Series: NOV 2021

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 10 Marks

AA – Nov 2021 – L2 – Q5b – Completion Procedures and Reporting

Describes the purpose of a management letter and outlines its contents as per ISA 260.

The partner in your firm has requested you to train the newly recruited junior audit staff on ISA 260: Communication with those charged with governance.

Required:
Draft a training material for the new junior recruits on the provisions set out in ISA 260 in relation to:

i) The purpose of issuing a Management Letter to a client after an audit.
(5 marks)

ii) The contents of a Management Letter.

i) Purpose of issuing a Management Letter

  1. Comment on accounting systems – To provide feedback on the accounting records, systems, and controls examined during the audit.
  2. Highlight weaknesses – To point out weaknesses in the internal control system (ICS) that could lead to material misstatements, giving management a chance to rectify them.
  3. Prevent future audit qualifications – To enable management to address internal control deficiencies, thus reducing the risk of audit report qualifications in the future.
  4. Offer recommendations – To suggest ways of improving internal controls and accounting practices to enhance efficiency and reduce risk.
  5. Provide ongoing advice – To communicate matters that may impact future audits, such as the introduction of new accounting standards or changes in financial regulations.

(5 marks)

ii) Contents of a Management Letter

  1. Transmittal or cover letter – An introduction and summary of the key issues identified during the audit.
  2. Executive summary – A high-level summary of the deficiencies found and their impact on the audit.
  3. Deficiencies – Detailed descriptions of the deficiencies or weaknesses found in the internal control system.
  4. Implications of deficiencies – An explanation of the potential risks or consequences of the identified deficiencies.
  5. Recommendations – Suggested actions for management to rectify or improve the weaknesses identified.
  6. Management’s response – A section where management can provide their responses or actions taken regarding the deficiencies noted.
  7. Conclusion – A final section summarizing the overall audit findings and offering additional comments.
  • 10 Marks

AA – Nov 2021 – L2 – Q5a – Professional and Ethical Considerations, Engagement Letters

Explains four key terms to be included in an engagement letter in accordance with ISA 210.

SA 210: Agreeing to the terms of an engagement states that Engagement Letters are issued to serve as contracts between clients and auditors.

Required:
Justify FOUR (4) terms that could be included in an Engagement Letter in accordance with ISA 210.

  1. Objective and scope of the audit – The engagement letter should clearly outline the purpose of the audit, including the period to be covered and the extent of work to be performed. This helps to clarify expectations and avoid misunderstandings between the auditor and client.
  2. Responsibilities of the auditor – The auditor’s duties, including conducting the audit in accordance with auditing standards, should be specified to define the limits of the auditor’s work and ensure the client understands what the audit does not cover (e.g., fraud detection).
  3. Responsibilities of the client – The client’s responsibilities, such as the preparation of financial statements and the establishment of an internal control system, should be included. This ensures the client is aware of their role in the audit process.
  4. Basis for audit fees – The engagement letter should state how fees will be calculated, including the time spent, staff involved, and other factors. This helps avoid disputes about fees and allows the client to budget for audit costs appropriately.
  • 10 Marks

AA – Nov 2021 – L2 – Q4b – Public Sector Auditing

Identifies corporate governance weaknesses in Formation Bank Ltd and provides recommendations for improvement.

Mr. William Kofi Ansah is the Founder, Chief Executive Officer, and Major Shareholder of Formation Bank Ltd. He single-handedly appointed his father-in-law as board chair and three related parties as Non-Executive Directors, in addition to the existing five (5) Executive Directors. Rewards such as first-class tickets and large consulting contracts were granted to Directors, and compensation for the Directors was excessive and not commensurate with the Bank’s performance.

There is no formal credit management policy for the Bank, and regular Board review meetings were not carried out. Large non-performing loans were granted to the related parties, which resulted in the Bank being heavily exposed. The Bank sent false monthly credit reports to the regulator, and the regulator failed to assess the report and provide prompt feedback.

