Topic: Practice management

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  • 10 Marks

AAA – Dec 2023 – L3 – Q1b – Practice Management | The Audit Approach, Quality Control

Review the quality of the audit performed for Kaaklo Plc, identifying issues related to audit planning, performance, and ethical considerations.

You are the Audit Manager in Peptom Partners, a firm of Chartered Accountants. Your role includes performing post-issuance audit quality reviews. You have been tasked to review the audit work performed on Kaaklo Plc for the financial year ended 31 January 2021. The following information was gathered from your review of the audit file:

Audit team and fees
Kaaklo Plc is a listed company operating in the construction industry. The company complies with corporate governance regulations and has an audit committee. Kaaklo Plc has been an audit client of Peptom Partners for eight years, and Kofi Sika has been the Audit Engagement Partner during this time. Kaaklo Plc’s auditor’s report was signed by Kofi Sika and issued last week. The report contained an unmodified opinion.

Peptom Partners requires its staff to record each hour they spend working on each client in the firm’s time management system.

From reviewing the time records relating to the audit of Kaaklo Plc, you identified that Kofi Sika and the other audit team members recorded the following hours on the audit:

  • Kofi Sika – Audit Engagement Partner: 2 hours
  • Coffie – Senior Audit Manager: 6 hours
  • Mabel – Audit Manager: 35 hours
  • Six Audit Assistants: 130 hours

Total time spent on audit: 173 hours

It is apparent from your review that almost all the detailed review of the audit working papers was completed by Mabel, who has evidenced her review by stating ‘final review’ on each page of the audit file. She has recently been promoted to the position of Audit Manager.

You are also aware that Kofi Sika booked a total of 40 hours to Kaaklo Plc in respect of non-audit work performed. The only information you can find in the file is that the non-audit work related to a ‘special investigation,’ and that Kofi Sika confirms that it does not create a threat to auditor objectivity. The total fee charged for the audit was GH¢250,000 and the fee for the ‘special investigation’ was GH¢890,000.

Going concern
From reviewing the audit working papers, you are aware that Kaaklo Plc’s ability to continue operating into the foreseeable future was identified as a significant audit risk at the planning stage of the audit due to low profit margins or losses being made on many of the company’s construction contracts and increasing economic uncertainty. The company typically has 20 contracts ongoing at any time.

Most of the audit work on going concern was performed by Mary Lamptey, an audit assistant who has just written her last professional exam and is not yet qualified. The majority of the audit work performed on the going concern focused on a review of five major contracts to determine their profitability. The management of Kaaklo Plc identified the major contracts for review and provided Mary with forecasts indicating that the contracts would have little impact on profit. Mary confirmed that the assumptions used in the forecasts agreed to assumptions used in previous years and concluded that the contracts which she had reviewed support the going concern status of the company. Having reviewed these major contracts, Mary concluded that there is no significant uncertainty over Kaaklo Plc operating into the foreseeable future.

Required:
Comment on the quality of the planning and performance of the audit of Kaaklo Plc. (10 marks)

A review of the information relating to the audit of Kaaklo Plc indicates many problems with how the audit has been planned and performed, which imply that the audit has not been conducted in accordance with ISA 220 Quality Control for an Audit of Financial Statements, ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and other Assurance and Related Services Engagements, and the IESBA International Code of Ethics for Professional Accountants (the Code).

