THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) ADVANCED AUDITING QUESTION PAPER NOVEMBER 2014

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1 QUESTION 1 THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) You are an audit senior at Chawe & Co, a five partner firm. Chawe & Co provides audit and advisory services and has gained a reputation in recent years for advising on the implementation and review of accounting and e-commerce systems for many non-audit clients. E-commerce systems are used by business to make sales to customers through the internet. You recently attended your first business event, as a representative of Chawe & Co, at the local Chamber of Commerce, an organization that provides support to businesses. The event included presentations on computer related crime within business, money laundering and the benefits of implementing e-commerce systems. After the presentations you met Mensah, the finance director, of Boafo Ltd, one of your firm s largest audit clients. He mentioned that, the managing director of a key supplier, Adom Ltd, was also at the event as she was interested in implementing an e-commerce system. Mensah suggested that he introduce you to his supplier with a view to your firm advising on that company s e- commerce implementations. She suggested that, should your firm put forward a cost-effective proposal, she may consider moving Adom Ltd s external audit to Chawe & Co. The conversation then moved to the topics of the other presentations. Mensah commented that his business had been a victim of computer crime during the past year. A disgruntled employee, ed a computer virus to employees within the company. The virus spread throughout the organization and corrupted some of the data within the sales system. Mensah thinks that most of the data files have been sufficiently cleaned but commented that he was not concerned as the forthcoming audit would identify what, if any, errors have arisen and provide advice to Boafo Ltd on steps to prevent such an incident happening again. As the event drew to a close, Mensah asked if you would phone him about the money laundering presentation. He said he had not appreciated the complexity of the legislation and wants to seek clarity on your firm s responsibilities. (a) Discuss the ethical issues raised, and any safeguards you consider appropriate, in respect of: (i) (ii) Your firm s audit of Boafo Ltd; and The potential advisory and audit work for Adom Ltd (7 marks)

2 Page 1 of 7 (b) Describe the impact of the computer crime, described by Mensah, on the audit procedures you would plan to undertake during your firm s audit of Boafo Ltd. (7 marks) (c) The Proceeds of Crime Act and Money Laundering Regulations identify accountants as having special responsibilities with respects to reporting suspicions of money laundering. Outline the responsibilities, contained in the above legislation, that apply to accountants and comment on how these reporting responsibilities potentially conflict with Ethical Guidance, International Standards on Auditing and Companies Act requirements relating to auditors. (6 marks) QUESTION 2 The directors of Baba Ltd have approached you with a view to your firm accepting appointments as its external auditor for the year ending 30 June Baba Ltd is a manufacturer of blank magnetic media such as CD-Roms and DVDs. The company has three factories located between 100 to 200 miles apart from each other in Ghana. The company s managing director, Mr. Baba has requested that your firm also performs the following services: (1) Preparation of the company s corporation tax return, and; (2) Assisting with the selection of a new computerized accounting package for the company. The company s current auditors have notified Mr. Baba that they will not be seeking reappointment at the company s forthcoming AGM. They have not given a specific reason for not seeking re-appointment, but Mr. Baba believes it is because they have recently taken on a new client which operates in the same sector as Baba Ltd, and is approximately three times the size of Baba Ltd. Mr. Baba has asked you to explain why this is such a big issue for the outgoing auditors, as he feels he has been let down by them at rather short notice. Your audit firm has partners located in three offices, all of which are located within 50 kilometres of each other. The firm s client base primarily consists of retailers, service industries and professional firms.

3 Page 2 of 7 (a) Identify the threats to objectivity that would arise by the provision of audit and non-audit services requested by the company, and describe what safeguards could be put in place to mitigate those threats. (8 marks) (b) You are to assume that you have already accepted appointment as external auditor and adviser to Baba Ltd. Identify, with reasons, which of the objectives of your firm s system of quality control are likely to be of particular relevance in your first year of appointment. (7 marks) (c) Draft notes in response to the above query raised by Mr. Baba concerning the outgoing auditors, including a description of the measures that could have been taken to enable them to act as auditors for both companies. (5 marks) QUESTION 3 You are planning the audit of Adeba Ltd for the year ended 31 December The principal activity of the company is the retailing and wholesaling of outdoor clothing, footwear and equipment. All goods are sold under the one of the company s two brands: The Star brand which targets the everyday consumer offering family orientated products at mid market prices; and The Bright brand which targets the specialist market for the serious outdoor consumer offering more technical clothing, footwear and equipment at a higher price. Adeba Ltd sources its products from suppliers based in Europe and, more recently China. The company sells its products through its own retail outlets and also wholesales to independent retailers. In February 2013, the company completed the implementation of a new dynamic warehouse management system. The implementation commenced in 2012 and was introduced in stages to avoid any disruption to the business.