The External Auditors and Regulator were treated to a high-end reception during audits and given large brown envelopes at the end of the audit. The internal audit unit is ill-resourced and reports directly to the Chief Executive Officer.

Required:
Explain FIVE (5) corporate governance weaknesses faced by Formation Bank Ltd in relation to corporate governance principles and for each weakness identified, recommend a solution to overcome it.

Weakness Recommendation
1. Dominant CEO with too much control – Mr. William Kofi Ansah, the CEO, holds excessive power, appointing related parties to the board without checks and balances. The Bank should appoint more independent non-executive directors, ensuring that no single individual holds excessive influence. Implement a robust nomination process.
2. No independent Board Chair – The CEO’s father-in-law serves as the board chair, leading to conflicts of interest. Appoint an independent, non-related Board Chair to provide unbiased oversight and ensure adherence to corporate governance principles.
3. No formal credit management policy – This has led to the approval of large non-performing loans to related parties. Establish a formal credit management policy, ensuring regular board reviews of loan performance and risk exposure to related parties.
4. Excessive rewards for directors not based on performance – Directors receive large contracts and perks despite the Bank’s poor performance. Set up a remuneration committee comprising independent non-executive directors to link compensation to the Bank’s performance, ensuring fairness and transparency.
5. Ill-resourced internal audit reporting to CEO – The internal audit lacks independence and resources to effectively monitor and control risks. Strengthen the internal audit department by providing adequate resources and ensuring it reports to an independent audit committee, not directly to the CEO.

(10 marks)

  • 10 Marks

AA – Nov 2021 – L2 – Q4a – Completion Procedures and Reporting

Discusses audit procedures for non-depreciation of buildings and the impact on the audit report if unresolved.

ou are an audit intern in Transparency & Associates, a firm of Chartered Accountants. This year, one of your new clients is Obuse Ltd, a company having net assets of GH¢20,000,000. The audit work has been completed, but there is one outstanding matter you are currently investigating; the directors have decided not to provide depreciation on buildings in the financial statements, although International Financial Reporting Standards suggest that depreciation should be provided. The estimated depreciation is GH¢500,000.

Required:
i) State FOUR (4) additional audit procedures and actions you should take in respect of the above matter.
(6 marks)

ii) What should be the impact on the audit report if the issue remains unresolved at the reporting stage of the audit?

i) Additional audit procedures and actions

  1. Review the audit file – Ensure that sufficient appropriate audit evidence has been collected regarding the decision not to depreciate buildings.
  2. Verify compliance with IFRS – Ensure that GAAP (Generally Accepted Accounting Principles) or IFRS guidelines on depreciation apply to the specific buildings owned by Obuse Ltd.
  3. Discuss with directors – Meet with the directors to confirm their reasons for not depreciating buildings and to explain the potential consequences.
  4. Warn of possible modified audit report – Inform the directors that failure to provide depreciation may lead to a modified audit report.
  5. Assess materiality – Determine the effect of the depreciation issue on the financial statements, evaluating whether the misstatement is material.
  6. Obtain written representation – Secure a letter of representation from the directors confirming that depreciation will not be charged on buildings.

(6 marks)

ii) Impact on the audit report if unresolved
If the issue remains unresolved, the auditor must consider the materiality of the misstatement. The estimated depreciation of GH¢500,000 represents 2.5% of the company’s net assets, which is material. The audit report will need to be qualified with an “except for” opinion due to the material misstatement. The basis for qualification should be included in the report, explaining the disagreement regarding depreciation.

(4 marks)

  • 4 Marks

AA – Nov 2021 – L2 – Q3c – Professional and Ethical Considerations

Discusses threats to audit independence due to personal relationships and financial incentives during audit engagements and suggests safeguards.

Kom & Associates, an audit firm, has regularly been auditing Ake Ltd. At the beginning of the current financial year, the wife of Koffie, the engagement partner of Kom & Associates, was appointed the personal assistant to the Chief Executive of Ake Ltd. In the course of the fieldwork, the audit team was given lunch and money for transport by Ake Ltd.

Required:
Discuss the threats and safeguards for the audit.