  • Audit partner rotation: Kofi Sika has been acting as audit engagement partner for eight years. As Kaaklo Plc is a listed company, this goes against the requirements of the Code, which requires that an individual shall not act as the engagement partner for more than seven years. The problem is that long association of the engagement partner with the client leads to a self-interest threat to auditor objectivity, whereby the audit firm’s judgment is affected by concern over losing the long-standing client. There may also be a familiarity threat due to close relationships between the audit engagement partner and management of Kaaklo Plc, meaning that the partner ceases to exercise sufficient professional skepticism, impacting on audit quality. This is especially the case given that Kofi Sika is performing additional non-audit services for the client, which will be discussed further below. Kofi Sika should be replaced as soon as possible by another audit engagement partner.
  • Supervision and review: Kofi Sika has booked only two hours for audit work performed on Kaaklo Plc. This is not sufficient time for the audit partner to perform their duties adequately. The audit partner is required to take overall responsibility for the supervision and performance of the audit. He should have spent an appropriate amount of time performing a review of the audit working papers in order to be satisfied that sufficient appropriate audit evidence had been obtained; this is a requirement of ISA 220. Instead, it appears that most of the final review was performed by a newly promoted audit manager who would not have the necessary experience to perform this review. It is possible that there is insufficient evidence to support the audit opinion which has been issued, or that inappropriate evidence has been obtained.
  • Special investigation: Kofi Sika’s focus appears to have been on the special investigation performed for Kaaklo Plc, to which he booked 40 hours of time. There is insufficient documentation as to the nature of this non-audit work, and it could relate to the provision of a non-audit service which is not allowed for a public interest entity. Kaaklo Plc is a listed company, and the Code prohibits the audit firm from providing certain non-audit services, for example, certain internal audit services, valuation services, and tax services. The lack of documentation means that Peptom Partners could have provided a prohibited service and therefore be in breach of the Code.
  • Audit of going concern: The audit work on going concern has been inappropriately delegated to an audit assistant who would not have the necessary skill or experience. This is of special concern given that going concern was identified as a significant audit risk, and that the work involves using judgment to evaluate information relating to contract performance. The work should have been performed by a more senior member of the team, probably one of the audit managers, who is more able to exercise professional skepticism and to challenge management where necessary on the assumptions underpinning the forecasts.
  • Audit Committee: It is concerning that the audit committee of Kaaklo Plc does not appear to have raised concerns about the issues discussed, especially the provision of the non-audit service and the length of time which Kofi Sika has served as audit engagement partner. One of the roles of the audit committee is to oversee ethical issues relating to the external auditor and to be involved with the engagement of external providers. Peptom Partners should ensure that these matters are discussed with the audit committee so that further ethical issues do not arise in the future.

Conclusion: From the discussion above, it can be seen that there are many problems with the audit of Kaaklo Plc. Kofi Sika appears to have ignored his responsibilities as audit engagement partner, and the audit firm needs to discuss this with him, consider further training, or possibly take disciplinary action against him. Peptom Partners need to implement procedures to ensure all work is carried out at the appropriate level of personnel with the appropriate experience, and that training is given to staff to ensure they understand that the client does not pick or specify the audit work to be carried out in any area, it is to be selected by the audit team in accordance with the audit firm’s methodology and sampling tools.

  • 10 Marks

AAA – Nov 2020 – L3 – Q1b – The audit approach | Practice management | Professional responsibility and liability

Evaluate five risk considerations and issues before accepting an engagement from Phobia Foods Ltd, focusing on financial position, client expectations, and fee structure.

You have been recently promoted as the Ethics Partner in Famous Chartered Accountants, a licensed audit firm. At your first visit to the Managing Partner, he informs you of an appointment by Phobia Foods Ltd (PFL), and gives you a file to go through. You open the file and find a copy of an e-mail from the Managing Director of PFL, extracts which read as follows:

From: Managing Director, Phobia Foods Ltd.
To: Managing Partner, Famous Chartered Accountants
Subject: Evaluation of Business Expansion Plan and Associated Items

Congratulations on your offer of appointment as auditor cum advisor of our company. As discussed in our earlier meeting, Phobia Foods Ltd (PFL) would like to open three more outlets, two in Sunyani and one in Sogakope. The necessary financing will be obtained through a new bank loan and the rescheduling of the payments of the existing loan, which is technically in default.

Your appointment and fees
Your audit fee will be GH¢16,000 for the year ended 30 June 2018.Your fee for evaluation of our expansion plan and advisory services in relation to obtaining a bank loan will be GH¢9,000. For advisory services and business efficiency and strategic decisions, your fee will be GH¢3,400 per month for the next two years.

Shareholders and key management issues
Five founding directors, each with equal shares, incorporated PFL which commenced trading in 2009. I still maintain my original 20% holding.

Audit and accounts 2016-2018
Ofosu-Mensah & Associates., a firm of licensed auditors audited the accounts for the years ended 30 June 2016 to 30 June 2018 inclusive. The audit of PFL for the year ended 30 June 2018 was signed off on 16 November 2018 with an unqualified opinion, notwithstanding that qualified opinions had been published on the previous two years’ accounts. The shareholders of PFL approved your firm’s appointment at the annual general meeting held on 15 April 2019 for the year ended 30 June 2019.

The funds raised by the new bank loan will be used for expansion of the business. Your firm is also expected to advise the company on the application for the new bank loan and the rescheduling of repayments of the existing loan in default.

Yours sincerely,
Managing Director.

