Question Tag: Material Misstatement

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AAA – Nov 2024 – L3 – Q3a – Auditor’s Responsibilities Relating to Other Information

Explain the auditor’s responsibilities regarding other information in an entity’s annual report and identify issues in the Chairman’s statement.

Question

a) In line with ISA 720: (Revised) The Auditor’s Responsibilities Relating to Other Information, explain the auditor’s responsibilities in relation to the other information presented with the audited financial statements and comment on the matters arising from the extract from the Chairman’s statement.

Answer

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Tags: Audit report, Chairman’s Statement, Financial Statements, ISA 720, Material Misstatement, Other Information, Regulatory Compliance
Level: Level 3

Topic: Auditor’s Responsibilities Relating to Other Information
Series: Nov 2024

AA – Nov 2024 – L2 – Q4b – Audit Report and Basis for Opinion

Justify the audit report type and draft the basis for the opinion section.

Question

You are part of the audit team auditing a client in the retail business. During your risk assessment procedures, you were informed by management that accounts receivable records in one of the company’s branches were destroyed in a fire. The company is in the process of obtaining these accounts receivable records but was not able to do so prior to the approval of the financial statements. The fire incident happened on 31 December 2023 and the estimated amount involved is GH¢20 million. The audit team assessed that they are unable to obtain sufficient appropriate audit evidence due to inadequate accounting records. Possible effects are deemed material but not pervasive.

Required:
i) Justify the type of audit report to be issued in the above scenario.

ii) Draft the basis for the above opinion section of the auditor’s report.

Answer

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Tags: Audit report, Basis for Opinion, Financial Reporting, Material Misstatement, Qualified Opinion, Sufficient Audit Evidence
Level: Level 2

Topic: Completion Procedures and Reporting
Series: Nov 2024

AAA – Nov 2012 – L3 – AII – Q2 – Overview of Advanced Audit and Assurance

Defines an unintentional mistake in the accounting process resulting in material misstatement.

Question

An unintentional mistake is ……………committed by anyone in the accounting process which results in material misstatement.

Answer

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Tags: Accounting Process, Errors, Financial Reporting, Material Misstatement, Misstatement
Level: Level 3

Topic: Overview of Advanced Audit and Assurance
Series: NOV 2012

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

Question

You are the Group Engagement Partner on the audit of the consolidated financial statements of GoodLife Investment Plc for the year ended 31 December 2017. GoodLife Investment Plc is a group of companies with subsidiaries in various countries across Africa. Based on the relative size of the components in terms of revenue, profit before tax, total assets, total liabilities, and net assets, you have identified some of the subsidiaries as significant components.

Component materiality has been determined as N22 million. In addition, from your preliminary risk assessment, you have identified some components that are likely to contain significant risk of material misstatements in the group financial statements. You plan to request component auditors to perform work on the financial information of the following components as at 31 December 2017.

Component ID	Component Name	Component Auditor	Country	Classification of Component	Likely Significant Risks of Material Misstatement
GIP	Goodlife Investment Plc	JPM & Co. (Chartered Accountants)	Nigeria	Significant component	– Fraudulent revenue recognition
					– Credit risk (allowance for loan impairment and impairment of other financial assets)
					– Valuation of financial instruments
GISAL	Goodlife Investments South Africa Limited	QSS Audit (Chartered Accountants)	South Africa	Significant component
GIL	Goodlife Insurance Limited	JPM & Co. (Chartered Accountants)	Nigeria	Insignificant component	– Valuation of insurance liabilities
GPRS	Goodlife Properties & Real Estate Services	Adibe & Co. (Chartered Accountants)	Nigeria	Significant component
GSL	Goodlife Stores Limited	Kwesi & Co. (Chartered Accountants)	Ghana	Insignificant component

