Question Tag: Audit Procedures

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  • 20 Marks

AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

Tijara Nigeria Limited has a credit facility of N6 million with Godiya Bank. The facility was due to expire on December 31, 2021. The overdraft in the recently audited statement of financial position as at September 30, 2021 is N5.5 million. The directors of Tijara have started negotiations with their bankers for a renewal of the facility and to increase the amount to N9 million. To support this request, the bank has asked Tijara to provide a business plan for the coming twelve months consisting of a cash flow forecast supported by a forecast income statement and statement of financial position.

The management of Tijara has produced a cash flow forecast for the period October 1, 2021, to September 30, 2022, and, at the request of the bank, has asked an auditor to examine and report on it.

The Audit Manager, who has recently completed Tijara’s audit, has been asked to make a preliminary examination of the cash flow forecast and supporting materials. The manager has made the following observations:

  1. The cash flows from sales are based on the assumption of an overall increase in sales of 24% compared to the previous financial year. Analysis shows that this is based on an increase in selling price of 5% and an increase in the volume of sales of 18%. Just over a quarter of all Tijara sales are made to foreign customers.
  2. The cost of sales in the recently audited comprehensive income to September 30, 2021, was 80% of sales revenue, giving a gross profit of 20%. In the forecast income statement for the year to September 30, 2022, the cost of sales has fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up of equal proportions of materials, labor, and production overheads.
  3. The trade receivables collection period used in the cash flow forecast to September 30, 2022, is 61 days. In the year to September 30, 2021, this period averaged 93 days. Management has stated that it is its intention to inform all customers of a new standard 60-day credit period. In addition, an early settlement discount of 1% will apply to customers who settle their accounts within 30 days of the statement. Conversely, the credit period for trade payables has been extended from an average of 45 days in the current year to 90 days in the forecast.
  4. The cash flow forecast showed that the maximum credit required during the period would rise to nearly N9 million in August 2022.

Required:

a. Describe the general approach to the assurance work an auditor should consider before accepting the engagement of a reporting accountant on Prospective Financial Information (PFI) under ISAE 3400: The Examination of Prospective Financial Information. (8 Marks)

b. Detail the procedures applicable to the cash flow forecast of Tijara for the year to September 30, 2022. (7 Marks)

c. Prepare a summarized presentation of what the reporting accountant should consider in forming an opinion on prospective financial information (PFI). (5 Marks)

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  • 15 Marks

AAA – May 2023 – L3 – Q5 – Audit Completion and Final Review

Discuss reasons for reviewing predecessor auditor’s work, audit procedures for sufficient evidence, and actions for insufficient audit evidence.

Vigo Microfinance Bank Limited was incorporated on July 1, 2014, as a public limited company under the Companies and Allied Matters Act. The bank obtained a Microfinance banking license from the Central Bank on August 5, 2015, to operate on a nationwide basis and commenced business operation on September 5, 2015. The bank’s principal business is to provide microfinance banking and related services to the poor and underserved segment of society to alleviate poverty under the Microfinance Institutions Ordinance.

In 2019, the bank decided to convert to a commercial bank and commenced business operations on August 10, 2019, after final approval from the regulator. As of December 31, 2019, the bank had five branches (2016: 24) in the Federal Capital and four other major geopolitical zones in the country.

With the new commercial banking license, the bank employed the services of F.K. George Professional Services to audit its financial statements. As part of the activities to be carried out on the initial engagement, the external auditors began a review of the books of account of the predecessor auditor, and the following issues emerged:

  1. Some property, plant, and equipment in the books of account and prior year financial statements had negative net carrying amounts.
  2. The basis for impairment included in prior year financial statements regarding loans and advances could not be established from the working papers.
  3. A material amount of pre-operating expenses included in receivables schedules could not be satisfactorily explained.
  4. Audit work performed on interest income in the prior year was not supported by sufficient appropriate audit evidence.
  5. Details of outstanding tax liabilities could not be provided, as the amount in the financial statements was the figure supplied by the tax consultant, and not reviewed by the former external auditor.
  6. There was no satisfactory explanation for nil balances in prior year financial statements on contingent liabilities, as no evidence existed that requests for confirmation were made from solicitors of the bank.
  7. Details of contraventions included in the examiner’s report were not considered for disclosures in the financial statements.

The Central Bank is requesting the financial statements of the bank, and management is worried about delays in releasing the financial statements by the new external auditors despite several notifications and reminders.