Required:

Evaluate FIVE (5) risk considerations and issues for Famous Chartered Accountants that should be identified prior to accepting this engagement. (10 marks)

The risks to be considered in relation to accepting this particular client are as follows:

  • The client appears more focused on our role as business advisors than auditors. The managing director refers to us as “auditor cum advisor”. The risk here is that the client does not appreciate the nature of assurance services and sees them as a mere extension of our advisory roles. This could lead to confusion and even conflict later.
  • The client’s financial position appears precarious. Although I do not yet have access to very detailed financial information about the client, there is a suggestion of a loan being, in the client’s own words, “technically in default”. Clients whose financial position is unsound present a much greater risk for several reasons. One reason is that their management teams tend to be under pressure rendering them more susceptible to unethical conduct or even outright fraud. Another reason is that accounting practices are more often pursued through the courts when clients have failed financially.
  • A third point concerning this appointment is that the fees appear to have been fixed by the client in advance. A fee of GH¢16,000 has been agreed as the audit fee. It seems imprudent to have fixed such a fee in advance of really understanding the client or fully appreciating what is involved with the audit. This is an ethical risk because personnel performing the audit may feed under psychological pressure to reduce the time spent on the audit commensurate with the fee.
  • Also, a fee has been agreed in relation to our advice and support in relation to the client’s application for some sort of “roll-over” of the bank financing. This would appear to create an advocacy threat to our independence. There is also an offer on a rolling fee of GH¢3,400 per month for general business, strategic and financial advice. It is commendable that this income will be received monthly by the practice but we need to be assured that we have the resources to invest in this on a continuous basis. It also gives rise to a familiarity threat so we will need to ensure the existence of robust information and communication barriers (so-called “Chinese Walls”) between the audit team and others working for the client.
  • It would appear that there were difficulties with audits in two of the three previous years. It appears that the audit reports for the years ended 30 June 2016 and 2017 were both subject to qualification. Although the 2017 report was not so qualified, the fact that there were difficulties in two of the three previous years is still a cause of concern. At this point, there appears to be insufficient detail of what lead to the qualifications but there must be a risk that these issues are still relevant notwithstanding the unmodified report in the year to 30 June 2018.

(5 points well explained @ 2 marks each = 10 marks)

  • 10 Marks

AAA – May 2017 – L3 – Q5a – Audit-related services | Practice management

Compare and contrast the audit of completed financial statements with the review of interim financial statements, focusing on key differences and similarities.

Your audit firm has been the statutory auditors for Apenkwa Co. Ltd. for the last three years. The company prepares its financial statements to December 31 each year. Due to the size of the company, it has been the practice of the client to prepare interim financial information to June 30 every year. At the request of the client, you have been reviewing the interim financial information each year it is prepared.

Required:

Compare and contrast the audit of completed financial statements and the review of interim financial statements. (10 marks)

Differences Between an Audit and a Review:

  1. Nature of Engagement:
    • Audit: An audit is a statutory requirement that involves the auditor expressing an opinion on whether the financial statements give a true and fair view of the financial position and performance of the entity.
    • Review: A review of interim financial statements is typically a voluntary engagement requested by the client. The auditor provides a conclusion, rather than an opinion, on whether anything has come to their attention that causes them to believe that the interim financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.
  2. Level of Assurance:
    • Audit: Provides a high level of assurance (reasonable assurance) that the financial statements are free from material misstatement.
    • Review: Provides a lower level of assurance (limited assurance) that nothing has come to the auditor’s attention to suggest that the interim financial statements are not fairly presented.
  3. Procedures Performed:
    • Audit: Involves extensive procedures, including tests of controls, substantive testing, and analytical procedures to gather sufficient appropriate evidence.
    • Review: Involves primarily inquiry and analytical procedures, with less emphasis on testing controls or substantive procedures.
  4. Reporting:
    • Audit: Results in an audit report with an opinion on the financial statements.
    • Review: Results in a review report with a conclusion, which is less definitive than an audit opinion.
  5. Scope of Work:
    • Audit: Covers the entire financial period, usually a full year, and includes all aspects of the financial statements.
    • Review: Typically focuses on interim financial information, covering a shorter period (e.g., six months) and may not address all aspects of the financial statements.

Similarities Between an Audit and a Review:

  1. Ethical Considerations:
    • In both engagements, the auditor must adhere to ethical standards, including independence, objectivity, and confidentiality. Quality control procedures should be applied to ensure the engagement is performed with due care.
  2. Engagement Planning:
    • Both an audit and a review require proper planning, including understanding the entity’s business, its environment, and internal control. The auditor must also assign staff with the requisite qualifications and provide necessary supervision and review of the work.
  3. Professional Skepticism:
    • The auditor must maintain an attitude of professional skepticism in both engagements, remaining alert to any indications of possible misstatements.
  4. Written Representations:
    • In both cases, the auditor typically obtains written representations from management regarding their responsibilities for the preparation and presentation of the financial information.
  5. Reporting Obligations:
    • Both engagements result in a report provided to the client. The report must be appropriately formatted according to the applicable standards (ISA for audits, ISRE 2400 for reviews).
  • 10 Marks

AAA – May 2017 – L3 – Q2a – Professional responsibility and liability | Practice management

Discuss ethical and professional issues related to tax consultancy services, contingent fees, and suspected illegal activities in a first-time audit engagement.

