Series: MAR 2024

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  • 10 Marks

AA – Mar 2024 – L2 – Q5b – Internal Audit and Its Relationship with External Audit

Recommend internal control procedures for cheque payments and petty cash systems for Automaga Ltd.

Automaga Ltd has recently acquired the controlling interest in Alkars Ltd, who are importers of car spare parts. In reviewing the organisational structure of Alkars Ltd, Automaga Ltd noticed a weakness in the procedures for the signing of cheques and the operation of the petty cash system. Automaga Ltd engaged you as the company’s auditor and requested that you review the controls over cheque payments and petty cash. Cheques are drawn almost every week and the petty cash account normally has a working balance of about GH¢600, and GH¢1,200 is expended from the fund each month.

Required:
Prepare a letter to Automaga Ltd highlighting your recommendations for good internal control procedures for:
i) Cheque payments. (5 marks)
ii) Petty cash. (5 marks)

To: Automaga Ltd
Date: 1st March, 2024
Subject: Internal Control Recommendations for Cheque Payments and Petty Cash

Dear [Client],

As requested, I have reviewed the internal control systems in place for cheque payments and the petty cash system of Alkars Ltd. Below are my recommendations to improve these controls:

i) Cheque payments:

  1. Dual signatures: All cheques should require the signatures of at least two authorized individuals to ensure proper oversight.
  2. Cheque authorization: Cheques should only be issued based on proper authorization of invoices or other supporting documents.
  3. Segregation of duties: The individuals approving invoices should be different from those signing the cheques to reduce the risk of fraud or errors.
  4. Cheque security: Unused cheques should be kept securely, and access should be limited to authorized personnel.
  5. Periodic review: A log of issued cheques should be maintained, and all cheques (including voided and canceled cheques) should be accounted for and reviewed periodically by senior management.
    (5 points @ 1 mark each = 5 marks)

ii) Petty cash:

  1. Imprest system: The petty cash fund should operate under an imprest system, where the fund is maintained at a fixed amount and replenished based on properly authorized vouchers.
  2. Authorization of payments: Petty cash payments should only be made upon presentation of duly authorized petty cash vouchers.
  3. Segregation of duties: The person responsible for petty cash should not be responsible for approving petty cash expenditures or performing periodic reconciliations.
  4. Surprise counts: Management should conduct unannounced petty cash counts to verify the cash balance and detect any discrepancies.
  5. Limit on petty cash disbursements: The company should set a reasonable limit on the maximum amount that can be paid from petty cash to ensure large payments are processed through regular payment channels.
    (5 points @ 1 mark each = 5 marks)

Yours sincerely,
[Your Name]
[Your Title]

  • 10 Marks

AA – Mar 2024 – L2 – Q5a – Completion Procedures and Reporting

Identify subsequent events and recommend auditor actions based on two scenarios for Benkum Ltd.

Atiko Audit firm is the external auditor of Benkum Ltd, a company operating in the oil and gas sector. Benkum Ltd is listed on the Ghana Stock Exchange. On completing the audit for the year ended 31 December 2022, the following issues were brought to the attention of the senior partner:

  1. On 25 February 2023, Benkum agreed with the workers’ union to increase the pay of all its employees by 10%, backdated to 1 July 2022. No provision for this has been made in the financial statements.
  2. One of the company’s oil tankers shipwrecked at Cape Three Points on the western side of Ghana. There is a risk of serious oil spillage which could have a significant effect on the future of the company. Further information will not be available until after the auditor’s report has been signed.

Required:
i) State TWO (2) types of the event identified by ISA 560: Subsequent Events in relation to the scenario above. (2 marks)
ii) What further action should Atiko Audit firm take concerning each of the above issues? (8 marks)

 

i) Two types of events identified by ISA 560:

  1. Adjusting events: These are events that provide evidence of conditions that existed at the end of the reporting period.
  2. Non-adjusting events: These are events that are indicative of conditions that arose after the reporting period.

ii) Actions required by Atiko Audit firm:

  1. Pay increase issue (Adjusting event):
    • Type: This is an adjusting event because the conditions for the pay increase existed at the reporting date (1 July 2022).
    • Action:
      • Review the agreement with the workers’ union to confirm the 10% pay increase.
      • Recalculate the amount to be accrued as of 31 December 2022.
      • Ensure that Benkum Ltd adjusts the financial statements to include the liability for the backdated pay increase in the statement of financial position and the corresponding expense in the income statement.
      • If Benkum Ltd fails to adjust the financial statements, issue a qualified opinion due to disagreement.
  2. Shipwreck issue (Non-adjusting event):
    • Type: This is a non-adjusting event as it indicates conditions arising after the reporting period.
    • Action:
      • Recommend that Benkum Ltd disclose the nature of the event and the potential financial effect (e.g., cleanup costs, liabilities for environmental damage) in the notes to the financial statements.
      • If Benkum Ltd fails to make adequate disclosure, issue a qualified opinion due to inadequate disclosure.
      • If material uncertainty exists regarding the company’s ability to continue as a going concern, consider adding an emphasis of matter paragraph to the audit report.
  • 10 Marks

