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As an Audit Manager in a big audit firm in Nigeria, you were opportuned to attend a conference on Professional Ethics and Anti-Money Laundering in New York. On your return, one of the audit seniors went through the presentations and asked questions on some of the statements she noted in the presentations.
You are required to explain the following statements to her:
a. A good Auditor is an independent auditor. (5 Marks)
b. The Accountant’s normal professional duty of confidentiality to clients is not an adequate defence where money laundering is involved. (5 Marks)
c. Specific obligations for detecting and reporting suspicions of money laundering are placed on professional firms. (5 Marks)
d. A firm might act for two clients that are in direct competition with each other where there are acceptable safeguards. (5 Marks)
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The auditors of Sunsit Manufacturers Limited had disagreements with the company on various issues. This came to a climax with the withholding of a part of the payment of the last audit fees. The auditors had also been disenchanted with the undue pressures of management and have decided that, as a result of this and the withheld fees, they would disengage from the client.
The company’s chairman, in consideration of past issues, has considered the size of the audit firm as being partly responsible for its inability to manage adequately the pressures from the company’s accounting and management team. He has subsequently approached your firm for a change, and the partners have accepted the engagement despite the predecessor auditor’s declaration of the forfeiture of the firm’s outstanding fees and no further involvement with the client and issues relating to the company.
Required:
a. Following the background to the client and the engagement, evaluate the internal and external business risks that need to be considered with respect to the client. (10 Marks)
b. Discuss the pre-engagement activities to be carried on the client. (10 Marks)
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Which ONE of these services may not be appropriate for an audit firm?
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The following scenarios may threaten compliance with fundamental principles in auditing:
i. The audit supervisor is married to the daughter of the Managing Director of the client company;
ii. The audit firm’s Senior Partner holds shares in the client company;
iii. The assurance firm also provides valuation services, internal audit services, and taxation services to an assurance client;
iv. The assurance firm earns more than 50% of its annual revenue from one assurance client; and
v. The firm obtained motor vehicle financing from a client bank for its staff.
Required:
a. Explain why compliance with fundamental principles in auditing may be threatened in each of the above FIVE circumstances. (10 Marks)
b. Explain FIVE ethical requirements that would reduce or mitigate the threats to compliance with the fundamental principles in the above FIVE circumstances. (10 Marks)
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ROC Company Plc. manufactures aluminium (stainless) household equipment. Its plant is located by Alobe river, which is the source of water for the community. The company currently has the largest share of the market on the West African Coast and plans to expand its operations to East African and South African markets.
At the 26th Annual General Meeting (AGM), shareholders approved the appointment of Adeola & Partners as External Auditors to the company. The Managing Partner of Adeola & Partners, Sir Segun Adeola, is a nephew of the Managing Director of ROC Company Plc. The appointment of Adeola & Partners as External Auditors to ROC Company was facilitated by the Managing Director, who did not disclose his relationship with Sir Segun Adeola to the company’s board.
At a recent board meeting, the Managing Director of ROC expressed concern that so much resources were expended towards satisfying the interest of the community at the expense of the company’s shareholders. According to him, shareholders are the primary stakeholders of the company, and their interest should be given the highest priority. He further opined that although other stakeholders are important to the company but only to the extent that ROC needs them. Consequently, the board resolved that henceforth, the company should not spend more than 0.5% of its Profit After Tax (PAT) on other stakeholders.
At the peak of the company’s production cycle, one of its underground waste tanks ruptured, and a large quantity of chemical waste leaked into Alobe river. This led to the destruction of aquatic life and contamination of neighbouring farmlands. This catastrophic event devastated the community as many farmers and fishermen lost their sources of livelihood. The community’s major source of drinking water was also contaminated.
The leadership of Alobe River Community Association approached the management of ROC Company Plc. and requested them to pay huge sums as compensation to the affected people and also to construct ten bore holes for the community. The management, however, informed the community leaders that based on the resolution of their board, expenditure on the issue would be limited to only 0.5% of profit after tax at the end of the year, which was projected to be far less than the amount of compensation demanded by the community. As a result, all discussions with the leadership of the community broke down.
The youths of the community responded with a sit-in protest, leading to a blockade of the company’s gate and disruption of its operations. The board of the company is now seeking immediate and amicable resolution of this problem.
While this was going on, the company suffered a major fire outbreak in its second factory, destroying its main furnace, machines and a large quantity of its finished goods. Some of the workers were severely burnt while attempting to put out the fire at the factory’s major warehouse. This event culminated in production shutdown at the second factory and temporary disengagement of several skilled workers as well as some casual staff. Fortunately, the company is covered by comprehensive fire and workers compensation insurance policies with Nagode Risk and Life Assurance Plc.