Your firm, Osei and Associates, has been appointed as the auditors of Dadeka Limited for the first time to perform the audit of the company for the year ended 31 December 2015. The company is in the agro-processing industry, and it sells most of its products to overseas customers. The following are two issues:

i) Tax consultancy services:

The directors appointed a tax consultant to perform certain corporate taxation services for the tax year ended 31 December 2014. On the start of the audit of the financial statements for the year ended 31 December 2015, and a review of the Income tax paid, your firm discovered that the Company did not take advantage of the special tax rate of 8% available for companies in the “export of Non-Traditional goods” in section 1.2(1) of the then Internal Revenue Act 2000 (Act 592). On discussion of this with management of the company, your firm accepted an engagement to act on behalf of the company to negotiate with Ghana Revenue Authority (GRA) and re-open the tax assessment for 2014 and submit a new Tax Assessment. One of the provisions in the engagement letter was that your firm would be paid a fee of 20% of any tax savings the company enjoys as a result of the engagement.

ii) Suspected Illegal Act:

During the observation of the inventory count at the company’s warehouse on 31 December 2015, the representative of your firm discovered that certain items on the premises were sealed and had inscriptions “Do not tamper with seal,” and these were not counted as part of the company’s inventory. On enquiry, the staff member was advised to ‘pretend she has not seen that’. It is suspected that the items contain either illegal drugs or ammunitions. This cannot be confirmed.

Required:

Identify and discuss the ethical and other professional issues raised by items (i) and (ii) above, and recommend what action, if any, your firm should take.

i) Tax Consultancy Services

  • The ethical issues here are that the Auditor has to report to the management of the company about the unsatisfactory service provided by another professional, who may also be a member of the Institute of Chartered Accountants – Ghana (ICAG).
  • The Code of Ethics for Professional Accountants does not prohibit this but cautions that the other professional accountant involved (if he/she can be identified) must be contacted with the permission of the mutual client and be told of the need to discuss the issue with the client, due to, in this case, the financial implications to the client.
  • This will ensure that the other professional accountant (if indeed he/she is a member of ICAG) will not think that we are deliberately destroying his reputation since this will also put our profession in general into disrepute and must be done only if absolutely essential, as in this case, the amount involved could be substantial.
  • The second ethical issue is that the auditor is accepting an engagement to provide a professional service on the basis of a contingent fee. The code does not frown on this except if the engagement is an assurance one in which the auditor is required to give an opinion for management to rely on. This is a tax consulting assignment and as such, the professional accountant can accept it on a contingent fee basis.
  • The professional accountant needs to be aware of two issues in this case:
    1. Accepting this engagement (and on a contingent fee basis) so early in your relationship with the new audit client could compromise the independence of the auditor.
    2. The auditor, if new in practice, would need to be cautious as this fee in addition to the normal audit fee, could take him/her beyond the 15% threshold for fees from one client as this could lead to an intimidation threat.

ii) Suspected Illegal Act

  • The ethical issue here is that it appears that a crime is suspected but the professional accountant has no evidence to confirm the suspicion. Therefore, the need to override the confidentiality requirement due to public interest is a consideration. Any of the suspected cases—storing of illegal narcotic drugs or storing of ammunitions—are both issues of public and national security interest.
  • The code of ethics requires that under such circumstances, the professional accountant would need to seek legal advice as well as professional advice from the technical department of ICAG but not disclose the identity of the client to any person consulted.
  • 10 Marks

AAA – May 2016 – L3 – Q2b – Internal audit and outsourcing | Practice management

Draft a report assessing the need for an internal audit department in a growing company.

Adepa Ltd, a fruit processing company, has been in operation for many years. It has managed to grow the business over the years and now has eight branches, four in rural areas and four in urban towns in addition to the head office. The management and those charged with governance are looking forward to the company adopting the latest technology in production – Advanced Technology Manufacturing (ATM) – and marketing and sales through the internet.

During the last audit of the financial statements of the company, the Managing Director suggested to the Senior Partner an assessment of the need for an internal audit department in the company. You were the audit manager who led the engagement team to do the audit. The Senior Partner has therefore asked you to carry out the assignment to assess the need for an internal audit in Adepa Ltd.

