Series: AUG 2022

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  • 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.

  • 4 Marks

AA – Aug 2022 – L2 – Q5b – Audit and Assurance Evidence

States factors that influence the reliability of audit evidence.

ISA 500: Audit Evidence requires among other things that audit evidence must be reliable.
Required:
State FOUR (4) factors that influence the reliability of audit evidence.

The following factors influence the reliability of audit evidence:

  1. Source of Evidence:
    Audit evidence obtained from independent external sources is generally more reliable than evidence obtained from internal sources.
  2. Effectiveness of Related Controls:
    Evidence generated internally is more reliable when the internal controls over its preparation and maintenance are strong and effective.
  3. Directness of Evidence:
    Evidence obtained directly by the auditor, such as through observation or physical examination, is more reliable than evidence obtained indirectly, such as through inquiry.
  4. Documentary Form of Evidence:
    Evidence that exists in written or documented form (e.g., contracts, invoices) is more reliable than verbal evidence. Original documents are more reliable than copies or electronic versions.
  • 6 Marks

AA – Aug 2022 – L2 – Q5a – Completion Procedures and Reporting

Identifies the responsibilities of those charged with governance and matters communicated by auditors.

ISA 260 (Revised and Redrafted): Communication with Those Charged with Governance deals with the auditor’s responsibility to communicate with those charged with governance in relation to an audit of financial statements.

Required:
i) Identify TWO (2) specific responsibilities of those charged with governance.
(2 marks)

ii) Explain FOUR (4) examples of matters that might be communicated to them by the auditor.
(4 marks)

i) Specific Responsibilities of Those Charged with Governance:

  1. Overseeing the Financial Reporting Process:
    Those charged with governance are responsible for ensuring that the financial reporting process is properly managed and that the financial statements are prepared in accordance with applicable standards.
  2. Establishing and Monitoring Internal Controls:
    They are responsible for setting up internal control systems and monitoring their effectiveness to ensure the prevention and detection of fraud and errors.
    (2 marks)

ii) Examples of Matters Communicated by the Auditor to Those Charged with Governance:

  1. Auditor’s Responsibilities in Relation to the Financial Statements:
    The auditor communicates their responsibility for forming and expressing an opinion on the financial statements in accordance with ISAs and relevant laws.
  2. Planned Scope and Timing of the Audit:
    The auditor discusses the audit approach, including risk assessment and the extent of reliance on internal controls, as well as the timeline for conducting interim and final audits.
  3. Significant Findings from the Audit:
    This includes difficulties encountered during the audit, such as delays in obtaining information, material weaknesses in internal controls, and any audit adjustments proposed.
  4. Independence Issues:
    The auditor reports on matters that may affect their independence and the safeguards in place to mitigate threats to independence.
    (4 marks)
  • 10 Marks

AA – Aug 2022 – L2 – Q4b – Internal Audit and Its Relationship with External Audit

Identifies measures that can be implemented to ensure the independence of the internal audit function.

A major criticism of Internal Audit is that it lacks independence. Many factors may contribute to this perceived lack of independence.

Required:
Identify FIVE (5) measures that can be put in place to ensure the independence of the Internal Audit function.

The following measures can be implemented to ensure the independence of the internal audit function:

  1. Appointment by the Board or Audit Committee:
    The internal auditor should be appointed by the Board of Directors or the Audit Committee, rather than by management, to reduce undue influence from management.
  2. Direct Reporting to the Audit Committee:
    The internal auditor should report directly to the Audit Committee or the Board rather than to operational management. This ensures that their findings are not influenced or filtered by management.
  3. Approval of Internal Audit Plan by the Audit Committee:
    The internal audit plan, including the scope of audit activities, should be reviewed and approved by the Audit Committee to maintain alignment with organizational priorities and risks.
  4. Rotating Internal Audit Staff:
    Internal audit staff should be rotated regularly to prevent them from becoming too familiar with the audited departments or staff, which could impair objectivity.
  5. Prohibition from Auditing Own Work:
    Internal auditors should not be involved in auditing areas where they had operational responsibility. This prevents conflicts of interest and ensures objectivity.
  6. Training and Competence of Internal Audit Staff:
    The internal audit staff should receive adequate training and continuous professional development to ensure they are competent and up to date with best practices and audit standards.
  7. Sufficient Budget and Resources:
    The internal audit function should have sufficient budgetary support and access to resources to conduct their activities independently and effectively.
  8. Communication Channels with the Audit Committee:
    Internal auditors should have direct access to the Audit Committee and be able to communicate any concerns or issues without management interference.
  • 10 Marks

AA – Aug 2022 – L2 – Q4a – Completion Procedures and Reporting

Defines going concern and discusses the auditor's responsibilities and procedures in relation to going concern.

Pinto Ltd (Pinto) provides analytical services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.