Required:

a. Identify four factors that need to be considered by the group auditor in determining the use of component auditors to work on the financial information of these components. (4 Marks)

b. Discuss three principles to be applied when determining the type of work to be performed on each of the components above. (Link specific consideration to relevant components as shown above). (9 Marks)

c. List four contents of a Group Audit Instruction to a component auditor. (2 Marks)

Answer

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Tags: Audit Instructions, Component Auditors, Financial Consolidation, Group Audit, Material Misstatement
Level: Level 3

Topic: Group audit

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

Question

Sweet Dreams, a limited liability company, is a new audit client and you are at the
planning meeting for the forthcoming audit. The company has grown rapidly and has
May 31 as year-end. The financial statements have not been audited in previous years
since the organization has only just converted from a partnership to a company.
The company’s bankers have requested that an audit be undertaken on the financial
statements for the year ending May 31, 2016. Higher levels of inventory required to
meet the increasing demand for its products have necessitated a request for an increase
in the bank’s overdraft facility.
The company makes beds, buying its materials directly. At the year-end, inventory
comprises raw materials, work-in-progress and finished goods. It does not undertake
continuous inventory counting but does intend to perform a full inventory count on
May 31, 2016. It uses standard costing system to value finished products and work-inprogress.

Answer

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Tags: Audit Planning, Audit Risk, Control Systems, Inventory Management, Material Misstatement
Level: Level 2

Topic: Audit evidence, Planning an Audit, Risk Assessment and Internal Control
Series: MAY 2016

AA – Mar 2023 – L2 – Q5b – Completion Procedures and Reporting

List the responsibilities of an auditor in auditing historical financial statements under ISA 700.

Question

Your manager is presenting to the Engagement Partner the draft opinion on the financial statements of a recently audited client. Your manager has tasked you to research into the responsibilities of an external auditor for auditing historical financial statements in line with ISA 700 (Revised): Forming an Opinion and Reporting on Financial Statements.

Required:
State FIVE (5) responsibilities of an auditor in line with the above standard.

Answer

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Tags: Auditors' responsibilities, Financial Statements, ISA 700, Material Misstatement

Topic: Completion Procedures and Reporting
Series: MAR 2023

AA – May 2019 – L2 – Q5a – Completion Procedures and Reporting

Explains the circumstances under which a qualified or adverse audit opinion is issued.

Question

a) When there is a material disagreement between the Auditor and management of a client, this could lead to the Auditor expressing a qualified opinion or an adverse opinion.
Required:
Evaluate the circumstances, when due to disagreement between Management and the auditor, an audit firm may express a qualified opinion or an adverse opinion in its report on the financial statements of a company.
(5 marks)

Answer

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Tags: Adverse Opinion, Audit opinion, Financial Statements, Material Misstatement, Qualified Opinion
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2019

AAA – Nov 2016 – L3 – Q4a – Reporting

Determine audit opinions and actions for various scenarios in Zealow Company Ltd.'s audit.

Question

Upon the completion of the audit of Zealow Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following:

There was a material inconsistency between the financial information and other information in documents containing the financial statements and the auditor’s report thereon. The material inconsistency has been traced to the financial information, but management has refused to effect any change when requested to do so.
Stocks worth GH¢5 million were valued at cost in the financial statements. The review of the post-balance sheet events indicated that not all the stocks could be sold in the normal course of business. Some were damaged and some have become obsolete and slow moving. The total assets of the company is GH¢20 million. If the stocks were valued at net realizable value, the value would have reduced by GH¢2.0 million. The Directors have refused to allow the stocks to be valued at lower of cost and net realizable value and valued all the stocks at cost.
Management refused to allow auditors to carry out the circularization of debtors. The receivables figure was material in the financial statements. In addition, the auditors have not received a reply to the letter of enquiry sent to the company’s solicitors in respect of a major litigation affecting the company. The auditors assessed that the effect of the two items is both material and pervasive.
Subsequent events indicated that a major debtor has become insolvent. The amount involved was material. The directors refused to recognize the provision for a write-off of the amount.