Required:
Draft a report to the Senior Partner on the assessment of the need for an internal audit department for Adepa Ltd., highlighting the factors to be considered in such assessment. (10 marks)

REPORT ON ASSESSMENT OF THE NEED FOR INTERNAL AUDIT IN ADEPA LTD.

To: Senior Partner
Date: 15th September, 2015

Introduction:
In assessing the need for an internal audit function in Adepa Ltd., several factors should be considered to determine whether it is beneficial for the organization to establish such a department.

Factors to Consider:

  1. Cost vs. Benefit Analysis:
    • The cost of setting up an internal audit department versus the predicted benefits.
    • Potential savings in external audit fees if the internal audit department can handle certain tasks currently outsourced.
  2. Complexity and Scale of Operations:
    • The complexity and scale of Adepa Ltd.’s activities and the systems supporting those activities, particularly given the company’s growth and desire to use modern technology.
  3. Management’s Perceived Need:
    • Management’s attitude towards risk management and internal controls, which could indicate their perceived need for an internal audit department.
  4. Skill Availability:
    • The ability of existing managers and employees to carry out tasks that internal audit may perform, or whether specialized skills are necessary.
  5. Outsourcing vs. In-house:
    • Whether it would be more cost-effective or desirable to outsource the internal audit work.
  6. External Stakeholder Pressure:
    • Pressure from external stakeholders (e.g., investors, regulators) to establish an internal audit department.
  7. Long-term Benefits:
    • Establishing an internal audit department can help maintain a group of highly skilled people, contributing to the company’s development.
    • The internal audit function can serve as a training ground for future senior executives.

Conclusion:
Considering these factors, Adepa Ltd. management will be in a better position to decide whether to establish an internal audit department.

Signed:
Audit Manager

  • 10 Marks

AAA – May 2016 – L3 – Q2a – Practice management | Professional responsibility and liability

Advise on the matters to consider in relation to accepting a new audit client according to ISQC 1.

Papa Nii and Papa Nana who just qualified as Professional Accountants have decided to enter into professional practice under a firm name Nana Nii & Associates. These two have been trainee accountants of an Audit and Assurance firm for three years before qualifying.

For their first engagement, the CEO of Mberdane Ltd. has nominated Nana Nii & Associates for appointment as auditors of his company though Mberdane Ltd was a former client of their former firm, Papa Nii and Papa Nana were never on the engagement team of Mberdane Ltd. As beginners, Papa Nii and Papa Nana have intended to follow best practices as required by ISQC 1 “Quality control for firms that perform audits and reviews of financial statements, and other assurance related services”. However, they are not clear on the matters that they have to consider in their acceptance decision according to the standard. They have approached you, a senior partner of their former firm, for advice.

Required:
Advise Papa Nii and Papa Nana on the matters that they may have to consider in relation to the acceptance decision on their nomination. (10 marks)

The standard, ISQC 1 provides three main issues to be considered for acceptance of nomination. These are the integrity of the client, the competence of the firm, and ethical requirements.

Matters to consider on the integrity of a client include:

  • The identity and business reputation of the client’s principal owners, key management, related parties, and those charged with governance.
  • The nature of the client’s operations, including its business practices.
  • Information concerning the attitude of the client’s principal owners, key management, and those charged with governance towards matters such as aggressive interpretation of accounting standards/internal control environment.
  • Whether the client is aggressive with fixing and maintaining the firm’s fees as low as possible.
  • Any indication of an inappropriate limitation on the scope of work.
  • Any indication that the client might be involved in money laundering or other criminal activities.
  • The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.

Matters to consider on the competence of the audit firm include:

  • Knowledge of the relevant industry by the firm’s personnel.
  • Experience with relevant regulatory or reporting requirements.
  • Personnel with the necessary capabilities and competence.
  • Availability of experts if needed.
  • Ability to complete the engagement within the reporting time.

Ethical issues include:

  • The firm must consider whether acceptance of the nomination will create any conflict of interest or other ethical issues.
  • The firm must ensure that the previous auditors have been properly removed in accordance with the law.
  • 10 Marks

AAA – Nov 2023 – L3 – Q1c – The Audit Approach, Practice Management

Explain five responsibilities of engagement partners for managing and achieving quality on audits as per ISA 220.

You have recently been employed by a small firm of Chartered Accountants “Osei Peprah and Associates”. The firm has been in operations since 1985 and the two main partners, Mr. Osei and Mr. Peprah, are above 70 years old. They are mostly inactive in the main audit work and rely on three audit trainees and one Audit Senior for the performance of the audit engagement for their 30 clients. The three audit trainees were recently employed after their national service with the firm. You are the only qualified accountant besides the partners.

