Question 1

a) Apricot is an information technology (IT) manufacturing company which has been dealing in various IT equipment over 70 years. It operates from one central site which includes the production facility, warehouse and administration offices. You are an audit senior in Juit Company, and you are commencing the audit planning of Apricot Company for the year ending 31 April 2019. Apricot Company sells all of it IT equipment to multinational clients, with 75% being sold to a multi-million IT dealer. The company has a one-year contract to be the sole supplier of IT equipment. In order to secure the contract, the company reduced prices and offered 100 days credit period, while its normal credit period is 28 days, which is an equivalent of month. Currently, Apricot Company has strategically reduced the level of products directly manufactured and rather started to import significant amount of its IT equipment from India. Nearly 65% of the IT equipment is imported and 35% manufactured. Purchase orders for imports are made five months in advance and goods can be in transit for up to three months. Apricot Company accounts for the inventory when it receives the goods. An assessment show that Apricot Company has an equipment manufacturing plant which is now redundant and also assessed to have minimal scrap value. To avoid the disruption of a year-end inventory count, Apricot Company has this year introduced a continuous inventory counting system. Apricot Company divided the warehouse into 12 areas, and each of these are to be counted once within the year. At the year-end, it is proposed that the inventory will be based on the underlining records. Traditionally, Apricot Company has maintained an inventory allowance based on 2% of the inventory value, but management feels that as inventory is being reviewed more regularly, it no longer needs this allowance. In January 2019 Apricot Company had a dispute with its finance director (FD) and he was forced to immediately leave the firm. In his place, the company has asked the financial controller to take over the role temporarily, while they recruit a permanent replacement. The old FD has notified Apricot that he has intentions of suing for unfair dismissal. The company is not proposing to make any provision or disclosure for this, as they are confident the claim has no merit. You are required to: i. Explain the audit risks identified at the planning stage of the audit of Apricot Company. 4 marks ii. Discuss the importance of assessing risks at the planning stage of an audit. 3 marks iii. Describe THREE substantive procedures the auditor of Apricot Company should perform at the year-end in confirming each of the following: (1) The valuation of inventory (2) The completeness of provisions of contingent liabilities. 3 marks b) Supreme Ventures is a manufacturer of quality home accessories and a client of your audit firm. You are carrying out the audit of the purchases system of Supreme Ventures. The company has revenue of Ghc 12.5 million, and all the shares are owned by Mr. Addo and Mr. Tekpe, who are non-executive directors and are not involved in the day-to-day running of the company. Kofi Badu is the accounts clerk who maintains all the accounting records and prepares the annual financial statements. The company uses a standard computerised accounting package. You have determined that the purchases system operates as follows: When materials are required for production, the production manager sends a handwritten note to the buying manager. For orders of other items, the department manager or managing director sends a handwritten note to the buying manager. The buying manager finds a suitable supplier and raises a purchase order. The purchase orders are signed by the managing director. Purchase orders are not issued for all goods and services received by the company. Materials for production are received by the Goods Received Department, who issue a goods received note (GRN), and sends a copy to the accounts clerk. There is no system for recording receipt of other goods and services. The accounts clerk receives the purchase invoice and matches it with goods received notes and purchase order (if available). The managing director authorises the invoice for posting to the purchase ledger. The accounts clerk analyses the invoice into relevant nominal ledger accounts codes and then posts it. At the end of each month, the accounts clerk prepares a list of payables to be paid. This is approved by the managing director. The accounts clerk prepares the cheques and remittances and posts the cheques to the purchase ledger and cashbook. The managing director signs the cheques and accounts clerk sends the cheques and remittances to the payables. Mr. Addo and Mr. Tekpe are aware that there may be weaknesses in the above system and have asked for advice. You are required to: i. Explain five (5) control deficiencies in Supreme Venturess purchases system and suggest improvements to overcome the deficiencies. 5 marks c) You are the partner responsible for quality control in Suta Excellence, A well-known audit firm. You are reviewing the findings from a recent post-issuance (cold) review performed by your firms compliance department. The following were identified on a number of audits: Zhetta Company A review of working papers found that some working papers had not been signed off by the team member that had completed the work. Some working papers were not dated, and some did not have a signature confirming they had not been reviewed. Petra Company A mandatory procedure included in the audit plan which required a written representation letter to be obtained, had not been completed. A comment had been added by the audit manager stating that there were no issues requiring a written representation from management. Jantra Company An audit test over purchases required a sample of 60 invoices to be tested. 54 had been tested and found to be recorded accurately and completely. Six (6) invoices could not be found. No further invoices were identified for testing and a conclusion was drawn based on the 54 items tested. Mantra Company The audit of a material provision was performed by the audit junior as the audit manager was too busy finishing off work for the previous client on which they had been working. Nuna Company The planning section of the file has not been completed. The audit procedures performed were copied over from the previous years file and the same approach and sample sizes have been used to conduct this years audit. You are required to: Describe the quality control issues arising from each of the findings. 5 marks (Total: 20 marks)