Required:
a. As a Strategic Risk Consultant of ROC Company Plc. you are to evaluate the adequacy of the risk management processes, including its information and communication systems. (8 Marks)
b. Evaluate the company’s residual risks in contrast to the management’s risk appetite. (7 Marks)
c. Using the stakeholders theory, evaluate the Managing Director’s position. Are there other stakeholders important to the company? (9 Marks)
d. Identify and discuss the ethical issues involved in the scenario described above. (6 Marks)
Answer:
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The ICAN Professional Code of Conduct and Guide for Members gives a list of threats to auditors’ independence, which may impair integrity, objectivity, or the good reputation of the profession.
Required:
Explain the following threats and give TWO examples each of circumstances that may lead to the threats:
a. Self-Interest (3 Marks)
b. Self-Review (3 Marks)
c. Advocacy (3 Marks)
d. Familiarity (3 Marks)
e. Intimidation (3 Marks)
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Wakaso Nigeria Limited has experienced serious labour turnover which has affected the business of the company in the last twelve months. The most frustrating issue was the resignation of a well-tested Financial Controller of the company close to year-end. Wakaso management is noted for timely financial reporting and rendering of tax returns due to the efficiency and effectiveness of the Financial Controller who was also involved in the preparation of tax computations. The company has been finding it difficult to quickly recruit a new Financial Controller that will match the technical ability of the former accountant. The Managing Director of the company has invited the company’s external auditors to a meeting, intimating them of the plan to employ their services to complete the write-up of the books of accounts and management account pending when they employ a good chartered accountant to handle the financial operations of the company.
The company’s management, in order to ensure timely reporting, has also informed the auditors that to save time and meet cost of operations, the firm’s staff will be accommodated in a five-star hotel with a mouth-watering offer of payment in lieu of feeding as recommended by the audit partner. In addition, the previous year’s audit fee will be doubled and an additional twenty percent payment made if the management accounts and audit work could be completed within three weeks.
The partner of the firm has rejected the offers on the grounds of possible threat to independence. The Managing Director complained to you, as his brother, lamenting that accountants are not good businessmen and uncooperative.
Required:
Discuss the following:
a. Meaning of threats to independence (2 Marks)
b. In relation to independence of auditors:
i. Fees and pricing (4 Marks)
ii. Financial interest (4 Marks)
iii. Contingent fees (2 Marks)
iv. Family and personal relationship (4 Marks)
c. The reasons why the preparation of accounting records and management accounts constitutes a threat to the independence of the auditors. (4 Marks)
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Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing Nigeria Plc. There have been some regulatory and compliance issues for which the company was sanctioned and paid penalties to the Financial Reporting Council of Nigeria.
At the board of directors meeting to consider the last annual report audited by the firm, some of the previous problems caused by the auditors were raised and discussed. Following the reoccurrence of such issues, it was proposed that another audit firm be engaged in addition to the present firm.
To achieve their objective, a bigger firm that has international affiliation was considered to take a leading role in a joint audit arrangement and to ensure appropriate compliance. Your firm has been approached for the appointment. A meeting was scheduled between your firm, Chukwuemeka & Co., and the executive management of GED Manufacturing Nigeria Plc.
After the meeting, your firm was subsequently appointed, and the necessary formalities were properly followed. Your partner has directed that you liaise with Chukwuemeka & Co. to obtain the necessary materials for the preparation of the audit and that you review the prior year working papers to understand the issues. Your assessment of the documents obtained from the other auditor revealed the following, amongst others:
(i) The work done on the process of dispatch of goods and invoicing was not considered sufficient and appropriate.
(ii) The IT operations of the company had weak controls such that it was possible for some staff to override some of the existing controls.
Required:
a. Explain the risks inherent in the dispatch of goods and invoicing. (10 Marks)
b. Discuss the control objectives and principal controls that are relevant to the process of dispatch of goods and invoicing. (10 Marks)
c. Explain the limitations of a joint audit. (5 Marks)
d. Discuss the benefits of audit carried out by an internationally affiliated audit firm. (10 Marks)
e. Explain briefly the importance of audit working papers. (5 Marks)
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Cringe Professional Services has been auditing Kogberegbe Limited for about 20 years. Being a limited liability company, no regulation imposed restriction on the tenure of the auditors.
The firm also provides taxation and valuation services for the company. The company has just adopted International Financial Reporting Standards and has employed the services of Cringe Professional Services for conversion services from local GAAP. The firm experienced a high staff turnover in the year and has no choice but to include the daughter of the Managing Director of the company as part of the engagement team, although as a support staff.
Management has indicated in confidence that the audit fee for the year will not be increased, except the firm can guarantee them that no adverse management letter will be issued and no loss will be made by the company as they are planning to go to the capital market to raise capital for expansion. With poor management letter and loss position, they believe that it will be difficult to achieve this.
