Subject: ADVANCED AUDIT AND ASSURANCE

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  • 5 Marks

AAA – July 2023 – L3 – Q5c – Reporting | Evaluation and review

Requires drafting a management letter addressing the issue of fixed assets not being embossed with identification codes at BTL Plc.

During an audit engagement, it was observed that the Fixed Assets of BTL Plc were not embossed with a code of identification.

Required:

Draft a management letter relating to the issue above. (5 marks)

Management letter

Observation: In the course of our audit, we observed that the following fixed assets were not embossed. See appendix…

Effect: This could lead to theft and some assets not accounted for.

Management Response: Management has taken note of observation and will ensure that all assets are embossed by (date).

  • 5 Marks

AAA – July 2023 – L3 – Q5b – Assurance services | Current issues

Explains appropriate audit procedures for Corporate Social Responsibility (CSR) reports, focusing on assessing impact and stakeholder engagement.

Corporate Social Responsibility (CSR) is the hallmark of every well managed entity. In some cases, cost of CSR may not involve actual expenditure.

Required:

Explain THREE (3) appropriate procedures for audit engagements for CSR reports. (5 marks)

 

Audit procedures for CSR

  • To determine the impact of CSR project on development indicator identified in the project report like on education/ health/ social/ economic conditions of the people in communities.
  • To assess the changes in the quality of life among communities through CSR project interventions.
  • To get objective description of social impacts than what people might perceive.
  • To identify requirement of changes in the existing policies and projects to take care of the changing needs of the people.
  • To enhance stakeholder engagement and the capacity of institutional setup.
  • To improve and reliability of data management and reporting.
  • 10 Marks

AAA – July 2023 – L3 – Q5a – The regulatory environment | Current issues

Discusses factors influencing new auditing standards and procedures for their development by the International Federation of Accountants (IFAC).

The auditing profession is very dynamic and constantly confronted with new challenges emanating from the political and economic spheres. To meet these challenges the global authority responsible for the regulation of accountancy profession, The International Federation of Accountants (IFAC) has been ensuring that the standards for conduct of audit and assurance engagements are revised and brought up to date all the time.

Required: i) Discuss FOUR (4) factors that influence the development of new Auditing Standards. (5 marks)

ii) Identify the procedures for developing new Auditing Standards. (5 marks)

i) Factors giving rise to new Auditing Standards: International Standards on Auditing (ISAs) are produced by the International Auditing and Assurance Standard Board (IAASB), a technical committee of the International Federation of Accountants.

New International Auditing Standards arise as a result of the following:

Response to new legal requirements: When new laws are enacted which have global implications for auditing and assurance practice, the IAASB will review the existing standards to determine whether they can adequately address the new legal requirements. If the existing standards are not adequate, a new standard will be produced to replace the existing inadequate one.

Changes in the economic and business environments: Changes are constantly taking place in the economic and business environment. To remain relevant to the business environment the Standard board on its own initiative or on the prompting of the IFAC governing council produces a new standard to respond to the new demands on the profession. For example the introduction of ICT into business processes and reporting of financial information electronically required the International Standards on Auditing to guide.

Demands from industry players and the general public: Clients and other stakeholders continue to express dissatisfaction about the performance of their external auditors even though some of the demands may be informed by e.g. the expectation gap. To maintain the good will of the client and other stakeholders the board will respond by revising the existing standards or come out with a completely new standard for example the new book on International Standards on Auditing 700/701 to make the auditors’ report on general purpose financial statements more user friendly.

Self-introspection: The IFAC council itself may find that an existing standard has become inadequate or irresponsive to the needs of practitioners and their clientele and would initiate action for the standard board to revise the exiting standards or produce a completely new standard.

ii) The procedures for developing a new standard:

  • When the need arises for a new standard the standard board is charged by IFAC council to initiate action
  • The board will initially review the existing standards to determine its adequacy to address the need. The board may determine that the existing standard should be revised or a new standard should be produced.
  • The board then produces an exposure draft
  • The exposure draft is widely circulated to professional accountancy bodies, governments, industry players and regulators for comments
  • The comments received are taken into account in producing a new standard for the attention of the IFAC Council.
  • The Council studies the amended draft and suggest improvements which are incorporated.
  • The final draft is debated and voted on by the Council.
  • The approved version becomes the new standard after a waiting period.
  • 10 Marks

AAA – July 2023 – L3 – Q4b – Government external audit and public accountability | Public sector audit

Discuss the responsibilities for an audit committee member during the first year of tenure in a public sector organization.

