a firm of Chartered Accountants. You have just attended a monthly meeting of audit partners and managers at which client-related matters were discussed. Information relating to one client which was discussed at the meeting is given below.

Tap Co Tap Co is a clothing manufacturer, which has recently expanded its operations overseas. To manage exposure to cash flows denominated in foreign currencies, the company has set up a treasury management function, which is responsible for entering into hedge transactions such as forward exchange contracts. These transactions are likely to be material to the financial statements. The audit partner is about to commence planning the audit for the year ending 31 July 2014.

Required:

Discuss why the audit of financial instruments is particularly challenging, and explain the matters to be considered in planning the audit of Tap Co’s forward exchange contracts. (10 marks)

Audit of financial instruments

Financial instruments themselves may be difficult to understand. Management themselves may fail to understand the risks involved with them, which may expose the entity to substantial risks.

Financial reporting requirements in this area can be complex, which increases the risk of misstatement. It is possible that neither management nor the auditor will properly understand how the instruments should be accounted for.

Accounting for financial instruments may also involve an element of subjectivity, e.g., in determining fair values. Fair values may be estimated with the use of models which will involve making assumptions. This presents a risk that the assumptions made by management are not reasonable.

Given the presence of subjectivity, it is all the more important that the auditor is professionally skeptical in this area, although this is likely to be difficult.

Alternatively, some financial instruments may be fairly simple to audit, e.g., where there is an active market, it may be possible to agree fair values to a broker’s report. This would of course be subject to the requirements of ISA 500 Audit Evidence in relation to the use of a management’s expert.

It may be necessary to make use of an auditor’s expert, in which case the auditor must ensure that the expert is independent and competent, and must evaluate the suitability of the expert’s work as audit evidence. This may not be straightforward to do, given the complexity of the subject matter.

Using an auditor’s expert may also have the effect of increasing the audit fee, which should be explained to and discussed with the client.

Matters to consider

The company’s treasury management function has only been set up recently, so it is possible that there will be problems in an area such as this. Internal controls may not be well established, so the auditor will need to spend time obtaining an understanding of them. This increases audit risk in this area.

Consideration should be given to the level of competence of staff in the new department. If they are skilled in this area, then they may be new to the company, in which case there may be difficulties integrating the department with the rest of Tap Co’s finance function.

Alternatively, there is a risk that staff do not have adequate knowledge or experience in this area.

It will be necessary to obtain an understanding of the kinds of financial instruments Tap Co uses to hedge transactions, including Tap Co.’s reasons for entering into them and the kinds of risks it may be exposed to thereby.

The materiality of the instruments should be considered, bearing in mind especially the possibility that transactions with either no, or very little, initial value may turn out to have a material effect on the financial statements. Some types of derivative financial instruments may fall into this category.

Management’s method for valuing financial instruments should be considered, and the auditor must choose whether to audit management’s valuation model or whether to construct a model of its own. This would depend on the assessed reliability of internal controls in this area.

  • 2 Marks

PSAF – Nov 2019 – L2 – Q5d – Public sector fiscal planning and budgeting

Explanation of the difference between planning and budgeting in the public sector.

Explain the difference between planning and budgeting in the public sector. (2 marks)

Government needs to plan its activities, programmes, and projects by setting clear objectives and targets for a given period. Fiscal planning refers to government’s anticipation of revenues, spending, and financing within the planning period. Fiscal planning involves the determination of government revenue, spending, and borrowing for the ensuing year. Fiscal planning is very important in government budgeting as it provides the macroeconomic and fiscal framework within which the budget is implemented.

Therefore, planning relates to fiscal planning which entails the policy-making stage of the budgeting process. It is the fiscal policies that influence the budget statement. Budget, on the other hand, is the expressing of government policies and programmes in some quantitative terms. It relates government spending to the attainment of fiscal and economic policies of government.

(2 marks)

  • 15 Marks

AAA – Nov 2020 – L3 – Q2a – Planning | Audit Evidence | Evaluation and Review

Identify and explain significant audit risks and other matters when planning the final audit for Manuf Co. for the year ended 31 March 2019.