At the end of the audit exercise, the company made a huge profit even with unfavorable economic climate, thanks to challenges associated with COVID-19. There was public outcry because it was believed that the financial statements of the company were misstated, and the auditor was accused of negligence. This necessitated the Financial Reporting Council to conduct an investigation on the company. It was found that the company restructured its debt portfolio, which was denominated in foreign currency with attendant foreign exchange risks to Naira.
The company restructured a huge intercompany loan to a 7-year principal payment holiday with principal repayment commencing September 30, 2025. The interest on the loan for the period was not brought into the books of account.
The company accrued for a NGN70.60m benefit from a transaction in 2019 from operating fees. This has been treated as income in the financial statements.
There were identified defaults by the company in relation to the payment of interests and principal on its outstanding loans and borrowings.
There were adverse ratios in the company’s financial performance ratios in the year due to interest on borrowings from financial institutions and related parties.
A revisit of the operating performance for the year revealed the following:
The Financial Reporting Council concluded that there were threats to the auditors’ independence, hence the professional firm was penalized for that.
A concerned staff of the company asks you of the implications of the issues raised by the Financial Reporting Council.
Required:
a. Identify and explain the threats to independence of the auditor in the above scenario. (7 Marks)
b. Discuss circumstances that could give rise to threats to independence. (7 Marks)
c. Suggest appropriate safeguards which could be put in place to mitigate the identified threats. (6 Marks)
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b) The Institute of Chartered Accountants (Ghana) is organizing a continuous professional development program on the code of conduct for members and other relevant issues pertaining to audit. You are the audit partner of Lankai and Co, a firm of Chartered Accountants, and you are to present a paper on the independence of the auditor and the inherent limitations of auditing.
Required:
i) Explain TWO (2) advantages of independent audit.
(3 marks)
ii) The phrase “the auditor must be seen to be independent both in fact and appearance.”
(3 marks)
iii) Inherent limitations of audit.
(4 marks)
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The Finance Director of the Company informed the audit partner that the reason for appointing Add Consult as auditors was because they audit other similar companies, including the Company’s main competitor. The Finance Director doubts how Add Consult keeps information (obtained during the audit) confidential.
Required:
Explain the safeguards which your firm should implement to ensure that this conflict of interest is properly managed. (5 marks)
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b)
i. Yaw Manu is a Chartered Accountant who has been appointed as an auditor of Level Ltd at the annual general meeting of the company in December 2009, which assignment Yaw Manu accepted. In April 2010, Yaw Manu joined Kwaku Assenso, also a Chartered Accountant, who is the Finance Manager of Level Ltd, as a partner.
Required:
Discuss the ethical issues raised in the above scenario. (5 marks)
ii. You are the auditor of S.K Ltd. While conducting the audit of the company for the year ended 31 December 2017, you wanted to refer to the minutes book, but the Board of Directors refused to give these books to you.
Required:
Discuss the implications of the directors’ action. (5 marks)
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External Auditors. This happens to be the first client of Agassi. The books of account for Sampras were incomplete, and Agassi agreed to prepare the financial statements for the year-end 31 December 2021.
The Accountant of Sampras doubles as the Sales Manager, and Agassi agreed to second one of its staff to assist the Accountant in Sampras. The business relationship between Agassi and Sampras has started on a good note, and they intend to continue into the foreseeable future. The Managing Director of Sampras worked as a Partner of one of the Big 4 audit firms.
Required:
Identify, evaluate, and address threats faced by Agassi. (10 marks)
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Abansro Corporation is a publicly traded company in the manufacturing industry. The company is yet to appoint an auditor to replace its previous auditor. A member of the board of Abansro Corporation, who is also a friend of the owners of an audit firm, referred the audit firm to Abansro Corporation. The board approved the appointment of the audit firm without considering the potential audit risks associated with the referral.
The audit firm conducted the audit for the year 2022, and the audit opinion issued was unqualified. However, in the course of 2023, it was discovered that there were material misstatements in the financial statements that were not detected by the audit firm. These misstatements resulted in a significant loss for the company and its shareholders.
As a result, Abansro Corporation faced legal action from its shareholders for the losses incurred due to the misstatements. The audit firm was also held liable for negligence and breach of professional duty.
Required:
i) Describe THREE (3) audit risks for a board member referring his friend who is the owner of an audit firm to be appointed by Abansro Corporation. (6 marks)
ii) What measures should have been undertaken by the Auditors to mitigate the issues associated with this engagement? (4 marks)
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In 2018, the Bank of Ghana (BoG) revoked the licenses of five struggling banks in Ghana and merged them to form a new bank. Following the merger, the BoG appointed an external auditor for the new bank, as the previous auditors of the merged banks were no longer able to continue in their roles.