On your first meeting with Mr. Osei, he explained that the firm needs to improve its quality control procedures and audit working papers. He highlighted that the recent audit of the firm’s activities by the Quality Assurance Monitoring department of ICAG revealed several quality control issues as well as non-compliance with ISAs in their audit engagements.

Required: In accordance with ISA 220 (Revised): Quality Management for an Audit of Financial Statements, explain FIVE (5) responsibilities of the engagement partners for managing and achieving quality on audits.

  • Overall Responsibility for Quality:
    • The engagement partner must take overall responsibility for managing and achieving quality on the audit engagement. This includes creating an environment that emphasizes the firm’s culture and expected behavior of engagement team members.
  • Communication of Quality Expectations:
    • The engagement partner should establish and communicate the expected behavior of engagement team members, emphasizing that all members are responsible for contributing to the management and achievement of quality at the engagement level.
  • Direction and Supervision:
    • The engagement partner is responsible for the direction, supervision, and review of the work performed by engagement team members to ensure that the significant judgments made and the conclusions reached are appropriate.
  • Understanding Ethical Requirements:
    • The engagement partner should have a thorough understanding of the relevant ethical requirements, including those related to independence, applicable to the audit engagement.
  • Evaluation of Threats to Compliance:
    • The engagement partner must evaluate any threats to compliance with ethical requirements, including independence, and take appropriate actions to address these threats.
  • 20 Marks

AAA – Aug 2022 – L3 – Q1 – Professional responsibility and liability | Practice management

Discuss the audit expectation gap, recommend ways to close it, and evaluate client acceptance decisions for a new audit client.

The potential liability of auditors has become an important topic in recent years, due to the growing complexity of the audit business environment and an increase in legal actions against auditors. One argument put forward to explain the high number of legal actions against auditors is the “expectation gap”.

i) Explain the Audit Expectation Gap and the elements in the Gap.
(4 marks)

ii) Recommend TWO (2) ways of closing the audit expectation gap.
(2 marks)

b) International Standards on Auditing (ISA) defines professional scepticism as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatements due to error or fraud and a critical assessment of audit evidence. It explicitly requires auditors to plan and perform an audit with professional scepticism recognising that circumstances may exist that may cause financial statements to be misstated.

Required:

Recommend FOUR (4) approaches or ways that the professional practice firms and auditors could adopt to create the awareness of the importance of professional scepticism and its application.
(4 marks)

c) Opelee Partners, a firm of Chartered Accountants is considering the acceptance of a new client, The Monkoo Group Plc (The Group).

The Group is a listed company, and it has a total of 14 subsidiaries, 10 of which are foreign subsidiaries. The Group is a food processing company and each of its foreign subsidiaries provides a particular ingredient used in the Group’s main processing plant, which is based in Ghana. The subsidiaries produce raw ingredients including corn, wheat, vegetables, and nuts.

If Opelee Partners decides to accept the appointment, it will perform the audit of the Group’s consolidated financial statements, and that of the financial statements of some of the individual subsidiaries. The Group audit committee has suggested that, in order to keep the audit fee as low as possible, Opelee Partners could audit the companies based in Ghana but the foreign subsidiaries would be audited by local firms. These foreign subsidiaries contribute 60% to the Group’s total assets.

As the Managing Partner of Opelee Partners, you have also obtained the following information from an internet search regarding the Group:

  • Local protestors: One subsidiary, Konti Plc, has been accused of environmental damage, due to its operations impacting on the rainforest and causing harm to wildlife. There have been some protests by concerned citizens in the country where Konti Plc is located. Digital recordings of these protests have spread world-wide on social media.
  • Expansion of operations: The Group has recently expanded its operations in a certain country by acquiring a large area of land on which to grow wheat. To receive government approval for the acquisition, a significant ‘incentive payment’ was made to a government minister. This has been reported widely in the media.

Required:

Evaluate the matters Opelee Partners should consider before accepting the audit of The Group under the following areas:

i) The audit firm’s capabilities
(4 marks)

ii) Ethical issues
(4 marks)

iii) Client integrity
(2 marks)

a)
i) Audit Expectation Gap
The expectations gap is the difference (or ‘gap’) between:

  • What the users of financial statements and other members of the public think that the auditors should do and what the auditors are actually required by the law and the profession to do.

