1 CSUC 456: AUDITING AND ASSURANCE SECTION B INSTRUCTION: Candidates are required to Answer ALL questions. Marks are allocated to each question. QUESTION ONE Owusu Forjour Ltd (Owusu Forjour) is a multinational mining group which is involved in different operations. The draft financial statements for the year ended 31 March 2019 show the following: Financial Statement Extracts 2019 (draft) 2018 (audited) GHmillion GHmillion Revenue 30.60 28.08 Profit before tax 3.12 3.00 Total net assets 29.76 27.24 You are the manager responsible for the audit for the year ended 31 March 2019.You have just visited the clients premises to review the audit teams work to date. The audit senior has drafted the following points for the attention of manager. a) On 12 March 2019, an explosion occurred in one of Owusu Forjours premises, destroying about one quarter of the premises. Luckily, the explosion happened at night when the premises were empty and there were no injuries to any persons. Structural engineers and surveyors are currently assessing the stability of the remainder of the premises and it is, as yet, unclear whether they can be repaired or will need to be demolished and rebuilt in their entirety. In the last few days, notifications have been received from the owners of four nearby businesses claiming that the structural integrity of their premises may have been compromised by the impact of the explosion. 2 They also advised that structural engineers are currently assessing their premises to ensure they are still safe. These business owners have formally notified Owusu Forjour that if their premises were adversely affected by the explosion, they will claim an appropriate and justifiable level of compensation from Owusu Forjour. Owusu Forjours insurers have been informed but at this point are refusing to comment on the situation until, they say, all the facts are clear in relation to the explosion and its effects. (8 marks) b) Owusu Forjour acquired a property in April 2018 at a cost of GH2.64 million. The property was not in a good state of repair but Owusu Forjour needed an office space for critical administration functions in a central location and moved some staff in immediately. In January 2019, more suitable accommodation became available for the staff who were quickly relocated. A decision was taken to sell the property. Hence, it was decided not to provide any depreciation on the property in respect of the year under review. However, significant remedial work was needed before the sale could be completed. This was commenced in early February 2019. The cost of this work is being expensed as Repairs and Maintenance as incurred. The property has a reserve price of at least GH4.2 million at a public auction scheduled for 30 June 2019. The property is classified as Held for Sale at the year-end under IFRS 5: Noncurrent Assets held for Sale and Discontinued Operations at a value of GH4.2 million and a gain of GH1.56 million has been recognised in the draft Consolidated Statement of Profit or Loss and Other Comprehensive Income. (8 marks) c) In January 2019, Owusu Forjour acquired 53% of the equity shares of Tanoso Ltd for GH2.04 million. The company has been accounted for as an associate company and the results have not been consolidated. The group finance director has given two reasons for this treatment. Firstly, the activities of Tanoso Ltd are very different to those of the rest of the group, and 3 secondly Tanosos financial systems has not been integrated with the groups Accounting system. (4 marks) Required: In respect of each of the above issues, critically appraise the matters that should be considered and the audit evidence that should be documented in undertaking a review of the audit working papers and the financial statements of Owusu Forjour for the year ended 31 March 2019. (Total: 20 marks) QUESTION TWO Musah Diara is a Malian resident in Ghana. He has established Tagoe Company Ltd (Tagoe) which engages in trading in West African countries; Ghana, Nigeria and Mali. Musah is always funded by his brother who is also a resident in Ghana. Musahs brother does not have a bank account in Ghana. He always gives huge cash to Musah who buys goods in Ghana and sells it in Nigeria or Mali. He pays the profit into Tagoes account in Ghana and bank the amount given to him by his brother into his brothers account in Mali. Required: You have been engaged to audit Tagoe. Discuss the risk you are likely to encounter in this audit, specifying your expectation of the risk format and the action you have to take. 10 marks QUESTION THREE Explain briefly how you would verify the following items; (a) Inventory and work in progress. (2. 5marks) (b) Goodwill. (2.5 marks) (c) Trade payable (Trade creditors). (2.5 marks) (d) Bank overdraft. (2.5 marks) 10 Marks