4 Page 3 of 7 You are preparing for your planning meeting with the finance director and have obtained, in advance of the meeting, a copy of the draft financial statements for the year ended 31 December Following your preliminary review, you have identified the following extracts from the financial statements as matters of significance to discuss with management. Statement of Profit or Loss and other Comprehensive Income Years ended 31 December Draft Audited GH 000 GH 000 Revenue Own retail outlets 53,447 45,968 Wholesale 45,539 39,159 98,986 85,127 Cost of sales (46,518) (41,212) Gross profit 52,468 43,915 Operating expenses (46,233) (40,192) Profit from operations 6,235 3,723 Statement of financial position As at 31 December Draft Audited GH 000 GH 000 Current assets Inventories 16,087 14,742 Trade receivables 5,281 3,992 (wholesale business) Current liabilities Trade payables 7,021 5,792 (a) In respect of the information provided above, prepare planning notes on matters which you wish to discuss with management. Your notes should refer to the results of your analytical procedures.

5 (16 marks) Page 4 of 7 (b) As part of the completion stage of an audit, the auditor will carry out a review of the financial statements. State the conclusions that the auditor should be in a position to reach as a result of this review. (4 marks) QUESTION 4 Your firm has recently been appointed as the external auditor of Hope Ltd. Hope owns and operates holiday villages located in Ghana and Liberia, through two wholly-owned subsidiaries. All of the companies in the group prepare financial statements to 31 December each year. Your firm is the auditor of both the Parent Company and the Ghanaian Subsidiary (GS) but does not audit the financial statements of the Liberian Subsidiary. The Liberian Subsidiary is material to the group financial statements and the company is audited by a Liberian audit firm Momo & Co. Your firm plans to use the audit work of Momo & Co for the purposes of auditing the group s financial statements. You are the audit senior in charge of the audit of the financial statements of GS. Your manager is responsible for all audit work on the Liberian Subsidiary and has said you do not need to consider this aspect of the engagement. GS rents out cottages in each of its holiday villages via the internet. Customers pay a 25% deposit by debit or credit card at the time of booking and the balance is due eight weeks before the holiday commences. Customers may book their holiday up to a year in advance. Whilst reviewing the management accounts you noted that deposits taken up to that date were approximately 35% lower than when compared with the equivalent figure for the previous year. Each holiday village offers families a range of facilities including a swimming pool, children s play areas and a boating lake. Customers can eat at the restaurants available in each village or cater for themselves in their cottages. GS employs a core team of permanent staff throughout the year and additional temporary staff during the peak summer months. During the year ended 31 December 2012 (the previous year), GS undertook a programme of maintenance and refurbishment in each of its holiday villages. This included repairing and redecorating each of the cottages, re-equipping them with fixtures and fittings including new kitchens and bathrooms and building a new children s indoor play area in each village. As part of your work to familiarize yourself with GS s business, you have undertaken some research on the internet. You have found some recent press articles regarding a client who was hospitalized due to a serious infection resulting from contaminated swimming pool water.

6 Page 5 of 7 The Ghana Tourist Board has closed the swimming pool at the village in question and is undertaking a review of the procedures surrounding all of the GS swimming pools. The results of its investigation will not be known until after the financial statements are published. (a) Identify, from the information provided, the areas of audit risk in respect of the financial statements of the Ghanaian Subsidiary for the year ended 31 December For each risk: (i) (ii) List the factors which have led you to identify that area of audit risk; and Outline the procedures that should be included in the audit plan in order to address the risk. (14 marks) (b) Discuss the ethical and quality control issues that your firm should consider in relation to its plan to use the audit work of Momo & Co, and state any actions that should be taken. (6 marks) QUESTION 5 You are in charge of the audit of Plumb Ltd for the year ended 30 September The principal activity is the provision of plumbing and central heating services under fixed-price short-term contracts. The majority of the company s business is conducted on a sub-contract basis for construction companies many of which use Plumb Ltd on a regular basis. It is common practice in this industry sector for construction companies to pay 95% of the contract value on completion with 5% balance being retained by the customer for six months as security against problems with the work undertaken. Plumb Ltd also has retail outlets through which it sells consumables used in the plumbing trade. However, management is currently negotiating the sale of the retail operation and plans to use the proceeds to repay a loan falling due in February Following the disposal of the retail operation, Plumb Ltd continues to buy consumables used in its contract work from the existing suppliers but in smaller quantities.

7 Page 6 of 7 Plumb Ltd made an operating loss for the year ended 30 September This is mainly due to a substantial provision for rectification work relating to a contract for Build Ltd, one of Plumb Ltd s major customers. The contract was completed in early September 2014 but failed to meet the customer s specification. Furthermore, in October 2014, Plumb received notification that Build Ltd had lodged a claim against the company for substantial compensation for alleged damage to the customer s business. No provision has been made for this compensation as the directors of Plumb Ltd have instructed the company s legal advisors to fight the claim. The company is currently trading at its overdraft limit and the directors have been negotiating with the company s bankers in order to increase its borrowings. The directors have prepared profit and cash flow forecast for the three years ending 30 September 2017 in support of the request for funding. The company s bankers require this information to be reviewed by independent accountants and the board of directors has requested that your firm undertakes this review. (a) In relation to the audit of the financial statements, identify from the information provided above, the matters which give cause for concern and explain why they give cause for concern. (6 marks) (b) Identify the different types of audit report modification which may arise from a going concern problem and state the circumstances in which they are appropriate. (6 marks) (c) Identify from the information provided above, the specific matters you would consider when reviewing the assumptions underlying the income and expenditure included in the profit forecast and the receipts and payments included in the cash flow forecast. (8 marks)

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