There are three main elements in the expectations gap:

  1. A standards Gap: This occurs because of a perception that auditing standards are more prescriptive than they actually are, and that auditors have wide-ranging rules that they must follow.
  2. A performance Gap: This occurs because of a perception that audit work has fallen below the required standards.
  3. A liability Gap: This arises from a lack of understanding about the auditor’s liability and who the auditor may be liable to.
    (4 marks)

ii) Closing the Expectation Gap
To reduce the frequency and cost of legal action, and to maintain the image of the audit profession in the mind of the public, the profession can take steps to close the expectation gap by:

  1. The profession should attempt to improve the general level of knowledge and understanding about the audit process.
  2. Controls over the auditing profession are important in enhancing public confidence.
    (2 marks)

b) Professional Skepticism
Professional skepticism within the engagement team is influenced by actions at both the firm and engagement levels, such as:

  1. Auditors must consider the integrity of the principal owners and management during engagement acceptance.
  2. The auditor must consider the reasonableness of significant assumptions used by management for accounting estimates giving rise to significant risks.
  3. ISA 240 notes that the auditor must maintain an ongoing questioning mind and be alert to the possibility of fraud.
  4. When considering going concern, the auditor must consider the reasonableness of assumptions and whether management’s plans are feasible in the circumstances.
    (4 marks)

c) Client Acceptance Decision – The Monkoo Group PLC
i) The Audit Firm’s Capabilities
Opelee Partners should consider the following:

  1. Competence to perform the engagement, capabilities, resources, and time availability.
  2. The complexity and size of The Monkoo Group PLC as a multinational listed company with many subsidiaries.
  3. The need for industry-specific knowledge or the potential need to bring in staff with relevant experience.
  4. The implications of fee pressure from the client, especially in relation to resource allocation.
    (4 marks)

ii) Ethical Issues
Opelee Partners should consider the following ethical issues:

  1. Pressure to maintain a low audit fee, which could affect audit quality and create an intimidation threat to auditor objectivity.
  2. The use of component auditors for foreign subsidiaries and whether sufficient appropriate audit evidence can be obtained.
  3. Understanding the group management’s rationale for appointing component auditors for subsidiaries, especially when they contribute significantly to the Group’s assets.
  4. Evaluating the competence of component auditors due to the specialized nature of The Group’s operations.
    (4 marks)

iii) Client Integrity
Opelee Partners should consider the following:

  1. Allegations of environmental damage by a subsidiary could raise concerns about The Group’s business ethics.
  2. A significant ‘incentive payment’ made to a government minister for land acquisition raises questions about the integrity of The Group’s management.
    (2 marks)
  • 10 Marks

AAA – Nov 2019 – L3 – Q1b – Professional responsibility and liability, Practice management

Evaluation of challenges and risks when auditing a Non-Governmental Organization (NGO).

b) You are a partner in a two-partner practice in a small rural town in Ashanti Region. Some local community groups recently got together and established a Non-Governmental Organisation (NGO). It aims to reduce poverty and inequality by supporting, influencing and advocacy around three interconnected pillars; Agriculture, Essential Services and Extractive Industry Governance.

The organisation is registered as a charity with a legal requirement to reinvest any excess of income over expenditure into the operation, or into other local community initiatives, as the management committee sees fit. The organisation is run by a management committee consisting of a member of the community council, the principal of the local school, two local business people, and the Parish Priest. Although, between them, they have considerable experience of various ‘for-profit’ and ‘not-for-profit’ ventures, none has particular experience of managing NGOs or charity organisations. The organisation is run on a day-to-day basis by the manager who is the only full-time employee experienced in the type of businesses involved. There is one other paid part-time employee – the assistant manager – but all other staff are volunteers.

It has been just over a year since the NGO was incorporated, and you are approached by a member of the management committee (a local business owner who is also one of your largest clients) to become the auditor of the NGO. He tells you that the committee, of course, would not expect you to provide this service entirely pro bono (free of charge). He also mentions that he knows you wouldn’t want to be seen to turn down this opportunity, given the way that “news can travel around in a small town”.

He is well aware that the revenue generated by the organisation is very low. The committee feels that the absence of an audit could be perceived as “negligent” or a “cover up” should any problems involving, for example, the misappropriation of assets emerge in the future.