AA – Mar 2024 – L2 – Q4b – Internal Audit and Its Relationship with External Audit

Explain the differences between internal and external auditors in fraud prevention, detection, and reporting responsibilities.

There are similarities and differences between the responsibilities of internal and external auditors. Both internal and external auditors have responsibilities relating to the prevention, detection, and reporting of fraud, for example, but their responsibilities are not the same.

Required:
In reference to the statement above, explain the difference between the responsibilities of internal auditors and external auditors in relation to:
i) Prevention and detection of fraud. (5 marks)
ii) Reporting of fraud. (5 marks)

i) Difference in prevention and detection of fraud:

  • Internal auditors:
    • They are actively involved in the prevention of fraud by evaluating and improving the effectiveness of internal controls. Internal auditors often conduct tests specifically designed to detect fraud or irregularities as part of their internal control reviews.
    • Internal auditors are more likely to be involved in both preventing and detecting fraud through routine monitoring and risk assessments.
  • External auditors:
    • External auditors are not primarily responsible for preventing fraud. However, ISA 240 requires that external auditors assess the risk of material misstatements due to fraud and design audit procedures to detect fraud if it exists. Their role is more focused on detection rather than prevention.
    • The external auditor’s responsibility for fraud detection is limited to obtaining reasonable assurance that the financial statements are free from material misstatements caused by fraud.

(5 marks = 2.5 marks each)

ii) Difference in reporting of fraud:

  • Internal auditors:
    • Internal auditors report fraud directly to senior management or the audit committee, as they are part of the organization’s governance structure. They provide ongoing reports and make recommendations to improve controls and mitigate risks of fraud.
  • External auditors:
    • External auditors must report suspected or detected fraud to those charged with governance (e.g., the board of directors or audit committee). If fraud involves senior management or the detected fraud is material, they are required to communicate this to the appropriate authorities, as mandated by professional and legal standards. In extreme cases, external auditors may report the fraud to external bodies if public interest is involved.
  • 10 Marks

AA – Mar 2024 – L2 – Q4a – Institutional Regulation and Standard-Setting

Discuss significant audit issues faced by national standard-setting bodies and the IAASB.

Santom Ltd is a global company that produces and sells consumer electronics. In the past year, Santom Ltd has faced several challenges, including the COVID-19 pandemic, supply chain disruptions, and increased regulatory scrutiny. Recent global events have raised significant audit issues for external auditors.

The national standard-setting bodies and the International Auditing and Assurance Standards Board (IAASB) are currently dealing with several significant audit issues.

Required:
Discuss FIVE (5) of these significant audit issues.

Significant audit issues faced by national standard-setting bodies and the IAASB:

  1. Climate change reporting: Growing emphasis on sustainability and environmental issues has increased the need for auditing the accuracy and completeness of climate change disclosures in financial statements.
  2. Fraud detection: Enhanced audit standards are being developed to strengthen auditors’ ability to detect and report fraudulent activities, especially in light of technological advancements and complex financial environments.
  3. Cybersecurity risks: As businesses rely heavily on technology, assessing a company’s cybersecurity controls has become crucial to audit procedures to mitigate risks of cyberattacks.
  4. Going concern assessments: In the context of the COVID-19 pandemic, companies face financial difficulties, making it essential for auditors to assess the ability of companies to continue as a going concern.
  5. Non-financial reporting: Increased demand for disclosures of non-financial information, such as social and environmental impacts, requires new audit standards to ensure the completeness and reliability of such information.
  • 10 Marks

AA – Mar 2024 – L2 – Q3b – Audit and Assurance Evidence

Identify examples of external confirmations and their corresponding audit assertions.

ISA 500: Audit Evidence identifies seven main testing procedures. One of these is external confirmation.