The Public Financial Management Act, 2016 (Act 921) requires that all public sector entities should have audit committees. The Act also prescribes the functions of such committees; the functions include mandatory responsibilities and advisory responsibilities. Fortunately, you have been appointed to serve on the audit committee of a Government Agency for a term of two years, renewable for a second term, also for two years.

Required:

Discuss FIVE (5) responsibilities for the first year of your tenure. (10 marks)

Responsibilities as an Audit Committee Member in the Public Sector:

  1. Review of Internal Audit Charter: Ensure that the internal audit function has a charter that clearly defines its mandate and responsibilities, and that this is communicated to senior management. This is crucial to empower the internal audit function and align its objectives with the entity’s goals.
  2. Internal Audit Plan Approval: Review and approve the internal audit annual plan to ensure it is comprehensive and covers all significant areas of risk within the organization. This includes ensuring that the audit plan is aligned with the overall strategic objectives of the government agency.
  3. Quarterly Review of Internal Audit Work: Conduct timely reviews of the internal audit work completed each quarter. Ensure that the internal audit reports are thorough and address all identified risks and weaknesses. These reports should be submitted to the Internal Audit Agency as required.
  4. Response to Auditor General’s Report: Ensure that any issues raised in the Auditor General’s report regarding the government agency are addressed promptly. Work with management to develop and implement corrective action plans, and ensure that responses are submitted as required by law.
  5. Training and Resources for Internal Audit: Advocate for sufficient training and resources for the internal audit staff to ensure they are well-equipped to carry out their duties effectively. This includes ensuring that the internal audit team has access to ongoing professional development and the necessary tools to perform their work.
  6. Regular Committee Meetings: Ensure that audit committee meetings are held regularly to address any emerging issues in a timely manner. This fosters a culture of accountability and ensures that internal audit findings are addressed promptly.
  7. Annual Reporting: Oversee the preparation and submission of an annual report on the activities and findings of the audit committee. This report should be sent to the relevant oversight bodies, ensuring transparency and accountability in the agency’s financial management practices.
  8. Support for Internal Auditor: Encourage the head of the government agency to view the internal auditor as a key facilitator of good governance, not as an adversary. Ensure that the internal auditor is given the necessary respect and involvement in decision-making processes, including attendance at management meetings.
  • 10 Marks

AAA – July 2023 – L3 – Q4a – The meaning of audit and assurance | Professional responsibility and liability

Discuss issues to consider in professional skepticism assessment and circumstances that can hinder professional skepticism during a performance audit.

Audit engagement rests on mutual understanding and respect between the auditor and the auditee. The Auditor, while not viewing the auditee as dishonest, must also have at the back of his mind that to err is human and must therefore not accept evidence from the auditee without further cross-checking the facts. The attitude should be that the auditor must have an enquiring mind. This is known as professional skepticism; while trusting, he must verify.

Required:

i) What FOUR (4) issues should be considered in Professional Skepticism assessment during performance audit? (5 marks)

ii) State FIVE (5) circumstances that can hinder Professional Skepticism at the engagement level. (5 marks)

i) Issues to Consider in Professional Skepticism Assessment:

  1. Integrity of Management: The auditor should assess the control environment of the business, including how management addresses internal control issues and their history of ethical behavior.
  2. Accuracy of Responses: Question the accuracy of responses to inquiries and other information obtained from management and those charged with governance.
  3. Revising Risk Assessments: Be prepared to revise risk assessments as a result of identifying material or significantly inconsistent information during the audit.
  4. Contradictory Evidence: Remain alert to audit evidence that contradicts other audit evidence obtained, indicating a potential misstatement or error.

ii) Circumstances That Can Hinder Professional Skepticism:

  1. Budget Constraints: Tight budgets may discourage the use of experienced resources, limiting the auditor’s ability to critically assess management’s assertions.
  2. Tight Deadlines: Deadlines can pressure the audit team, reducing the time available for thorough analysis and potentially leading to oversight.
  3. Lack of Cooperation from Management: Management’s reluctance to provide necessary information or cooperation can hinder the audit team’s ability to exercise skepticism.
  4. Insufficient Understanding of the Entity: Without a deep understanding of the client’s business and environment, the audit team may struggle to question management effectively.
  5. Overreliance on Automated Tools: Excessive reliance on automated audit tools can reduce critical assessment of the evidence and lead to oversight.
  • 20 Marks

AAA – July 2023 – L3 – Q3 – The audit approach | Audit evidence | Reporting

Evaluate quality control issues and their implications for audit completion, including actions to be taken.

The audit of Nkwa Ltd’s financial statements for the year ended 30 November 2022 is nearing completion, and the auditor’s report is due to be signed next week. Nkwa Ltd manufactures parts and components for the aviation industry. You are conducting an engagement quality control review on the audit of Nkwa Ltd, which is a listed entity and a significant new client of your firm. The draft financial statements recognize revenue of GH¢8.7 million, assets of GH¢15.2 million, and profit before tax of GH¢1.8 million.

You have identified the following issues as a result of your review:

a) The planned audit approach to trade payables was to place reliance on purchasing controls and keep substantive tests to a minimum. During control testing on trade payables, from a random statistical sample, the audit team identified three purchase orders that had not been authorized by the procurement manager. On review of the supporting documentation, the audit team concluded that the items were legitimate business purchases and therefore decided that no additional procedures were required. (4 marks)

b) Following a review of petty cash transactions, the audit assistant identified that the petty cashier paid for taxi fares for personal, non-business journeys with a total value of GH¢175. Following discussions with the Audit Assistant, you have ascertained that he did not report the matter as the amount is immaterial. The audit assistant also commented that the petty cashier is his brother, and that he did not want to get him into trouble. (6 marks)

c) Cut-off testing on revenue has identified two goods despatch notes, dated 2 December 2022, for items sent to Chinn Co, with a combined sales value of GH¢17,880, which had been included in revenue for the year ended 30 November 2022. The client’s financial controller, David Mount, has explained that Chinn Co does not order on a regular basis from Nkwa Ltd. In the absence of a regular payment history with Chinn Co, and in order to minimize the receivables collection period from this particular customer, the sales invoice was raised and sent to the customer on the same day that the sales order was received. The average time period between the receipt of an order and despatching the goods to the customer is approximately one to two weeks. The audit working papers have concluded that no further investigation is necessary. (6 marks)

d) The Finance Director, Leslie Gray, has not completed the tax computation for the year ended 30 November 2022. He has recently asked the audit assistant to compute the company’s tax payable for the year on the basis that as a newly qualified chartered accountant, the audit assistant was more up to date with recent changes in tax legislation. (4 marks)

Required:
Evaluate the quality control issues and the implications for the completion of the audit, including any further actions that should be taken by your audit firm. Your answer should include the matters to be communicated to management and those charged with governance in relation to the audit of Nkwa Ltd.

a) Controls Testing on Payables:

The absence of authorization by the procurement manager for three purchase orders is an indication of a deficiency in internal control over purchasing. The audit team’s conclusion that the items were legitimate business expenses does not mitigate the fact that the control was not operating effectively. This raises concerns about the reliability of the purchasing process and the possibility of further unauthorized transactions that may not have been legitimate.

Actions to be taken:

  • The audit team should extend the sample size and perform additional substantive tests to assess the extent of the control deficiency.
  • The issue should be reported to those charged with governance as a significant finding in line with ISA 260.

b) Petty Cash Fraud:

The payment for personal expenses by the petty cashier represents a breach of trust and is indicative of weak internal controls over petty cash. Although the amount is immaterial, the fact that the audit assistant did not report the issue due to a personal relationship with the petty cashier raises concerns about professional integrity and objectivity.