Required:

Evaluate FIVE (5) challenges and other risks presented to your practice as a result of the request from your client to become the auditor of this NGO. (10 marks)

Challenges and other risks presented to your practice as a result of the request from your client to become the auditor of this NGO:

  1. High Audit Risk Due to Size and Control Environment: The audit risk of this charity is likely to be high due to its size and the difficulty of implementing adequate controls (e.g., segregation of duties, supervision). The lack of experience of the management committee in this type of business, combined with the reliance on volunteers, could lead to excessive dependence on the only paid staff members – the manager and the assistant manager.
  2. Intimidation Threat to Independence: The client is pressurizing the auditor to take on the audit of a small charity in which they are involved, potentially for less than the full commercial fee. This situation creates an intimidation threat to the auditor’s independence, as the client is also one of the largest clients of the audit practice.
  3. Potential Impact on Professional Reputation: Conducting the audit pro bono or for a reduced fee may raise questions about the auditor’s independence and objectivity. There is a concern that this could affect the firm’s reputation, especially in a small community where word spreads quickly.
  4. Risk of Bad Publicity: Given that this is a charity, any issues or failures related to the audit could attract significant negative publicity, potentially damaging both the auditor’s and the charity’s reputations.
  5. Possible Compromise of Audit Quality: The auditor may face pressure to deliver the audit at a lower fee, which could compromise the quality of the audit work. Additionally, the complexity and risks involved in auditing an NGO, particularly one with limited financial resources and a volunteer workforce, might require more time and effort than what the fee would justify.
  • 12 Marks

AAA – Nov 2017 – L3 – Q5a – Practice Management, Professional Responsibility and Liability

Identify the causes of failure in a microfinance company and recommend actions to prevent recurrence.

You are an Audit Manager in the firm Taiplan Chartered Accountants, a firm in public practice registered with the Institute of Chartered Accountants (Ghana) (ICAG). Bank of Ghana (BOG) has appointed your firm to investigate reasons for the failure of DC Microfinance Limited (DCM) and your investigation has revealed the following as some of the reasons for the failure:

i) The board of directors of the company is made up only of Mr. and Mrs. David Commodore;

ii) The failure of the Bank of Ghana to examine or detect the non-submission of the fidelity returns submitted to it by the company and monitor the company adequately;

iii) The auditors have been the auditors of the company since its incorporation over ten years ago;

iv) The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company. This is partly due to the fact that the consulting arm of the audit firm has been performing all the consultancy work needed by the company since its incorporation and particularly at the time of its application for the microfinance operating permit from BOG.

Required:
For points (i) to (iv) above, state for each point, and show what would contribute to the failure of the company and make ONE recommendation to ensure that this would not re-occur in DCM or any other microfinance company in Ghana. (12 marks)

i) The board of directors of the company is made up only of Mr. and Mrs. David Commodore:

  • Contribution to Failure:
    • This structure does not promote sound corporate governance. A company with public accountability, such as a microfinance institution, should not have only a married couple as its board. This can lead to a lack of independent oversight and decision-making, increasing the risk of mismanagement.
  • Recommendation:
    • The Bank of Ghana (BOG) should require all Microfinance Institutions (MFIs) to have a diversified board comprising both executive and non-executive directors, including independent members who are not related by family. This ensures that decisions are made with broader oversight and reduces the risk of biased or improper decision-making.

ii) The failure of the Bank of Ghana to examine or detect the non-submission of the fidelity returns submitted to it by the company and monitor the company adequately:

  • Contribution to Failure:
    • BOG’s failure to monitor the company effectively allowed DCM to operate without proper oversight. This lack of scrutiny meant that financial irregularities went undetected, leading to the company’s eventual collapse.
  • Recommendation:
    • BOG should strengthen its monitoring and supervisory mechanisms, including implementing automated systems that alert the central bank of non-submission of returns or irregularities in submissions. Regular and thorough inspections should be mandated to ensure compliance and detect potential issues early.

iii) The auditors have been the auditors of the company since its incorporation over ten years ago:

  • Contribution to Failure:
    • Having the same audit firm for over ten years creates a familiarity threat, which can erode the independence and objectivity of the auditors. This long-term relationship may result in complacency and a failure to critically assess the company’s financial statements.
  • Recommendation:
    • MFIs should be required to rotate their auditors after a maximum of five years. Auditor rotation helps maintain auditor independence and brings a fresh perspective to the audit, reducing the risk of oversight or bias.

iv) The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company:

  • Contribution to Failure:
    • The audit firm’s failure to question dubious accounting treatments is partly due to the conflict of interest created by the consulting services it provided to the company. This self-review threat compromised the auditors’ ability to remain objective and critical, allowing financial misstatements to persist.
  • Recommendation:
    • BOG should enforce regulations that prohibit audit firms from providing both audit and non-audit services, such as consultancy, to the same client. This separation ensures that auditors remain independent and do not face conflicts of interest that could compromise the quality of their audit work.

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