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.

4 marks

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.

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 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.