Threats:

  1. Familiarity threat – The appointment of Koffie’s wife as a personal assistant to the Chief Executive of Ake Ltd may create a familiarity threat, as she is closely associated with the leadership of the client. This could impair Koffie’s objectivity and independence in conducting the audit.
  2. Self-interest and intimidation threat – The audit team receiving lunch and money for transport may lead to self-interest or intimidation threats. Even though the gifts are minor, they could influence the audit team’s decisions or lead to perceptions of compromised independence.

Safeguards:

  1. Limited influence of personal assistant role – Since Koffie’s wife holds a non-executive role as a personal assistant, her influence on the audit is minimal. The audit firm should ensure that this relationship does not affect the audit’s independence by monitoring interactions.
  2. Rejecting financial incentives – The audit firm should develop a policy prohibiting auditors from accepting any gratuities, even small ones such as meals and transport money, to safeguard against perceived or actual threats to independence.

(4 marks)

  • 6 Marks

AA – Nov 2021 – L2 – Q3b – Professional and Ethical Considerations

Discusses the threats and safeguards related to a former Finance Director reviewing audit work for their former company.

Ackah Senzu had been the Finance Director of Keke Ltd for the immediate past eight years, influencing all the major financial policies of the company. Last year, he moved to Plus Associates, an audit firm, as a Partner. The Directors of Keke Ltd then appointed Plus Associates as their auditors because of the strong relationship with Ackah Senzu. The Senior Partner assumed the engagement responsibility of the audit of Keke Ltd but asked Ackah Senzu to review the audit work.

Required:
Discuss the threats and safeguards of this decision.

Threats:

  1. Self-review threat – Since Ackah Senzu was the Finance Director for the past eight years, he would be reviewing his own work if he were to review the audit. This poses a significant threat to objectivity and independence.
  2. Familiarity threat – Ackah Senzu’s strong relationship with the directors of Keke Ltd could lead to a lack of professional skepticism, making him more lenient in his review.

Safeguards:

  1. Reassigning the review – Ackah Senzu should not be allowed to review the audit file. Another independent partner or senior staff member in the firm should be assigned to review the audit work.
  2. Independent engagement partner – A different partner should be appointed as the engagement partner to avoid familiarity or self-review threats.
  • 10 Marks

AA – Nov 2021 – L2 – Q3a – Professional and Ethical Considerations

Lists areas of non-compliance by clients and explains actions auditors can take when they become aware of non-compliance situations.

The International Ethics Standards Board for Accountants (IESBA) code guides all Professional Accountants on how to respond when their clients are not complying with the laws and regulations of a country or a state.

Required:
i) State FIVE (5) areas where auditees can be non-compliant.
ii) When an auditor becomes aware of non-compliant situations, what FIVE (5) actions can the auditor take?

i) Areas where auditees can be non-compliant

  1. Fraud, corruption, and bribery.
  2. Money laundering, terrorist financing, and concealing proceeds of crime.
  3. Insider trading.
  4. Non-compliance with banking laws and regulations.
  5. Flouting environmental protection laws.
    (5 marks)

ii) Actions that an auditor can take in situations of non-compliance

  1. Obtain an understanding of the matter to determine its nature and implications.
  2. Advise management to take timely and appropriate remedial action to address or mitigate the effects of non-compliance.
  3. Deter further non-compliance where it has not yet occurred.
  4. Disclose the matter to the appropriate authority if necessary, considering legal obligations.
  5. Determine whether further action is needed based on the appropriateness of management’s response.
  • 15 Marks

AA – Nov 2021 – L2 – Q2b – Audit and Assurance Evidence

Describes the substantive procedures auditors should adopt to verify valuation, completeness, and rights and obligations of property, plant, and equipment (PPE).