Required:
i) For each of the items, recommend the type of audit opinion to be issued. (8 marks)

ii) Consider what action the auditors should take in view of management’s refusal to accept the recommendations and/or allow the auditor to carry out the necessary audit procedures. (2 marks)

Answer

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Tags: Audit opinion, Financial Statements, Material Misstatement
Level: Level 3

Topic: Reporting
Series: NOV 2016

AAA – Nov 2024 – L3 – Q3a – Auditor’s Responsibilities Relating to Other Information

Explain the auditor’s responsibilities regarding other information in an entity’s annual report and identify issues in the Chairman’s statement.

Question

Answer

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Tags: Audit report, Chairman’s Statement, Financial Statements, ISA 720, Material Misstatement, Other Information, Regulatory Compliance
Level: Level 3

Topic: Auditor’s Responsibilities Relating to Other Information
Series: Nov 2024

AA – Nov 2024 – L2 – Q4b – Audit Report and Basis for Opinion

Justify the audit report type and draft the basis for the opinion section.

Question

Required:
i) Justify the type of audit report to be issued in the above scenario.

ii) Draft the basis for the above opinion section of the auditor’s report.

Answer

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Tags: Audit report, Basis for Opinion, Financial Reporting, Material Misstatement, Qualified Opinion, Sufficient Audit Evidence
Level: Level 2

Topic: Completion Procedures and Reporting
Series: Nov 2024

AAA – Nov 2012 – L3 – AII – Q2 – Overview of Advanced Audit and Assurance

Defines an unintentional mistake in the accounting process resulting in material misstatement.

Question

An unintentional mistake is ……………committed by anyone in the accounting process which results in material misstatement.

Answer

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Tags: Accounting Process, Errors, Financial Reporting, Material Misstatement, Misstatement
Level: Level 3

Topic: Overview of Advanced Audit and Assurance
Series: NOV 2012

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

Question

Component ID	Component Name	Component Auditor	Country	Classification of Component	Likely Significant Risks of Material Misstatement
GIP	Goodlife Investment Plc	JPM & Co. (Chartered Accountants)	Nigeria	Significant component	– Fraudulent revenue recognition
					– Credit risk (allowance for loan impairment and impairment of other financial assets)
					– Valuation of financial instruments
GISAL	Goodlife Investments South Africa Limited	QSS Audit (Chartered Accountants)	South Africa	Significant component
GIL	Goodlife Insurance Limited	JPM & Co. (Chartered Accountants)	Nigeria	Insignificant component	– Valuation of insurance liabilities
GPRS	Goodlife Properties & Real Estate Services	Adibe & Co. (Chartered Accountants)	Nigeria	Significant component
GSL	Goodlife Stores Limited	Kwesi & Co. (Chartered Accountants)	Ghana	Insignificant component

Required:

a. Identify four factors that need to be considered by the group auditor in determining the use of component auditors to work on the financial information of these components. (4 Marks)

c. List four contents of a Group Audit Instruction to a component auditor. (2 Marks)

Answer

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Tags: Audit Instructions, Component Auditors, Financial Consolidation, Group Audit, Material Misstatement
Level: Level 3

Topic: Group audit

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

Question

Answer

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Tags: Audit Planning, Audit Risk, Control Systems, Inventory Management, Material Misstatement
Level: Level 2

Topic: Audit evidence, Planning an Audit, Risk Assessment and Internal Control
Series: MAY 2016

AA – Mar 2023 – L2 – Q5b – Completion Procedures and Reporting

List the responsibilities of an auditor in auditing historical financial statements under ISA 700.

Question

Required:
State FIVE (5) responsibilities of an auditor in line with the above standard.

Answer

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Tags: Auditors' responsibilities, Financial Statements, ISA 700, Material Misstatement

Topic: Completion Procedures and Reporting
Series: MAR 2023

AA – May 2019 – L2 – Q5a – Completion Procedures and Reporting

Explains the circumstances under which a qualified or adverse audit opinion is issued.

