Communication with Governance

AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

Question

Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy, which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, further plunging the company and the industry into a downward slide in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism, and insecurity have also affected the operations of major international oil companies, which are the entity’s major customers. As a result of the above, the company recorded the following in its books of account:

Financial losses: The company has made consistent losses from the financial year ended December 31, 2017, to date.
Current liability position: The company’s current liabilities exceeded its current assets.
Negative net operating cash position: The company has maintained a negative net operating cash position from December 31, 2017, to date.

Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.

The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 – 45%) of the total current liability balance. The borrowings stood at N1.5 billion, N1.6 billion, and N2 billion for the financial years ended December 31, 2019, 2020, and 2021, respectively. The finance costs in relation to the borrowings stood at N230 million in the year ended December 31, 2021 (2020- N214 million).

The company has currently defaulted on a number of its contractual obligations with its directors, and there was no directors’ remuneration in the current year due to its continuous loss-making position.

At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company. To pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed of. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors and annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters.

After the meeting with management, you have started the preparation for the year-end audit, and in compliance with regulatory requirements and auditing standards, a Key Audit Matter should be inserted on the opinion page.

Required:

(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)

(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)

(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)

(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)

Answer

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Tags: Audit opinion, Communication with Governance, ISA 701, Key Audit Matters, Risk Assessment
Level: Level 3

Topic: Audit Reporting

AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance

Evaluate auditor's objectives under ISA 250, internal control deficiencies, and communication requirements for audit strategy.

Question

Eat Well Bakeries is a private limited liability company. It bakes bread and other confectioneries, produced from the main bakery and a smaller bakery in another part of town. Products are sold from these two bakeries and five additional outlets in the same town. Distributors purchase products outright and bear the risk of sale.

The main administrative and management functions of the bakeries are conducted from the main bakery, while basic records are kept at the small bakery and sales outlets. These records are transmitted to the main office every morning. Detailed accounting records and performance analysis are handled in the main administrative office.

Despite being a private business, the chairman insists on maintaining proper standards to stay competitive. The chairman transferred the company’s audit to your firm after a discussion with your partner, and professional clearance was obtained. However, limited documentation from the predecessor auditor was available, and no extensive documentation was done at the beginning of the audit.

You have been assigned to continue the audit from where it was left off, ensuring the chairman’s expectations are met.

Required:

a. Evaluate the Auditor’s objective concerning ISA 250 that would be discussed with the chairman. (5 Marks)

b. Prepare an outline of matters that should be communicated. (5 Marks)

c. Your review shows internal control challenges. Based on this, prepare a brief on:

i. The meaning of deficiency as per ISA 265 (3 Marks)
ii. The components to be included in communication to the chairman regarding deficiencies (5 Marks)

d. Evaluate potential audit strategies, and recommend an appropriate model for application to Eat Well Bakeries. (12 Marks)

Answer

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Tags: Audit Objectives, Audit strategy, Communication with Governance, Deficiency Reporting, Internal Control, ISA 250, ISA 265, Risk Assessment
Level: Level 3

Topic: Overview of Advanced Audit and Assurance

AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

Question

ISA 706 (Revised): Emphasis of Matter Paragraphs and Other Matter(s) paragraphs in the Independent Auditor’s Report requires that an auditor’s report may include an “emphasis of matter” paragraph and/or an “other matter” paragraph.

Required:
Distinguish between Emphasis of Matter and Other Matter paragraphs, showing clearly requirements of Audit Report and communication with those charged with governance.

Answer

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Tags: Audit report, Communication with Governance, Emphasis of Matter, ISA 706, Other Matter
Level: Level 2

Topic: Completion Procedures and Reporting
Series: AUG 2022

AAA – July 2023 – L3 – Q3 – The audit approach | Audit evidence | Reporting

Evaluate quality control issues and their implications for audit completion, including actions to be taken.

Question

The audit of Nkwa Ltd’s financial statements for the year ended 30 November 2022 is nearing completion, and the auditor’s report is due to be signed next week. Nkwa Ltd manufactures parts and components for the aviation industry. You are conducting an engagement quality control review on the audit of Nkwa Ltd, which is a listed entity and a significant new client of your firm. The draft financial statements recognize revenue of GH¢8.7 million, assets of GH¢15.2 million, and profit before tax of GH¢1.8 million.