Actions to be taken:

  • Conduct a thorough review of the petty cash transactions to identify any other irregularities.
  • Discuss the matter with management and recommend strengthening petty cash controls.
  • The relationship between the audit assistant and the petty cashier should be considered a familiarity threat, and appropriate safeguards should be implemented to maintain audit quality.

c) Cut-off Testing on Revenue:

The recognition of revenue for goods despatched after the year-end violates the revenue recognition principles under IFRS 15, which require that revenue is recognized when control of the goods has passed to the customer. Including this revenue in the financial year under audit results in an overstatement of revenue and receivables.

Actions to be taken:

  • Extend the cut-off testing to ensure that no further instances of early revenue recognition have occurred.
  • Communicate this significant audit finding to those charged with governance and recommend a correction to the financial statements.

d) Tax Advice:

The request for the audit assistant to calculate the company’s tax payable represents a self-review threat, particularly as Nkwa Ltd is a listed company. The auditor’s independence could be compromised by being involved in preparing figures that will be audited.

Actions to be taken:

  • The audit firm should decline the request to prepare the tax computation and advise the Finance Director to seek assistance from a separate tax advisor.
  • Report the situation to those charged with governance as it indicates a lack of sufficient resources and expertise within the client’s finance function, which may have broader implications for the audit.
  • 20 Marks

AAA – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

Eebuks Ltd is a retailer of academic textbooks that sells through its own network of bookshops and online through its website. The revenue from the website includes both cash sales and sales on credit to educational institutions. The company has provided historical analysis from its trade receivables ledger indicating that for sales made on credit, 25% payment is received in the month of sale, 70% after 30 days, and the remainder are irrecoverable debts.

You are a Manager in Makafui & Associates, a firm of Chartered Accountants offering a range of services from audit to non-audit for its clients. On 1 July 2023, your firm was asked by Eebuks Ltd, a company that is not an audit client of your firm, to consider a potential engagement to review and provide an assurance report on Prospective Financial Information. Makafui & Associates has already conducted specific client identification procedures in line with money laundering regulations with satisfactory results.

Additionally, Eebuks Ltd has approached your firm to obtain an independent assurance opinion on its cash flow forecast, which is being prepared for its bankers in support of an application for an increase in its existing overdraft facility.

Required:

a) In line with ISAE 3400: The Examination of Prospective Financial Information, discuss FIVE (5) matters to be considered by Makafui & Associates before accepting the engagement to review and report on Eebuks Ltd’s Prospective Financial Information. (10 marks)

b) Assuming Makafui & Associates accepts the engagement, recommend EIGHT (8) procedures to be performed in respect of Eebuks Ltd’s cash flow forecast. (10 marks)

a) Matters to Consider Before Accepting the Review Engagement:

Before accepting the review engagement to provide an assurance report on Eebuks Ltd’s cash flow forecast, ISAE 3400 The Examination of Prospective Financial Information identifies several matters that need consideration:

  1. Intended Use of the Information: The firm should determine whether the cash flow forecast and assurance report will be used solely to support the increase in Eebuks Ltd’s overdraft facility. If the report is intended for other purposes, such as securing additional loans, this must be clarified as it affects the risk assessment.
  2. Distribution of the Information: The firm should consider whether the information will be distributed generally or to a limited audience. General distribution increases the risk associated with the engagement due to a broader audience relying on the information.
  3. Period Covered and Key Assumptions: Makafui & Associates should evaluate the period covered by the forecast and the assumptions used. Unrealistic assumptions or long-term forecasts may introduce significant risk, making the engagement inappropriate.
  4. Scope of Work: The firm must clearly define the scope, including the specific elements of the forecast to be reviewed. The level of assurance required by Eebuks Ltd and the form of the report should also be considered to ensure the engagement meets the client’s needs.
  5. Resources and Skills: The firm should assess whether it has the necessary staff with the required expertise to complete the engagement within the deadline and whether they will have access to all relevant information.
  6. Client Integrity: ISQC 1 requires an evaluation of the client’s integrity. Makafui & Associates should assess the reasons for appointing a different firm from the auditors and consider potential biases in the forecast.
  7. Ethical Matters: The firm must ensure no threats to independence or objectivity exist, particularly if the incumbent auditors were not chosen to provide the assurance report. Permission to contact the auditors should be obtained; otherwise, the engagement should be declined.