The Chief Finance Officer of the bank complained to you, as a member of the engagement team, about the delay in concluding the audit. He argued that your firm should not be concerned about prior period financial statement issues, as your firm did not express an opinion on them. Furthermore, the responsibility for the financial statements lies with the board of directors.

Required:

(a) Discuss why your firm needs to carry out the above exercise. (3 Marks)

(b) Analyze the nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence. (8 Marks)

(c) Evaluate what your firm might likely do in case of inability to obtain sufficient appropriate audit evidence from the exercise. (4 Marks)

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  • 15 Marks

AAA – Nov 2016 – L3 – Q5 – Regulatory Framework and Professional Standards

Identify steps and procedural actions auditors take under ISA 250 to ensure compliance with laws and regulations.

In compliance with ISA 250 “Consideration of Laws and Regulations in an Audit of Financial Statements,” the auditor shall conduct the audit in a manner that gives them confidence that the client has met all legal requirements of the country in which it operates.

As the Audit Partner in charge of APB Manufacturing Plc, you are required to:

a. Identify and clarify SIX steps that ISA 250 requires of you in ascertaining that the company complies with all applicable laws and regulations. (9 Marks)
b. State and explain FOUR procedural actions you will take in the event that the company failed to comply, in material areas, with applicable laws and regulations. (6 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q4 – Audit Reporting

This question tests understanding of the primary purpose of audit working papers.

The primary purpose of audit working papers is to
A. Support the underlying concepts included in the preparations of the basic financial statements
B. Aid the auditors in adequately planning their work
C. Aid the auditors in adequately circularising the client’s debtors
D. Provide a point of reference for future audit engagements
E. Identify area of weaknesses so as to conduct extended substantive and compliance tests

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q13 – Audit Reporting

Determining the correct date to include on an audit report.

The auditor should always date the audit report on a date:

A. The financial statements were approved
B. After the directors have approved the financial statements
C. When the directors approved the audit work
D. The audit assignment was completed
E. The audit commenced

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q10 – Audit of Complex Transactions

Identifying irrelevant ledger accounts in a payroll journal review.

In order to review a payroll journal, the auditor is NOT likely to interface with which of the following ledger accounts?

A. Pay As You Earn
B. Pension
C. Staff loans
D. Current Assets
E. National Health Insurance

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Identifies going concern symptoms, audit procedures for evaluating going concern, and factors to assess continuation potential.

When a company is experiencing going concern problems, it may exhibit various financial and non-financial symptoms.

Required:

(a) State FIVE financial and FIVE non-financial going concern symptoms.
(5 Marks)

(b) State the audit procedures you would adopt as an auditor to determine whether a client company is experiencing going concern problems.
(6 Marks)

(c) What other factors would you consider in assessing if the company can continue despite the going concern issues?
(4 Marks)

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  • 1 Marks

AAA – Nov 2011 – L3 – SAII – Q18 – Review of Subsequent Events and Going Concern Assumptions

Definition of audit procedures for recording transactions in the correct period.

The audit procedures that ensure that transactions are recorded in the period to which they belong are known as…………………….

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  • 1 Marks

AAA – Nov 2011 – L3 – SAII – Q11 – Regulatory Framework and Professional Standards

Definition of audit procedure statements by accountancy bodies.

Statements by professional accountancy bodies stating the basic procedures to be adopted when conducting an audit assignment are called………………..

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  • 10 Marks

AA – Aug 2022 – L2 – Q4a – Completion Procedures and Reporting

Defines going concern and discusses the auditor's responsibilities and procedures in relation to going concern.

Pinto Ltd (Pinto) provides analytical services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.

The annual audit is nearly complete. As Audit Senior, you have reported to the Engagement Partner that Pinto is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where Pinto’s services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for Pinto, but a number of clients did not renew their contracts. A senior employee then left Pinto, stating lack of investment in new analysis machines thus increasing the risk of incorrect information being provided by the company.

A cash flow forecast prepared internally showed Pinto requiring significant additional cash within the next 12 months to maintain even the current level of services and operations. Pinto’s auditors have been asked to provide a negative assurance report on this forecast.

Required:
i) Define going concern and discuss the auditor’s responsibilities in respect of going concern.
(4 marks)

ii) State FIVE (5) audit procedures that may be carried out to determine whether or not Pinto is a going concern.
(6 marks)

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  • 10 Marks

AA – May 2021 – L2 – Q4a and b – Completion Procedures and Reporting

Discuss whether the financial statements require amendment and audit procedures to conclude on the amendment.