You have identified the following issues as a result of your review:

a) The planned audit approach to trade payables was to place reliance on purchasing controls and keep substantive tests to a minimum. During control testing on trade payables, from a random statistical sample, the audit team identified three purchase orders that had not been authorized by the procurement manager. On review of the supporting documentation, the audit team concluded that the items were legitimate business purchases and therefore decided that no additional procedures were required. (4 marks)

b) Following a review of petty cash transactions, the audit assistant identified that the petty cashier paid for taxi fares for personal, non-business journeys with a total value of GH¢175. Following discussions with the Audit Assistant, you have ascertained that he did not report the matter as the amount is immaterial. The audit assistant also commented that the petty cashier is his brother, and that he did not want to get him into trouble. (6 marks)

c) Cut-off testing on revenue has identified two goods despatch notes, dated 2 December 2022, for items sent to Chinn Co, with a combined sales value of GH¢17,880, which had been included in revenue for the year ended 30 November 2022. The client’s financial controller, David Mount, has explained that Chinn Co does not order on a regular basis from Nkwa Ltd. In the absence of a regular payment history with Chinn Co, and in order to minimize the receivables collection period from this particular customer, the sales invoice was raised and sent to the customer on the same day that the sales order was received. The average time period between the receipt of an order and despatching the goods to the customer is approximately one to two weeks. The audit working papers have concluded that no further investigation is necessary. (6 marks)

d) The Finance Director, Leslie Gray, has not completed the tax computation for the year ended 30 November 2022. He has recently asked the audit assistant to compute the company’s tax payable for the year on the basis that as a newly qualified chartered accountant, the audit assistant was more up to date with recent changes in tax legislation. (4 marks)

Required:
Evaluate the quality control issues and the implications for the completion of the audit, including any further actions that should be taken by your audit firm. Your answer should include the matters to be communicated to management and those charged with governance in relation to the audit of Nkwa Ltd.

Answer

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Tags: Audit Completion, Audit evidence, Communication with Governance, Quality control
Level: Level 3

Topic: Audit evidence, Reporting, The audit approach
Series: JULY 2023

AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

Question

Financial losses: The company has made consistent losses from the financial year ended December 31, 2017, to date.
Current liability position: The company’s current liabilities exceeded its current assets.
Negative net operating cash position: The company has maintained a negative net operating cash position from December 31, 2017, to date.

Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.

Required:

(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)

(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)

(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)

(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit opinion, Communication with Governance, ISA 701, Key Audit Matters, Risk Assessment
Level: Level 3

Topic: Audit Reporting

AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance

Evaluate auditor's objectives under ISA 250, internal control deficiencies, and communication requirements for audit strategy.

Question

You have been assigned to continue the audit from where it was left off, ensuring the chairman’s expectations are met.

Required:

a. Evaluate the Auditor’s objective concerning ISA 250 that would be discussed with the chairman. (5 Marks)

b. Prepare an outline of matters that should be communicated. (5 Marks)

c. Your review shows internal control challenges. Based on this, prepare a brief on:

i. The meaning of deficiency as per ISA 265 (3 Marks)
ii. The components to be included in communication to the chairman regarding deficiencies (5 Marks)

d. Evaluate potential audit strategies, and recommend an appropriate model for application to Eat Well Bakeries. (12 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Objectives, Audit strategy, Communication with Governance, Deficiency Reporting, Internal Control, ISA 250, ISA 265, Risk Assessment
Level: Level 3

Topic: Overview of Advanced Audit and Assurance

AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

Question

Required:
Distinguish between Emphasis of Matter and Other Matter paragraphs, showing clearly requirements of Audit Report and communication with those charged with governance.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit report, Communication with Governance, Emphasis of Matter, ISA 706, Other Matter
Level: Level 2

Topic: Completion Procedures and Reporting
Series: AUG 2022

AAA – July 2023 – L3 – Q3 – The audit approach | Audit evidence | Reporting

Evaluate quality control issues and their implications for audit completion, including actions to be taken.

Question

You have identified the following issues as a result of your review:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Completion, Audit evidence, Communication with Governance, Quality control
Level: Level 3

Topic: Audit evidence, Reporting, The audit approach
Series: JULY 2023

Question Tag: Communication with Governance

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AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance

Evaluate auditor's objectives under ISA 250, internal control deficiencies, and communication requirements for audit strategy.

AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

AAA – July 2023 – L3 – Q3 – The audit approach | Audit evidence | Reporting

Evaluate quality control issues and their implications for audit completion, including actions to be taken.

AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance

Evaluate auditor's objectives under ISA 250, internal control deficiencies, and communication requirements for audit strategy.

AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

AAA – July 2023 – L3 – Q3 – The audit approach | Audit evidence | Reporting

Evaluate quality control issues and their implications for audit completion, including actions to be taken.

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Question Tag: Communication with Governance

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AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

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AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance

Evaluate auditor's objectives under ISA 250, internal control deficiencies, and communication requirements for audit strategy.

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AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

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AAA – July 2023 – L3 – Q3 – The audit approach | Audit evidence | Reporting

Evaluate quality control issues and their implications for audit completion, including actions to be taken.

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AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

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AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance

Evaluate auditor's objectives under ISA 250, internal control deficiencies, and communication requirements for audit strategy.

You're reporting an error for "AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance"

AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

You're reporting an error for "AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting"

AAA – July 2023 – L3 – Q3 – The audit approach | Audit evidence | Reporting

Evaluate quality control issues and their implications for audit completion, including actions to be taken.

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