b) Procedures to Examine Eebuks Ltd’s Cash Flow Forecast:

  1. Mathematical Accuracy: Cast the cash flow forecast to confirm its mathematical accuracy.
  2. Consistency with Accounting Policies: Confirm the consistency of the accounting policies used in the preparation of the forecast with those used in the last audited financial statements.
  3. Opening Cash Position: Agree the opening cash position to the cash book and the bank statement.
  4. Key Assumptions Review: Discuss the key assumptions with management, such as collection and payment periods, and assess their reasonableness.
  5. Analytical Review: Perform an analytical review by comparing forecast trends with historical cash flows and sector data, investigating any significant differences.
  6. Recalculate Cash Flow Patterns: Recalculate the patterns of cash flows based on historical data to ensure accuracy in the forecast preparation.
  7. Sample Testing of Overheads: Obtain a breakdown of forecast overheads and compare it with historical data. Ensure that non-cash items like depreciation are excluded from the cash flow forecast.
  8. Review Supporting Documentation: For significant costs, review supporting documents like invoices or agreements to verify the accuracy and completeness of forecast payments.
  9. Board Minutes Review: Review board minutes to identify discussions or decisions relevant to the cash flow forecast.
  10. Sensitivity Analysis: Conduct sensitivity analyses by varying key assumptions to assess the impact on the cash position.
  11. Bank Confirmation: Obtain confirmation from the bank regarding the terms of the additional finance and ensure the forecast accurately reflects these terms.
  12. Management Representations: Obtain written representations from management confirming the reasonableness of their assumptions and completeness of the information provided.
  • 10 Marks

AAA – July 2023 – L3 – Q1b – Rules of professional conduct | Professional responsibility and liability | Reporting

Assess ethical and professional implications in scenarios involving audit team members and client requests.

You are the Audit Manager at Ndaa & Associates whose client portfolio includes ABC Credit Plc, a listed financial institution offering loans and credit facilities to both commercial and retail customers. You have received an email from the Audit Supervisor who is currently supervising interim testing on systems and controls in relation to the audit of ABC Credit Plc for the year ending 31 October 2022. The email gives the following details for your consideration:

  1. One of the audit team members, Obiba JK, has provisionally agreed to apply for a loan from ABC Credit Plc to finance the purchase of a domestic residence. The loan will be secured on a property, and the client’s business manager has promised Obiba JK that he will ensure that she gets ‘the very best deal which the bank can offer.’ (5 marks)
  2. The payroll manager at ABC Credit Plc has asked the audit supervisor if it would be possible for Ndaa & Associates to provide a member of staff on secondment to work in the payroll department. The payroll manager has struggled to recruit a new supervisor for the organisation’s main payroll system and wants to assign a qualified member of the audit firm’s staff for an initial period of six months. (5 marks)

Required:
Assess the ethical and professional implications of the issues raised in respect of the audit of ABC Credit Plc and recommend actions to be taken in each case by the audit firm.

  • Loan to Member of the Audit Team:

    According to the IESBA Code of Ethics for Professional Accountants (the Code), a loan to a member of the audit team may create a threat to the auditor’s independence. If the loan is not made under normal lending procedures, terms, and conditions, a self-interest threat arises due to Obiba JK’s financial interest in the audit client. This threat could lead to a significant risk where the auditor might not act objectively.

    The key issue is whether the loan is offered under the bank’s normal lending procedures and terms. The bank’s standard lending terms should be obtained and reviewed alongside the documentation for Obiba JK’s loan. The audit engagement partner should ensure ethical principles are not breached by involving in the discussions and decision-making process.

    If the loan terms deviate from standard procedures, the audit team member should decline the loan to maintain independence. Discussions should occur with JK and the client’s business manager to establish whether the loan follows normal procedures, and the outcome should be communicated to both parties.