Using the information provided, identify and explain the significant audit risks, and any other matters to be considered when planning the final audit for Manuf Co. for the year ended 31 March 2019. (15 marks)

  • Legal claim: The claim should be investigated seriously by Manuf Co. The chief executive officer’s (CEO) opinion that the claim will not result in any financial consequence for Manuf Co is naive and flippant. Damages could be awarded against Manuf Co if it is found that the machinery is faulty. The recurring high level of warranty provision implies that machinery faults are fairly common and therefore the accident could be the result of a defective machine being supplied to Law Co Ltd. The risk is that no provision is created for the potential damages under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if the likelihood of paying damages is considered probable. Alternatively, if the likelihood of damages being paid to Law Co Ltd is considered a possibility, then a disclosure note should be made in the financial statements describing the nature and possible financial effect of the contingent liability. As discussed below, the CEO, Odo Pa Nye, has an incentive not to make a provision or disclose a contingent liability due to the planned share sale post year-end.
  • A further risk is that any legal fees associated with the claim have not been accrued within the financial statements. As the claim has arisen during the year, the expense must be included in this year’s income statement, even if the claim is still ongoing at the year-end.
  • Law Co Ltd has canceled two orders. If the amounts are still outstanding at the year-end, then it is highly likely that Law Co Ltd will not pay the invoiced amounts, and thus receivables are overstated. If the stage one payments have already been made, then Law Co Ltd may claim a refund, in which case a provision should be made to repay the amount, or a contingent liability disclosed in a note to the financial statements.
  • Warranty provision: The warranty provision is material at 2·6% of total assets (2018 – 2·7%). The provision has increased by only GHS 100,000, an increase of 4·2%, compared to a revenue increase of 21·4%. This could indicate an underprovision as the percentage change in revenue would be expected to be in line with the percentage change in the warranty provision unless significant improvements had been made to the quality of machines installed for customers during the year. This appears unlikely given the legal claim by Law Co Ltd and the machines installed at Mmere Pa Nye Company Ltd operating inefficiently. The basis of the estimate could be understated to avoid charging the increase in the provision as an expense through the income statement. This is of special concern given that it is the CEO and majority shareholder who estimates the warranty provision.
  • Inventories: Work in progress is material to the financial statements, representing 8·9% of total assets. The inventory count was held two weeks prior to the year-end. There is an inherent risk that the valuation has not been correctly rolled forward to a year-end position.
  • Overseas supplier: As the supplier is new, controls may not yet have been established over the recording of foreign currency transactions. Inherent risk is high as the trade payable should be retranslated using the year-end exchange rate per IAS 21 The Effects of Changes in Foreign Exchange Rates. If the retranslation is not performed at the year-end, the trade payable could be significantly over or under-valued, depending on the movement of the dollar to euro exchange rate between the purchase date and the year-end. The components should remain at historic cost within inventory valuation and should not be retranslated at the year-end.
  • Revenue Recognition – timing: Manuf Co raises sales invoices in three stages. There is potential for a breach of IFRS 15 Revenue from Contracts with Customers.
  • Disputed receivable: The amount owed to Mmere Pa Nye Company Ltd is highly material as it represents 50·9% of profit before tax, 2·3% of revenue, and 3% of total assets. The risk is that the receivable is overstated if no impairment of the disputed receivable is recognized.
  • Majority shareholder: Odo Pa Nye exerts control over Manuf Co via a majority shareholding and by holding the position of CEO. This greatly increases the inherent risk that the financial statements could be deliberately misstated, i.e. overvaluation of assets, undervaluation of liabilities, and thus overstatement of profits. The risk is severe at this year-end as Odo Pa Nye is hoping to sell some Manuf Co shares post year-end. As the price that she receives for these shares will be to a large extent influenced by the financial position of the company at 31 March 2019, she has a definite interest in manipulating the financial statements for her own personal benefit.

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