QUESTION 1

a.Upon the completion of the audit of Lovejoy Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following;

There was material inconsistency between the financial information and other information in documents containing the financial statements and the auditor's report thereon. The material inconsistency has been traced to the financial information but management has refused to effect any change when requested to do so.

Stocks worth GH5 million were valued at cost in the financial statements. The review of the post balance sheet events indicated that not all the stocks could be sold in the normal course of business. Some were damaged and some have become obsolete and slow moving. The total assets of the company is GH20 million. If the stocks were valued at net realizable value, the value would have reduced by GH2.0 million. The Directors have refused to allow the stocks to be valued at lower of cost and net realizable value and valued all the stocks at cost.

Management refused to allow auditors to carry out circularization of debtors. The receivables figure was material in the financial statements. In addition, the auditors have not received a reply to the letter of enquiry sent to the company's solicitors in respect of a major litigation affecting the company. The auditors assessed that the effect of the two items is both material and pervasive.

Subsequent events indicated that a major debtor has become insolvent. The amount involved was material. The directors refused to recognize the provision for a write- off of the amount.

Required:

i) For each of the items, recommend the type of audit opinion to be issued.

ii) Consider what action the auditors should take in view of management refusal to accept the recommendations and/or allowed the auditor to carry out the necessary audit procedures.

b.Blue Insurance Company Ltd. has appointed Lovejoy and Betty and Co., a firm of chartered accountants, as its new auditors to audit its financial statements for the year 2012. You were engaged as Senior audit assistant of the firm since last year.

The audit manager has assigned the checking of the opening balances schedule to the audit team over which you are the team leader. The following are the items on the schedule:

oProperty and Equipment - 50 million

oComputer Hardware - 2 million

oComputer Software - 3 million

oAccounts Receivable - 10 million

oAccounts Payable - 8 million

At the briefing meeting, the audit manager asked your team to prepare audit procedures for the audit of the opening balances.

Required:

Outline the audit procedures that should be used to verify the opening balances of Blue Insurance Company Ltd.

QUESTION 2

GGC Co. Ltd (GGCL) specialises in manufacturing equipment which can help to reduce toxic emissions in the production of chemicals. The company has grown rapidly over the past eight years and this is partly due to the warranties that the company gives to its customers. It guarantees its products for five years and if problems arise during this period, it undertakes to fix them or provide a replacement.

You are the manager responsible for the audit of GGCL and you are performing the final review stage of the audit and have come across the following issues.

Receivable balance owing from Nhyira Co. Ltd

GGCL has a material receivable balance owed by its customer, Nhyira Co. Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Nhyira Co. Ltd for over six months. GGCL would not allow this balance to be circularised. Instead management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision

The warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming that the basis and amount of the provision are reasonable. Management is yet to confirm acceptance of this representation.

Required:

a) Describe the audit procedures required in respect of accounting estimates.

b) For each of the two issues above:

i) Discuss the appropriateness of written representations as a form of audit evidence; and

ii) Describe additional procedures the auditor should now perform in order to reach a conclusion on the balance to be included in the financial statements.