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)