- 10 Marks
AAA – May 2019 – L3 – Q5b – Reporting
Evaluate the implications of related party transactions and inventory misstatements for the audit report of a company
Question
You are the audit manager of Ashiyie Ltd, a private indigenous company that manufactures and retails furniture. Summary draft and audited results show the following:
| 2018 (Draft) | 2018 (Audited) | |
|---|---|---|
| Revenue (for the year to 30 June) | GH¢54.0m | GH¢51.6m |
| Profit before taxation (for the year to 30 June) | GH¢2.4m | GH¢1.8m |
| Total assets (as at 30 June) | GH¢37.2m | GH¢28.8m |
The following points should be considered in the drafting of the Audit Report.
i) Ashiyie Ltd leases one of its main retail facilities from a partnership controlled by its Chief Executive Officer (CEO). Your review of the lease indicates that it costs Ashiyie about GH¢60,000 more per annum than would normally be expected in an ‘arm’s length’ transaction. Ashiyie refuses to disclose this related-party transaction in the notes to the financial statements for the year ended 30 June 2018.
ii) Ashiyie has one small subsidiary in Rwanda. Restrictions on the repatriation of earnings from this country were introduced in July 2018 and remain in place. As a result, Ashiyie has decided to account for the subsidiary on an equity basis this year. You are satisfied as to the appropriateness of this change and it is fully disclosed in the financial statements.
iii) During the audit, you discovered that inventory valued approximately GH¢1.2 million had been excluded from the financial statements of the company. After discussing this with management, you are satisfied that it was an unintentional oversight. The error was corrected prior to the conclusion of the audit.
Required:
Evaluate the implications of matters (i), (ii), and (iii) for the Audit Report for the year ended 30 June 2018. (10 marks)
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