Required:
i) List FOUR (4) examples of external confirmation. (2 marks)
ii) For each of the examples in (i) above, explain: ONE (1) audit assertion that the external confirmation supports, and ONE (1) audit assertion that the external confirmation does not support. (8 marks)

i) Examples of external confirmation:

  1. Accounts receivable confirmation
  2. Bank confirmation
  3. Legal confirmation (lawyer’s letter)
  4. Inventory held by third parties
    (4 points @ 0.5 marks each = 2 marks)

ii) Audit assertions supported and not supported by external confirmation:

  1. Accounts receivable confirmation
    • Supports: Existence (confirmation from the debtor provides evidence that the receivable exists).
    • Does not support: Valuation (the confirmation does not provide information on the likelihood of the receivable being collectible).
  2. Bank confirmation
    • Supports: Existence (confirms the existence of bank balances).
    • Does not support: Completeness (it does not confirm whether all bank accounts have been disclosed).
  3. Legal confirmation (lawyer’s letter)
    • Supports: Rights and obligations (provides evidence on potential legal obligations).
    • Does not support: Valuation (it does not quantify the financial impact of ongoing legal cases).
  4. Inventory held by third parties
    • Supports: Existence (confirms that the inventory is held by a third party).
    • Does not support: Valuation (it does not provide details on the condition or value of the inventory).
  • 10 Marks

AA – Mar 2024 – L2 – Q3a – Audit and Assurance Evidence

Explain audit procedures to obtain sufficient and appropriate audit evidence for Galito Ltd's inventories.

Galito Ltd is a Ghanaian company that operates in multiple industries and has several subsidiaries. Due to the complexity of its operations, its inventories and properties are scattered across the country and used by any of its subsidiaries.

Required:
As the auditor of Galito Ltd, explain FIVE (5) audit procedures to help obtain sufficient and appropriate audit evidence for its inventories.

Audit procedures for obtaining evidence on inventories:

  1. Physical verification: Conduct physical verification of inventory at various locations to confirm the existence of inventories.
  2. Inspection of documents: Review inventory records, purchase invoices, and goods receipt notes to verify ownership and rights to the inventory.
  3. Observation: Observe the client’s inventory count procedures to assess the effectiveness of controls over inventory and to validate the completeness of the count.
  4. Recalculation: Recalculate the value of inventory, comparing the recorded inventory cost to the net realizable value (NRV), ensuring that items are correctly valued and costs are properly allocated.
  5. Analytical procedures: Perform trend analysis by comparing current inventory levels and values to prior periods, investigating any unusual fluctuations or variances.
  • 10 Marks

AA – Mar 2024 – L2 – Q2b – Audit and Assurance Risk Environment

Discuss audit risks and the necessary measures auditors should take to mitigate issues in the engagement.

Abansro Corporation is a publicly traded company in the manufacturing industry. The company is yet to appoint an auditor to replace its previous auditor. A member of the board of Abansro Corporation, who is also a friend of the owners of an audit firm, referred the audit firm to Abansro Corporation. The board approved the appointment of the audit firm without considering the potential audit risks associated with the referral.

The audit firm conducted the audit for the year 2022, and the audit opinion issued was unqualified. However, in the course of 2023, it was discovered that there were material misstatements in the financial statements that were not detected by the audit firm. These misstatements resulted in a significant loss for the company and its shareholders.

As a result, Abansro Corporation faced legal action from its shareholders for the losses incurred due to the misstatements. The audit firm was also held liable for negligence and breach of professional duty.

Required:
i) Describe THREE (3) audit risks for a board member referring his friend who is the owner of an audit firm to be appointed by Abansro Corporation. (6 marks)

ii) What measures should have been undertaken by the Auditors to mitigate the issues associated with this engagement? (4 marks)

i) Audit risks associated with the referral:

  1. Conflict of interest: The referral of the audit firm by a board member who is a friend of the firm’s owner may impair the audit firm’s independence, leading to a lack of objectivity in the audit.
  2. Undue influence: The friendship between the board member and the audit firm’s owner may result in pressure on the audit firm to overlook or understate material misstatements, increasing the risk of audit failure.
  3. Lack of professional skepticism: The personal relationship may lead the audit firm to adopt a less rigorous audit approach, reducing their level of professional skepticism and leading to the omission of material errors in the financial statements.
    (3 points @ 2 marks each = 6 marks)

ii) Measures to mitigate audit risks:

  1. Disclose the relationship: The audit firm should have disclosed the personal relationship between the board member and the owner of the firm to the shareholders and board of Abansro Corporation to ensure transparency.
  2. Exclude the firm owner from the engagement: The firm owner should have been excluded from the engagement team to mitigate any potential conflict of interest.
  3. Engagement quality control review: An independent engagement quality control reviewer should have been assigned to review the audit procedures and final report.
  4. Assign qualified staff: Experienced and competent audit staff should have been assigned to the engagement to ensure thoroughness and quality in the audit process.
    (4 points @ 1 mark each = 4 marks)
  • 10 Marks

AA – Mar 2024 – L2 – Q2a – Regulatory Framework and Audit Responsibilities

Discuss the circumstances under which BoG can appoint or terminate the appointment of an auditor for a bank.