However, in 2019, the BoG terminated the appointment of the external auditor for the new bank due to concerns about the independence and competence of the auditor. As a result, the BoG appointed new external auditors for the bank.
Required:
i) Discuss THREE (3) circumstances under which BoG may appoint an auditor to audit the financial statements of a bank. (5 marks)
ii) Discuss THREE (3) circumstances under which BoG may terminate the appointment of an auditor to audit the financial statements of a bank. (5 marks)
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Mr. Odorkor Asare is a partner of Fobes Chartered Accountants, an auditing firm. Mr. Asare was informed by the other partners to take a “compulsory leave” because he was in breach of the firm’s independence rules as his wife was the Finance Director of Millenium Insurance (an audit client). He was to resume after completion of the audit. Mr. Asare was disturbed by this notice even though he was not the reporting partner.
Required:
Discuss the stance taken by the other partners of the firm and its effect on the objectivity of Fobes Chartered Accountants.
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You are the Audit Manager at Ndaa & Associates whose client portfolio includes ABC Credit Plc, a listed financial institution offering loans and credit facilities to both commercial and retail customers. You have received an email from the Audit Supervisor who is currently supervising interim testing on systems and controls in relation to the audit of ABC Credit Plc for the year ending 31 October 2022. The email gives the following details for your consideration:
Required:
Assess the ethical and professional implications of the issues raised in respect of the audit of ABC Credit Plc and recommend actions to be taken in each case by the audit firm.
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You have been recently promoted as the Ethics Partner in Famous Chartered Accountants, a licensed audit firm. At your first visit to the Managing Partner, he informs you of an appointment by Phobia Foods Ltd (PFL), and gives you a file to go through. You open the file and find a copy of an e-mail from the Managing Director of PFL, extracts which read as follows:
From: Managing Director, Phobia Foods Ltd.
To: Managing Partner, Famous Chartered Accountants
Subject: Evaluation of Business Expansion Plan and Associated Items
Congratulations on your offer of appointment as auditor cum advisor of our company. As discussed in our earlier meeting, Phobia Foods Ltd (PFL) would like to open three more outlets, two in Sunyani and one in Sogakope. The necessary financing will be obtained through a new bank loan and the rescheduling of the payments of the existing loan, which is technically in default.
Your appointment and fees
Your audit fee will be GH¢16,000 for the year ended 30 June 2018.Your fee for evaluation of our expansion plan and advisory services in relation to obtaining a bank loan will be GH¢9,000. For advisory services and business efficiency and strategic decisions, your fee will be GH¢3,400 per month for the next two years.
Shareholders and key management issues
Five founding directors, each with equal shares, incorporated PFL which commenced trading in 2009. I still maintain my original 20% holding.
Audit and accounts 2016-2018
Ofosu-Mensah & Associates., a firm of licensed auditors audited the accounts for the years ended 30 June 2016 to 30 June 2018 inclusive. The audit of PFL for the year ended 30 June 2018 was signed off on 16 November 2018 with an unqualified opinion, notwithstanding that qualified opinions had been published on the previous two years’ accounts. The shareholders of PFL approved your firm’s appointment at the annual general meeting held on 15 April 2019 for the year ended 30 June 2019.
The funds raised by the new bank loan will be used for expansion of the business. Your firm is also expected to advise the company on the application for the new bank loan and the rescheduling of repayments of the existing loan in default.
Yours sincerely,
Managing Director.
Required:
Evaluate FIVE (5) risk considerations and issues for Famous Chartered Accountants that should be identified prior to accepting this engagement. (10 marks)
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You are an Audit Manager in the firm Taiplan Chartered Accountants, a firm in public practice registered with the Institute of Chartered Accountants (Ghana) (ICAG). Bank of Ghana (BOG) has appointed your firm to investigate reasons for the failure of DC Microfinance Limited (DCM) and your investigation has revealed the following as some of the reasons for the failure:
i) The board of directors of the company is made up only of Mr. and Mrs. David Commodore;
ii) The failure of the Bank of Ghana to examine or detect the non-submission of the fidelity returns submitted to it by the company and monitor the company adequately;
iii) The auditors have been the auditors of the company since its incorporation over ten years ago;
iv) The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company. This is partly due to the fact that the consulting arm of the audit firm has been performing all the consultancy work needed by the company since its incorporation and particularly at the time of its application for the microfinance operating permit from BOG.
Required:
For points (i) to (iv) above, state for each point, and show what would contribute to the failure of the company and make ONE recommendation to ensure that this would not re-occur in DCM or any other microfinance company in Ghana. (12 marks)
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