Question 2

a) Modern Day Gospel Fellowship is a non-denominational charity organisation established in 2001. The charitys aim is to provide support to children from disadvantaged backgrounds. The support comes in two folds i.e. academic such as scholarships and related academic activities and sports such as tennis, swimming and football. The aim is to provide total well-being to humanity. Modern Day Gospel Fellowship has detailed constitution which explains how the charitys income can be spent. The constitution also notes that the administration expenditure cannot exceed 6% of annual income. The charitys income is derived wholly from voluntary donations which includes: Cash collected from public donations by volunteers. Cheques sent to the charitys head office. Donation from generous individuals. Some of these donations have specific clauses attached to them indicating that the initial amount donated (capital) cannot be spent. However, the income (interest) from the donation can only be spent on specific activities, for example, provision of sport equipment and scholarships. The rules regarding the taxation of charities in the country where Modern Day Gospel Fellowship is based are complicated, with only certain expenditure being allowable for taxation purposes and donations of capitals being treated as income in some situations. You are required to: i. Identify areas of inherent risk in Modern Day Gospel Fellowship and explain the effect of each of this risk on the audit approach. 5 marks ii. Explain why the control environment may be weak at Modern Day Gospel Fellowship. 3 marks b) You work in a reputable audit firm and you are currently reviewing the working papers of several audit assignments recently curried out by your audit firm. Each of the audit engagement is nearing completion, but certain matters have recently come to light which may affect your audit opinion on each of the assignments. In each case, the year-end of the company is 30 August 2019. i. Mimie Company (Profit before tax Ghc 750,000) On 6 September 2019 a letter was received informing the company that a customer, who owed the company Ghc 150,000 as at the year-end had been declared bankrupt on 30 August. At the time of the audit it was expected that unsecured creditors, such as Mimie, would receive nothing in respect of this dept. The directors refuse to change the financial statements to provide for the loss, on the grounds that the notification was received by the statement of financial position date. Total debts shown in the statement of financial position amounted to Ghc 2,375,000. 3 marks ii. Kokuvi Company (Profit before tax Ghc 2,500,000) On 20 July 2019 a customer sued the company for personal damages arising from a defect in one of its products. Shortly before the year-end, the company made an out-of-court settlement with the customer of Ghc 50,000, although this agreement is not reflected in the financial statements. Further, the matter subsequently became known to the press and was extensively reported. The companys legal advisers have now been informed that further claims have been received following the publicity, although they are unable to replace a figure on the potential liability arising. The company has referred to the claims in a note to the financial statements stating that no provision has been made because the claims are not expected to be material. 3 marks iii. Baaba Na Company (profit before tax Ghc 1,250,000) The audit work revealed that a trade investment stated in the statement of financial position at Ghc 2,500,000 has suffered a permanent fall in value of Ghc 1,500,000. The company has refused to put an impairment charge through for it on the grounds that other investments (not held for resale) have risen in value and are stated at amount considerably below their realisable values. 3 marks iv. Achah Martin (profit before tax Ghc 500,000) This client is a furniture company, currently manufacturing for the local market using local materials and some of its own workforce. The labour cost has been included in the cost of a non-current asset in the statement of financial position at a value of Ghc 50,000. During the audit it was discovered that the direct labour cost records for the early parts of the year have been accidently destroyed. 3 marks You are required to: Discuss each of the cases outlined above, referring to materiality considerations and, where appropriate, relevant accounting principles and appropriate accounting standards, explaining the audit reporting implications in each case. Total: 20 marks