In 2018, the Bank of Ghana (BoG) revoked the licenses of five struggling banks in Ghana and merged them to form a new bank. Following the merger, the BoG appointed an external auditor for the new bank, as the previous auditors of the merged banks were no longer able to continue in their roles.

However, in 2019, the BoG terminated the appointment of the external auditor for the new bank due to concerns about the independence and competence of the auditor. As a result, the BoG appointed new external auditors for the bank.

Required:
i) Discuss THREE (3) circumstances under which BoG may appoint an auditor to audit the financial statements of a bank. (5 marks)

ii) Discuss THREE (3) circumstances under which BoG may terminate the appointment of an auditor to audit the financial statements of a bank. (5 marks)

i) Circumstances under which BoG may appoint an auditor:

  1. Failure to appoint an auditor: If a bank fails to appoint an auditor within the prescribed period.
  2. Resignation or removal of the appointed auditor: If the auditor previously appointed by the bank has resigned or has been removed by the bank.
  3. Inappropriate appointment: When BoG determines that the appointment made by the bank is inappropriate or the auditor does not meet the required qualifications.
    (3 points @ 1.67 marks each = 5 marks)

ii) Circumstances under which BoG may terminate the appointment of an auditor:

  1. Independence concerns: If BoG suspects that the auditor is not independent and therefore unable to carry out an unbiased audit.
  2. Incompetence: When BoG believes that the appointed auditor is not competent to perform the audit effectively.
  3. License suspension or revocation: If the auditor’s license is suspended or revoked by the relevant professional body, such as ICAG.
    (3 points @ 1.67 marks each = 5 marks)
  • 15 Marks

AA – Mar 2024 – L2 – Q1b – Planning and Approach for Audit and Assurance Engagements

Distinguish between audit strategy and audit plan and identify their contents as required by ISA 200 and ISA 300.

ISA 200: Overall Objectives of Independent Auditor and the Conduct of an Audit and ISA 300: Planning an Audit of Financial Statements require 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) Clearly distinguish between audit strategy and audit plan. (5 marks)
ii) Identify the contents of audit strategy and audit plan. (10 marks)

i) Difference between audit strategy and audit plan:

  • Audit strategy: Sets the overall scope, timing, and direction of the audit and serves as a guide to develop a more detailed audit plan. It is broader and outlines high-level goals for the audit.
  • Audit plan: A detailed procedure setting out the specific work to be done to achieve the audit strategy. It provides clear instructions to the audit team on the steps and audit procedures to be carried out.

(2.5 marks each = 5 marks)

ii) Contents of audit strategy:

  • The characteristics of the engagement that define its scope (e.g., reporting standards).
  • The industry-specific reporting requirements.
  • Reporting objectives and deadlines.
  • Communication and reporting requirements.
  • The focus areas for the audit based on risk assessment.
  • Materiality assessment.
  • Nature, timing, and extent of audit resources needed (personnel, audit techniques, etc.).
  • The overall audit approach (e.g., reliance on internal controls or substantive testing).
    (Any 5 points @ 1 mark each = 5 marks)

Contents of audit plan:

  • Procedures for assessing risk of material misstatements.
  • Detailed audit procedures in response to the assessed risks.
  • Materiality levels.
  • Use of analytical procedures for risk assessment.
  • Test of internal controls.
  • Detailed instructions for audit team members.
  • Timing and extent of audit work.
    (Any 5 points @ 1 mark each = 5 marks)
  • 6 Marks

AA – Mar 2024 – L2 – Q1a – Audit and Assurance Evidence

Ways in which management can support auditors in obtaining appropriate and sufficient audit evidence.

Management of Bagabu Ltd has a filing system that is largely manual. Their external auditors have expressed concern about how to obtain appropriate and sufficient evidence to support their opinion.
Required:
State FIVE (5) ways management of Bagabu Ltd can support the auditors to obtain appropriate and sufficient audit evidence to support their opinion.

To fulfill this responsibility, management should:

  • Provide complete and accurate financial statement data, including supporting documents and records.
  • Provide access to all relevant information, including personnel, documents, and records related to the financial statements.
  • Provide timely responses to auditor inquiries and address discrepancies promptly.
  • Implement effective internal controls to ensure accuracy and completeness of the financial statements.
  • Ensure overall cooperation with the auditor by providing unrestricted access and support during the audit process.

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