Fafa Ltd operates a chain of food wholesalers across the Volta Region of Ghana, and its year-end was 30 September, 2019. The final audit is nearly complete, and it is proposed that the financial statements and audit report will be signed on 13 December, 2019. Revenue for the year is GHS 79 million, and profit before taxation is GHS 8.5 million. The following event occurred after the year-end.

Receivable:
A customer of Fafa Ltd has been experiencing cash flow problems, and its year-end balance is GHS 0.8 million. The company has just become aware that its customer is experiencing significant going concern difficulties. Fafa Ltd believes that as the company has been trading for many years, they will receive some, if not full, payment from the customer, hence they have not adjusted the receivable balance.

Required:
i) Discuss whether the financial statements require amendment. (1 mark)

ii) Describe THREE (3) audit procedures that should be performed to form a conclusion on the amendment.

(3 marks)

b) Describe management’s responsibility for subsequent events occurring between:
i) The year-end date and the date the Auditor’s report is signed. (3 marks)
ii) The date the Auditor’s report is signed and the date the financial statements are issued. (3 marks)

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  • 10 Marks

AA – Nov 2021 – L2 – Q4a – Completion Procedures and Reporting

Discusses audit procedures for non-depreciation of buildings and the impact on the audit report if unresolved.

ou are an audit intern in Transparency & Associates, a firm of Chartered Accountants. This year, one of your new clients is Obuse Ltd, a company having net assets of GH¢20,000,000. The audit work has been completed, but there is one outstanding matter you are currently investigating; the directors have decided not to provide depreciation on buildings in the financial statements, although International Financial Reporting Standards suggest that depreciation should be provided. The estimated depreciation is GH¢500,000.

Required:
i) State FOUR (4) additional audit procedures and actions you should take in respect of the above matter.
(6 marks)

ii) What should be the impact on the audit report if the issue remains unresolved at the reporting stage of the audit?

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  • 3 Marks

AA – Nov 2021 – L2 – Q1c – Audit and Assurance Evidence

Explains three purposes of audit documentation in line with ISA 230.

Audit evidence may come in many forms. For instance, enquiries may be verbal, while confirmations may be in written form. Regardless of the form of audit evidence they obtain, auditors need to document their procedures. The process of documenting audit evidence is known as audit documentation.

Required:
Explain THREE (3) purposes of audit documentation in line with ISA 230: Audit Documentation.
(3 marks)

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  • 10 Marks

AA – May 2018 – L2 – Q3b – Audit and Assurance Risk Environment, Completion Procedures and Reporting

Explains the importance of professional skepticism and audit procedures for subsequent events in the audit process.

ii) Auditors are required to plan and perform an audit with professional skepticism, to exercise professional judgment, and to comply with ethical standards.

Required:
Explain what is meant by ‘professional skepticism’ and why it is so important that the auditor maintains professional skepticism throughout the audit. (5 marks)

b)
i) International Standard on Auditing (ISA) 560: Subsequent Events deals with the auditor’s responsibility towards events that occur after the reporting date and especially before the auditor’s report is issued.

Required:
Explain FIVE audit procedures to test subsequent events. (5 marks)

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  • 10 Marks

AA – May 2018 – L2 – Q3a – Planning and Approach for Audit and Assurance Engagements

Describes key audit procedures performed during the interim and final audit phases for large entities.

i) The external audit process for large entities generally involves two or more phases. One phase involves understanding the business and risk assessment, determining the response to assessed risk, testing of controls, and a limited amount of substantive procedures. This phase is sometimes known as the interim audit. Another phase involves further tests of controls and substantive procedures, as well as audit finalization procedures. This phase is sometimes known as the final audit.

Required:
Describe and explain the main audit procedures and processes that take place during the interim and final audit of a large entity. (10 marks)

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  • 25 Marks

AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

Damongo Ltd (Damongo) is a computer hardware specialist and has been trading for over ten years. Damongo is the only hardware specialist listed on the Ghana Stock Exchange within five years after incorporation.

The company is funded partly through overdrafts and loans and also by several large shareholders. The year-end is 31 December 2017. Damongo has experienced significant growth in previous years. However, in the current year, a new competitor, HardWare Specialist Co (HardWare), has entered the market and through competitive pricing has gained considerable market share from Damongo. One of Damongo’s large customers has stopped trading with them and has moved its business to HardWare. In addition, a number of Damongo’s specialist developers have left the company and joined HardWare. Damongo has found it difficult to replace these employees due to the level of their skills and knowledge. Damongo has just received notification that its main supplier who provides the company with specialist electrical equipment has ceased trading.