The annual audit is nearly complete. As Audit Senior, you have reported to the Engagement Partner that Pinto is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where Pinto’s services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for Pinto, but a number of clients did not renew their contracts. A senior employee then left Pinto, stating lack of investment in new analysis machines thus increasing the risk of incorrect information being provided by the company.

A cash flow forecast prepared internally showed Pinto requiring significant additional cash within the next 12 months to maintain even the current level of services and operations. Pinto’s auditors have been asked to provide a negative assurance report on this forecast.

Required:
i) Define going concern and discuss the auditor’s responsibilities in respect of going concern.
(4 marks)

ii) State FIVE (5) audit procedures that may be carried out to determine whether or not Pinto is a going concern.
(6 marks)

i) Definition of Going Concern:
Going concern refers to the assumption that an entity will continue its operations for the foreseeable future without the intention or necessity of liquidation or ceasing trade. It is a fundamental accounting concept used in the preparation of financial statements as per IAS 1 – Presentation of Financial Statements.
(2 marks)

Auditor’s Responsibilities in Respect of Going Concern (ISA 570):
The auditor has three key responsibilities regarding going concern:

  • Evaluate Management’s Use of the Going Concern Assumption:
    The auditor should evaluate whether management’s use of the going concern assumption in the preparation of financial statements is appropriate.
  • Perform Appropriate Audit Procedures:
    The auditor must carry out procedures to assess whether the organization can continue as a going concern.
  • Report on the Going Concern Assumption:
    If the auditor believes that management’s use of the going concern assumption is inappropriate or that there are material uncertainties, the auditor must modify their audit report accordingly.
    (2 marks)

ii) Audit Procedures to Assess Going Concern:

  1. Review the Cash Flow Forecast:
    Obtain and review Pinto’s cash flow forecast for the next 12 months, analyzing assumptions and discussing with management to assess liquidity issues.
  2. Inquire of Management:
    Discuss with management their plans to obtain additional financing or take other measures to address the cash shortfall and evaluate the feasibility of these actions.
  3. Review Interim Financial Statements:
    Obtain and review interim financial statements to evaluate post-year-end performance and whether sales or income levels align with the forecast.
  4. Examine Legal Claims:
    Obtain a solicitor’s letter and review the details of legal claims against Pinto, assessing their potential financial impact.
  5. Review Post-Year-End Orders and Contracts:
    Review Pinto’s order book and contracts with clients to determine whether future revenue streams are sufficient to support continued operations.
  6. Assess Capital Investment and Equipment Needs:
    Consider whether lack of investment in new machines or equipment may further weaken Pinto’s financial position and ability to generate revenue.
  • 5 Marks

AA – Aug 2022 – L2 – Q3c – Audit and Assurance Evidence

Recommends actions the auditor can take when audit evidence is insufficient due to control weaknesses.

After performing tests of controls, the auditor is of the opinion that the audit evidence is not sufficient to support the audit opinion; in other words, many control errors were found.

Required:
Recommend FIVE (5) actions that the auditor may take in response to this problem

The following actions can be taken by the auditor when audit evidence is insufficient:

  1. Expand the Amount of Control Testing:
    The auditor can increase the sample size or expand the testing of controls to determine if the control weakness is pervasive or isolated.
  2. Report the Problem to the Directors:
    The auditor can raise the issue with the directors either verbally or through a management letter to ensure they are aware of the control weaknesses.
  3. Perform Additional Substantive Procedures:
    In cases where controls are found to be weak, the auditor can perform additional substantive procedures to gather more direct evidence regarding the audit area.
  4. Consider Qualifying the Audit Report:
    If the control weaknesses are material and pervasive, the auditor may need to consider qualifying the audit report, depending on the significance of the issue.
  5. Include a Basis for Qualification Paragraph:
    The auditor should introduce a “Basis for Qualification” paragraph in the audit report to explain the material impact and reasons for the qualification, if necessary.
  • 5 Marks

AA – Aug 2022 – L2 – Q3b – Completion Procedures and Reporting

Lists items that could be included in a management representation letter as part of audit evidence.

ISA 580: Management Representations provides guidance on the use of management representations as audit evidence.

Required:
List FIVE (5) items that could be included in a management representation letter.

The following items could be included in a management representation letter:

  1. No Irregularities Involving Management or Employees:
    A statement that management is not aware of any irregularities involving employees or management that could materially affect the financial statements.
  2. Availability of All Books of Account and Supporting Documentation:
    Confirmation that all books of account and supporting documentation have been made available to the auditors.
  3. Completeness of Related Party Disclosures:
    A declaration that information and disclosures related to related parties are complete.
  4. Financial Statements Free from Material Misstatements:
    Management’s assertion that the financial statements are free from material misstatements, including omissions.
  5. No Non-Compliance with Statutes or Regulations:
    A statement that the company is in compliance with all statutes and regulatory authorities.
  • 10 Marks

AA – Aug 2022 – L2 – Q3a – Audit and Assurance Evidence

Explains factors that influence the sufficiency of audit evidence obtained during an audit.

