You are an audit supervisor of Ali & Babs partners and you are planning the audit of Little Angel Corporation, a listed company, for the year ending 31 March 2020. The company manufactures computer components and forecast profit before tax is GH336m and total assets are GH793m.

Little Angel Corporation distributes its products through wholesalers as well as via its own website. The website was upgraded during the year at a cost of GH11m. Additionally, the company entered into a transaction in February to purchase a new warehouse which will cost GH32m. Little Angel Corporations legal advisers are working to ensure that the legal process will be completed by the year end. The company issued GH5m of irredeemable preference shares to finance the warehouse purchase.

During the year the finance director has increased the useful economic lives of fixtures and fittings from three to four years as he felt this was a more appropriate period. The finance director has informed the engagement partner that a revised credit period has been agreed with one of its wholesale customers, as they have been experiencing difficulties with repaying the balance of GH12m owing to Little Angel Corporation.

In January 2020, Little Angel Corporation introduced a new bonus based on sales targets for its sales staff. This has resulted in a significant number of new wholesale customer accounts being opened by sales staff. The new customers have been given favourable credit terms as an introductory offer, provided goods are purchased within a two-month period. As a result, revenue has increased by 5% on the prior year.

The company has launched several new products this year and all but one of these new launches have been successful. Feedback on product Pute, launched four months ago, has been mixed, and the company has just received notice from one of its customers, Lanque Company, of intended legal action. They are alleging the product sold to them was faulty, resulting in a significant loss of information and an ongoing detrimental impact on profits.

As a precaution, sales of the Pute product have been halted and a product recall has been initiated for any Pute products sold in the last four months.

The finance director is keen to announce the companys financial results to the stock market earlier than last year and in order to facilitate this, he has asked if the audit could be completed in a shorter timescale. In addition, the company is intending to propose a final dividend once the financial statements are finalized. Little Angel Corporations finance director has informed the audit engagement partner that one of the companys non-executive directors (NED) has just resigned, and he has enquired if the partners at Ali & Babs partners can help Little Angel Corporation in recruiting a new NED.

Specifically, he has requested the engagement quality control reviewer, who was until last year the audit engagement partner on Little Angel Corporation, to assist the company in this recruitment.

Ali & Babs partners also provides taxation services for Little Angel Corporation in the form of tax return preparation along with some tax planning advice.

The finance director has recommended to the audit committee of Little Angel Corporation that this years audit fee should be based on the companys profit before tax. At todays date, 20% of last years audit fee is still outstanding and was due to be paid three months ago.

Required:

Describe FIVE audit risks, and explain the auditors response to each risk, in planning the audit of Little Angel Corporation. (20 marks)

Note: Prepare your answer using two columns headed Audit risk and Auditors response respectively.

QUESTION 2

NAK Consult Ltd is a construction company with many contracts being executed concurrently. A large number of workers are on various construction sites. NAK Consult Ltd has an internal audit department and the team is currently reviewing cash wages systems within the company. The following information is available concerning the wages systems:

Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can issue temporary numbers for new employees.

Any overtime is calculated by the computerized wages system and added to the standard pay.

The two staff in the wages department make amendments to the computerized wages system in respect of employee leave, illness, as well as setting up and maintaining all employee records.

The computerized wages system calculates deductions from gross pay, such as employee taxes (PAYE), and other statutory deductions.

Finally, a list of net cash payments for each employee is produced. Cash is delivered to the wages office by secure courier. The two staff place cash into wages envelopes for each employee along with a handwritten note of gross pay, deductions and net pay. The envelopes are given to the foreman for distribution to the individual employees.

Required:

Identify and explain FIVE deficiencies in NAK Consult Ltd system of internal control over the wages system that could lead to misstatements in the financial statements, and, for each deficiency, suggest an internal control to overcome that deficiency. (20 marks)

Note: Prepare your answer using two columns headed Control deficiency and Internal Control recommendation respectively.

QUESTION 3

The IFAC international Ethics Standards Board for Accountant (IESBA) Code of Ethics for Professional Accountants set out the five fundamental principles of professional ethics and provides a conceptual framework for applying those principles. Professional Accountants must apply this conceptual framework to identify threats to compliance with the principles, evaluate their significance and apply appropriate safeguards to eliminate or reduce them so that compliance is not compromised.

Required:

Explain FIVE major threats identified in the code of ethics giving ONE example of each. (10 marks)

QUESTION 4

a) ISA 230 Audit Documentation contains the following statement with regard to working papers:

Audit working papers refer to the material prepared by, or for, or obtained and retained by, the auditor in connection with the performance of the audit work. Such material may be in the form of paper or electronic media.

The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached in conducting an audit.

The working papers must be sufficiently complete and detailed to provide an overall understanding of the audit.

Required:

i. Describe THREE benefits that the auditors will obtain from working papers. (3 marks)

ii. Working papers are usually split into two separate files. List these files and give TWO types of information in each of the file. (2marks)

b) The audit engagement team of which you are a member, for the audit of God is Love Ltd has almost completed the audit of the financial statements for the year ended 31 December, 2020. You have been told that your firm will need to obtain a letter of representation from management as part of the audit evidence needed to form an opinion on the financial statement.

Required:

Describe FIVE ways AUDIT EVIDENCE can be gathered whencarrying out an audit. (5 marks)