Question 2

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 Ventures's 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 firm's 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 year's file and the same approach and sample sizes

have been used to conduct this year's audit.

You are required to:

Describe the quality control issues arising from each of the findings.

5 marks

Question 3

a) Modern Day Gospel Fellowship is a non-denominational charity organisation

established in 2001. The charity's 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 charity's

income can be spent. The constitution also notes that the administration expenditure cannot

exceed 6% of annual income.

The charity's income is derived wholly from voluntary donations which includes:

Cash collected from public donations by volunteers.

Cheques sent to the charity's 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.

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 company's 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.

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.

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.

Question 4

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 auditor's

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 company's 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.

Event 2 - Inventory

On 22 February 2020, it was discovered that a large batch of Morning Delight Company's

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.

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.

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 auditor's 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.