Question

Answer

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Tags: Adverse Opinion, Audit opinion, Financial Statements, Material Misstatement, Qualified Opinion
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2019

AAA – Nov 2016 – L3 – Q4a – Reporting

Determine audit opinions and actions for various scenarios in Zealow Company Ltd.'s audit.

Question

Upon the completion of the audit of Zealow Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following:

There was a material inconsistency between the financial information and other information in documents containing the financial statements and the auditor’s report thereon. The material inconsistency has been traced to the financial information, but management has refused to effect any change when requested to do so.
Stocks worth GH¢5 million were valued at cost in the financial statements. The review of the post-balance sheet events indicated that not all the stocks could be sold in the normal course of business. Some were damaged and some have become obsolete and slow moving. The total assets of the company is GH¢20 million. If the stocks were valued at net realizable value, the value would have reduced by GH¢2.0 million. The Directors have refused to allow the stocks to be valued at lower of cost and net realizable value and valued all the stocks at cost.
Management refused to allow auditors to carry out the circularization of debtors. The receivables figure was material in the financial statements. In addition, the auditors have not received a reply to the letter of enquiry sent to the company’s solicitors in respect of a major litigation affecting the company. The auditors assessed that the effect of the two items is both material and pervasive.
Subsequent events indicated that a major debtor has become insolvent. The amount involved was material. The directors refused to recognize the provision for a write-off of the amount.

Required:
i) For each of the items, recommend the type of audit opinion to be issued. (8 marks)

ii) Consider what action the auditors should take in view of management’s refusal to accept the recommendations and/or allow the auditor to carry out the necessary audit procedures. (2 marks)

Answer

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Tags: Audit opinion, Financial Statements, Material Misstatement
Level: Level 3

Topic: Reporting
Series: NOV 2016

Question Tag: Material Misstatement

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AAA – Nov 2024 – L3 – Q3a – Auditor’s Responsibilities Relating to Other Information

Explain the auditor’s responsibilities regarding other information in an entity’s annual report and identify issues in the Chairman’s statement.

AA – Nov 2024 – L2 – Q4b – Audit Report and Basis for Opinion

Justify the audit report type and draft the basis for the opinion section.

AAA – Nov 2012 – L3 – AII – Q2 – Overview of Advanced Audit and Assurance

Defines an unintentional mistake in the accounting process resulting in material misstatement.

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

AA – Mar 2023 – L2 – Q5b – Completion Procedures and Reporting

List the responsibilities of an auditor in auditing historical financial statements under ISA 700.

AA – May 2019 – L2 – Q5a – Completion Procedures and Reporting

Explains the circumstances under which a qualified or adverse audit opinion is issued.

AAA – Nov 2016 – L3 – Q4a – Reporting

Determine audit opinions and actions for various scenarios in Zealow Company Ltd.'s audit.

AAA – Nov 2024 – L3 – Q3a – Auditor’s Responsibilities Relating to Other Information

Explain the auditor’s responsibilities regarding other information in an entity’s annual report and identify issues in the Chairman’s statement.

AA – Nov 2024 – L2 – Q4b – Audit Report and Basis for Opinion

Justify the audit report type and draft the basis for the opinion section.

AAA – Nov 2012 – L3 – AII – Q2 – Overview of Advanced Audit and Assurance

Defines an unintentional mistake in the accounting process resulting in material misstatement.

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

AA – Mar 2023 – L2 – Q5b – Completion Procedures and Reporting

List the responsibilities of an auditor in auditing historical financial statements under ISA 700.

AA – May 2019 – L2 – Q5a – Completion Procedures and Reporting

Explains the circumstances under which a qualified or adverse audit opinion is issued.

AAA – Nov 2016 – L3 – Q4a – Reporting

Determine audit opinions and actions for various scenarios in Zealow Company Ltd.'s audit.

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