Question 3

a) Morning Delight Company manufactures cereals and operates five factories, six warehouses and five distribution depots in major cities in Ghana. The audit for the year ended 31 December 2019 is almost complete and the financial statements and auditors report are due to be signed shortly. Profit before taxation is Ghc 11.6 million. The following events have occurred subsequent to the year-end and no amendments or disclosure have been made in the financial statements. Event 1 Fire Outbreak On 2 February 2020, a fire occurred at the largest of the distribution depots. The fire resulted in extensive damage to 41% of the companys vehicles used for dispatching goods to costumers, however, there was no significant delays to customers deliveries. The company estimated the level of damage to the vehicles to be in excess of Ghc108,000. Only a minimal level of inventory, approximately Ghc 42,000, was damaged. Secure Insurance company, the insurers of Morning Delight Company has started to investigate the fire to assess the likelihood and the level of payment, however, there are concerns that the fire was started deliberately, and if it is true, it will invalidate any insurance cover. 4 marks Event 2 Inventory On 22 February 2020, it was discovered that a large batch of Morning Delight Companys new cereal brand Anopayede held in inventory at the year-end was defective, as the cereal contained too much sugars. To date no sales of this new cereal have been made. The cost of the defective batch of inventory is Ghc 1,500,000 and the defects cannot be corrected. However, the scrapped cereal can be utilized as a raw material as an alternative cereal brand at a value Ghc 84,000. 4 marks Based on the two subsequent events above you are required to: i. Explain whether the financial statements require amendment, and ii. Describe audit procedures which should now be performed in order to form a conclusion on any required amendments. b) You are the manager in charge of the audit of Nananom Company, a public limited liability company which manufactures specialist equipment and costumes for use in Kumahwood and Nafftti films in Ghana. Audited revenue is Ghc 100 million with profit before tax of Ghc 6.25 million. Audit work up to but not including, the obtaining of written representations has been completed. A review of the audit file has disclosed the following outstanding point: Kumahwood Nananom Company is facing a potential legal claim from the Kumahwood company in respect of a defective equipment that was supplied for one of their films. Kumahwood sustains that the equipment built was not robust enough, while the directors of Nananom argue that the specification was not sufficiently detailed. Nananom were of the view that using such sophisticated equipment under conditions that require heavy falls, may render them not in the best of working conditions after a couple of films produced. However, this is what Kumahwood expected. Solicitors are unable to determine liability at the present time. Kumahwood has therefore slapped a claim for Ghc 3.33 million being the cost of a replacement equipment and lost production time on Nananom. The directors opinion is that the claim is not justified. 4 marks Depreciation Depreciation of specialist production equipment has been included in the financial statements at the amount of 12% per annum using the reducing balance method. The treatment is consistent with prior accounting periods (which received an unmodified auditors report) and other companies in the same industry. Sales of old equipment show negligible profit or loss on sale. The audit senior, who is new to the audit, feels that depreciation is being undercharged in the financial statements. 4 marks You are required to: i. Discuss whether or not a paragraph is required in the written representation for each of the above matters. c) A suggested format for the written representation has been sent by the auditors to the directors of Nananom. The directors have stated that they will not sign the written representation this year on the grounds that they believe the additional evidence that it provides is not required by the auditor. You are required to: i. Discuss the action the auditor may take as a result of the decision made by the directors, not to sign the written representation. 4 marks (Total: 20 marks)