Damongo is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development, however, they declined to invest further in Damongo. Damongo’s loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed.

The directors have produced a cash flow forecast which shows a significantly worsening position in the coming 12 months. They are confident that the new products being developed is viable. Damongo has trading history of significant growth and they believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Damongo received notification from one of its customers that the hardware installed for the customers’ online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Damongo that they intend to take legal action against them for loss of earnings. Damongo has investigated the problem post year end and discovered that other work-in-progress is similarly affected and inventory should be written down. The Finance Director believes that as this misstatement was identified after the year end, it can be amended in the 2017 financial statements.

Required:
a) Describe THREE (3) procedures the auditors of Damongo Ltd should undertake in relation to the uncorrected inventory misstatement identified above.
(6 marks)

b) Explain FIVE (5) going concern potential indicators of Damongo Ltd.
(10 marks)

c) Identify SIX (6) going concern audit procedures which you should perform for Damongo Ltd.
(6 marks)

d) The auditors have been informed that Damongo’s bankers will not take a decision on the overdraft facility until after the audit report is completed. The directors have now agreed to include some going concern disclosures. Describe the impact on the audit report of Damongo Ltd if the auditor believes the company is a going concern but that this is subject to a material uncertainty.
(3 marks)

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  • 10 Marks

AA – May 2019 – L2 – Q1a – Responsibilities for the prevention and detection of fraud

Explains auditor’s responsibility regarding fraud detection and outlines audit procedures to detect fraud anomalies.

a) J.K. Asenso is a member of a team auditing the financial statement of Sascraku Co. Ltd for the year ended 31 December 2017. Shortly after the end of the audit, the media made an allegation of fraudulent activities with the aim of reducing tax liability against the company. A committee was appointed by Ghana Revenue Authority (GRA) to examine the books of the company to substantiate the allegations.

The committee discovered the following anomalies:

  • Diverting receipts to private bank accounts;
  • Stealing physical assets or intellectual property;
  • The entity paid for goods that had not been received;
  • Assets had been used for personal purposes.

The directors were not happy with the work of the auditors due to their inability to discover the above anomalies.

Required:
i) Explain the responsibility of the Auditor with respect to detection and prevention of fraud.
(5 marks)
ii) Outline the audit procedures that the auditors should have adopted to detect the above anomalies.
(5 marks)

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  • 7 Marks

AA – Nov 2018 – L2 – Q4b – Audit and Assurance Evidence

Explains audit procedures for verifying the valuation of land and buildings in the financial statements.

b. At a meeting to deliberate with management on the draft financial statement of E.T Company Ltd, the external auditors, Sampson Amarty and Co., a firm of Chartered Accountants, demanded that management should explain how an amount of GH¢200,000 for land and building in the financial statements had been arrived at. The Managing Director asked the Director of Finance to explain how the amount of GH¢200,000 was arrived at. The Director of Finance explained that the amount of GH¢200,000 was given to them by an external valuer, S.K. Valuation Experts.

Required:
Explain the audit procedures that would be adopted in verifying the land and building value in the financial statements. (7 marks)

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  • 10 Marks

AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

a) Aseye Ltd is in the manufacturing sector and its year-end is 30 September 2019. The final audit is nearly complete and it is proposed that the financial statements and audit report will be signed on 10 November 2019. Revenue for the year is GH¢80 million and profit before taxation is GH¢9 million. Subsequent to the year-end, a lawsuit was filed against Aseye Ltd. Below are the details of the lawsuit:

A key supplier of Aseye Ltd is suing the company for breach of contract. The lawsuit was filed on 10 October 2019, and the sum claimed by the supplier is GH¢2 million. This has been disclosed as a contingent liability in the notes to the financial statements; however, correspondence has just been received from the supplier indicating that they are willing to settle the case for a payment by Aseye Ltd of GH¢1 million. It is likely that the company will agree to this.

Required:
i) For the event above:

  • Discuss whether the financial statements require amendment. (2 marks)
  • Describe audit procedures that should be performed to enable the Auditor to draw a conclusion on the amendment. (2 marks)

ii) Describe the auditor’s responsibility for subsequent events occurring between:

  • The year-end date and the date the auditor’s report is signed. (3 marks)
  • The date the auditor’s report is signed and the date the financial statements are issued. (3 marks)

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