    Actions to be taken:

    • Review the bank’s standard lending procedures.
    • Discuss the matter with JK and the business manager.
    • Ensure adherence to ethical guidelines by declining the loan if terms are not standard.
  • Temporary Staff Assignment:

    The Code states that lending staff to an audit client may create a self-review threat to auditor independence. If the audit firm’s staff is involved in the preparation of payroll figures that will be included in the financial statements, there is a risk of insufficient objectivity when auditing those figures. Additionally, assuming management responsibilities during the secondment is prohibited.

    Given that ABC Credit Plc is a listed bank, and therefore a public interest entity, assigning a staff member as a payroll supervisor would likely be material to the financial statements and might involve management responsibilities. The audit manager should discuss the proposed role with the payroll manager and assess its significance and materiality.

    Actions to be taken:

    • Discuss the details of the proposed role with the payroll manager.
    • Decline the assignment if the role is material and involves management responsibilities, to avoid self-review and management threats.
  • 10 Marks

AAA – July 2023 – L3 – Q1a – The audit approach | Audit-related services Planning |

Discuss five factors to consider before developing an audit proposal for a multinational company facing financial challenges.

Your firm has been approached to tender for an audit assignment by STK Ghana Ltd. The company is a multinational with its headquarters in Europe. STK Ghana Ltd is a manufacturing company that has operated in Ghana since 2010 and has made steady profits over the years. However, over the past few years, the company’s profits have been dwindling, and the group director in charge of Anglophone West Africa subsidiaries has charged the company to reduce its costs.

In a meeting with the country manager, you ascertained the following information:

  • Several creditors are pursuing the company for payment of their outstanding debt, including the previous auditor who is being owed for the past three years of audit work. The company has negotiated a payment plan for all its creditors.
  • Staff wages have been frozen, staff morale is very low, and several have left.
  • The company’s liquidity challenges commenced when the license of Glow Savings and Loans was revoked as part of the banking sector crisis with STK Ghana Ltd funds exceeding GH¢1 million locked up in short and long-term investments.

In the Terms of Reference (TOR) for the audit engagement, you are required to provide timelines for the overall audit and a financial proposal that is competitive. Upon receiving the TOR, a debate ensued among the partners on the relevance of submitting a proposal in response to the TOR.

Required:
Discuss FIVE (5) factors to be considered prior to developing a proposal for submission. (10 marks)

Tendering should commence only when a firm has been approached by a prospective client. The firm should not submit a proposal unless it can give satisfactory answers to the following questions:

  1. Expertise to Undertake the Engagement: The firm needs to assess whether its current manpower has the adequate expertise to undertake the audit of a manufacturing multinational like STK Ghana Ltd. The firm must understand both local and European legal and regulatory frameworks that the company operates under.
  2. Staff Availability: The firm must consider whether it has enough manpower to undertake the audit within the required timelines, considering STK Ghana Ltd’s size as a multinational corporation.
  3. Ethical Issues: Ethical considerations are critical. The firm must evaluate potential conflicts of interest, integrity issues, and independence, particularly since the group director is focused on cost reduction, which might impair the firm’s independence and objectivity.
  4. Liquidity Challenges: The firm should assess the seriousness of the company’s liquidity issues, the likelihood of getting paid for the audit services, and the risk of joining the list of unpaid creditors.
  5. Audit Risks: The firm must evaluate the audit risks involved, including the possibility of the company’s going concern and the risk of the auditor expressing an inappropriate audit opinion if the financial statements are materially misstated.

Additional considerations might include geographical coverage, the appropriateness of the proposed audit fee, and the possibility of communicating with the incumbent auditor to understand the situation better.

  • 6 Marks

AAA – Dec 2023 -L3 – Q5C – The meaning of audit and assurance

Outline the implications of the term "true and fair" in audited financial statements.

Auditors performing an audit in accordance with statutory requirements are required to issue a report that gives “a true and fair view” of the Financial Statements audited. Required:

Outline FOUR (4) implications of the term “true and fair” in audited financial statements.

The term “True and Fair” on an audited Financial Statements imply:

  • Compliance with any relevant legislation and accounting standards.
  • The use of accurate figures or best possible estimates.
  • Meaningful presentation and disclosure of information.
  • The avoidance of bias, distortion and manipulation of figures.
  • No concealment of material information.

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