Sophie & Co., a firm of Chartered Accountants, is preparing the end-of-year audit for GH Mobile, a client that is listed on the Ghana Stock Exchange. You have been selected to be part of the team to audit the non-current assets of GH Mobile. As an audit associate, you were provided with evidence that you have assessed as not sufficient. Also, you have raised issues regarding the omission of important items in the management representation letter of the client.

Required:
Explain FIVE (5) factors that will influence the auditor’s judgement regarding the sufficiency of the evidence obtained.

The following factors will influence the auditor’s judgment regarding the sufficiency of audit evidence:

  1. Assessment of Risk:
    The higher the assessed risk at the financial statement level or individual transaction level, the more evidence will be required to reduce audit risk to an acceptable level.
  2. Materiality of the Item:
    Material items in the financial statements require more evidence than immaterial items, as they have a greater impact on the auditor’s opinion.
  3. Nature of Accounting and Internal Control Systems:
    The auditor’s confidence in the client’s internal control system affects the amount of evidence needed. Strong, reliable internal controls reduce the need for extensive substantive testing.
  4. Auditor’s Knowledge and Experience of the Client’s Business:
    If the auditor has significant prior experience with the client and trusts the integrity of the management team, fewer detailed tests may be required.
  5. Reliability of the Source of Evidence:
    Audit evidence is more reliable when it is obtained from independent, external sources rather than from the client’s management or staff.
  6. Findings from Audit Procedures:
    The findings from related audit procedures, such as tests of controls, influence the extent of substantive testing required. If controls are strong, less substantive evidence may be needed.
  • 10 Marks

AA – Aug 2022 – L2 – Q2c – Professional and Ethical Considerations

Explains factors to consider before accepting a new audit client and preconditions for agreeing to an audit engagement.

There are factors to consider and procedures to follow before accepting a new client, a new engagement for an existing client, or agreeing to the terms of any new engagement. It could be an audit, a non-audit engagement, or an assurance engagement. Acceptance decisions are critical since new clients and/or engagements can impair the objectivity or expose the firm to an audit risk, both of which must be carefully considered.

Required:
i) Explain TWO (2) factors a professional accountant in public practice should consider before accepting a new audit client.
(5 marks)

ii) Explain TWO (2) preconditions that should exist when agreeing to the Terms of Audit Engagement.
(5 marks)

i) Factors a professional accountant in public practice should consider before accepting a new audit client:

  1. Integrity of Management:
    The accountant should assess whether the management of the potential client has integrity. If there are any doubts about the honesty or ethical behavior of the management team, it could compromise the auditor’s independence and objectivity.
  2. Firm’s Capability and Resources:
    The audit firm must determine whether it has the necessary expertise, resources, and time to properly carry out the engagement. This includes ensuring that the team has the relevant industry knowledge and experience.
    (5 marks)

ii) Preconditions that should exist when agreeing to the Terms of Audit Engagement:

  1. Acceptable Financial Reporting Framework:
    The auditor must determine whether the financial reporting framework used by the client for preparing the financial statements is appropriate, ensuring that it complies with relevant standards (e.g., IFRS, GAAP).
  2. Management’s Acknowledgement of Responsibility:
    The auditor must obtain agreement from management that they acknowledge their responsibility for the preparation of the financial statements and for providing the auditor with all necessary access to information and documentation.
    (5 marks)
  • 5 Marks

AA – Aug 2022 – L2 – Q2b – Institutional Regulation and Standard-Setting

Identifies and explains the roles of the main committees established under the ICAG Act, 2020 (Act 1058).

The Institute of Chartered Accountants, Ghana Act, 2020 (Act 1058) gives power to the council to establish committees to regulate the Accountancy Profession and Practice.

Required:
Identify THREE (3) main committees and their role as stated under the new Act.

The three main committees under the Institute of Chartered Accountants, Ghana Act, 2020 (Act 1058) and their roles are:

  1. Accountancy Practice Review Committee:
    • Monitors compliance with professional standards.
    • Reviews the practice standards of registered firms.
    • Ensures registered firms follow the prescribed accounting and auditing practices.
    • Oversees quality control within the accountancy practice.
  2. Public Accountancy Supervisory Committee:
    • Monitors and evaluates the public accountancy practice to ensure compliance with standards.
    • Oversees the public accountancy practice of registered firms and ensures compliance with ICAG’s code of ethics.
  3. Disciplinary Committee:
    • Receives and investigates complaints or allegations of professional misconduct against members of the Institute.
    • Inquires, hears, and makes decisions regarding issues of professional misconduct.
    • Takes necessary disciplinary actions where applicable.

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