Describe FOUR (4) substantive procedures the external auditor of HMH should adopt to verify each of the following assertions in relation to an entity’s property, plant and equipment (PPE):

i) Valuation
ii) Completeness
iii) Rights and obligations

(Note: Assume that the hospital prepares Financial Statements in accordance with International Financial Reporting Standards)

i) Valuation

  1. Review depreciation policies for reasonableness by comparing them to the prior year, industry practices, and the entity’s replacement policy.
  2. Recalculate depreciation for a sample of assets and agree to the entity’s asset register.
  3. Assess any revaluations of PPE by reviewing the valuation report, ensuring the independence and qualifications of the valuer, and verifying assumptions used.
  4. For newly acquired PPE, vouch the cost to a recent purchase invoice and confirm appropriate treatment in the financial statements.

(6 marks)

ii) Completeness

  1. Compare the current year PPE schedule to that of the prior year and investigate any discrepancies.
  2. Reconcile the PPE schedule to the general ledger and financial statements.
  3. Select a sample of assets physically present at the entity’s premises and trace them to the asset register.
  4. Review the repair and maintenance expense accounts for items of a capital nature that may have been incorrectly expensed.

(5 marks)

iii) Rights and Obligations

  1. Verify the ownership of land and buildings by inspecting title deeds and land registration documents.
  2. For a sample of additions, agree the purchase invoices to verify ownership.
  3. Review lease agreements to ensure the correct classification of finance and operating leases.
  4. Inspect vehicle registration documents to confirm the entity’s ownership of motor vehicles.
  • 5 Marks

AA – Nov 2021 – L2 – Q2a – Audit and Assurance Risk Environment

Explains audit risks auditors should consider when gathering evidence in the healthcare sector.

Hamosa Manu Hospital (HMH) is one of the government hospitals in Ghana where healthcare is free due to the National Health Insurance Scheme, as taxpayers fund healthcare by contributing an indirect tax of 2.5% on consumption.

All purchase requisition forms for medical supplies are forwarded to a centralized procurement department. Upon receipt, the procurement team will research the lowest price from suppliers and raise a purchase order. This is then passed to the Procurement Manager, who authorizes all orders. The small procurement team receives in excess of 300 forms a day.

Due to the government’s announcement of free Covid-19 testing in public hospitals, the hospital has invested heavily in new equipment, which, although very expensive, has meant that more testing could be performed and patient recovery rates would be faster. Currently, there is a shortage of appropriately trained medical staff. As a result, a capital expenditure committee has been established, made up of senior managers, and they plan and authorize any significant capital expenditure items.

Required:
Explain audit risks that auditors of HMH should consider during evidence gathering.

  1. Inherent risk due to the nature of healthcare services – The hospital provides free services funded through taxes, which could result in increased risk of fraud or mismanagement.
  2. Control risk in procurement process – High volume of requisition forms (over 300 daily) and centralized procurement could lead to errors or omissions in approving purchases.
  3. Capital expenditure on new equipment – High-value investments in new medical equipment increase the risk of misstatements in the financial statements if improperly accounted for.
  4. Shortage of trained staff – The shortage of trained medical staff might lead to operational inefficiencies, increasing the risk of misstatements in areas like payroll or capital expenditures.
  5. Risk of improper authorization – Lack of sufficient oversight in the procurement and capital expenditure processes may lead to unauthorized or incorrect transactions being recorded.
  • 3 Marks

AA – Nov 2021 – L2 – Q1c – Audit and Assurance Evidence

Explains three purposes of audit documentation in line with ISA 230.

Audit evidence may come in many forms. For instance, enquiries may be verbal, while confirmations may be in written form. Regardless of the form of audit evidence they obtain, auditors need to document their procedures. The process of documenting audit evidence is known as audit documentation.

Required:
Explain THREE (3) purposes of audit documentation in line with ISA 230: Audit Documentation.
(3 marks)

  1. Provides a record for the auditor’s report – It ensures that there is sufficient and appropriate evidence of the basis on which the auditor’s report is made.
  2. Evidence of compliance with ISAs and regulations – It provides proof that the audit was conducted according to International Standards on Auditing (ISA) and applicable legal frameworks.
  3. Facilitates audit review – It allows supervisors or others reviewing the audit to understand the work performed and the evidence collected to form the auditor’s opinion.

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope