Question Tag: Related parties

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 5 Marks

CR – May 2021 – L3 – Q3b – Related Party Disclosures for Government Entities

Advice on related party disclosure requirements for government-controlled GHBank Ltd.

GHBank Ltd is a government-controlled bank. GHBank Ltd was taken over by the government of Ghana during the recent financial sector clean-up by the Bank of Ghana. GHBank Ltd does not directly trade with other government-controlled banks but has underwritten the development of the nationally owned postal service and the newly created railway ministry. The directors of GHBank Ltd are concerned about the volume and cost of disclosing its related party interests because they extend theoretically to all other government-controlled enterprises and banks. The directors require general advice on the nature and importance of the disclosure of related party relationships and specific advice on the disclosure of the above relationships in the financial statements.

Required:
Advise the directors of the company on how to deal with the above transaction in the financial statements in accordance with IAS 24: Related Party Disclosures. (5 marks)

 

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  • 10 Marks

AA – Nov 2021 – L2 – Q4b – Public Sector Auditing

Identifies corporate governance weaknesses in Formation Bank Ltd and provides recommendations for improvement.

Mr. William Kofi Ansah is the Founder, Chief Executive Officer, and Major Shareholder of Formation Bank Ltd. He single-handedly appointed his father-in-law as board chair and three related parties as Non-Executive Directors, in addition to the existing five (5) Executive Directors. Rewards such as first-class tickets and large consulting contracts were granted to Directors, and compensation for the Directors was excessive and not commensurate with the Bank’s performance.

There is no formal credit management policy for the Bank, and regular Board review meetings were not carried out. Large non-performing loans were granted to the related parties, which resulted in the Bank being heavily exposed. The Bank sent false monthly credit reports to the regulator, and the regulator failed to assess the report and provide prompt feedback.

The External Auditors and Regulator were treated to a high-end reception during audits and given large brown envelopes at the end of the audit. The internal audit unit is ill-resourced and reports directly to the Chief Executive Officer.

Required:
Explain FIVE (5) corporate governance weaknesses faced by Formation Bank Ltd in relation to corporate governance principles and for each weakness identified, recommend a solution to overcome it.

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  • 5 Marks

CR – May 2019 – L3 – Q2e – Presentation of financial statements (IAS 1, IAS 34, IFRS 8, IAS 24, IAS 10)

The question requires the identification of related parties for Bongo Designs and an explanation of why each is a related party, according to IAS 24.

Bongo Designs is the parent company of a small group. Its shares are stock market quoted, with many shareholders. Only one shareholder, Akwasi Boakye, has a holding over 5%. Akwasi Boakye holds 20% of the shares and was the founder of the company. He still retains a seat on the board which is made up of four executive directors (including himself) and two non-executive directors.

Akwasi Boakye’s domestic live-in partner of ten years, Abena Lamptey, recently set up a company, Gushegu Ltd, in the textile industry with a friend, Akosua Pokuaa. Abena Lamptey and Akosua Pokuaa each own 50% of the shares of Gushegu Ltd, and decisions are made jointly under a contract that both parties signed.

Bongo Designs has two subsidiaries, Zabzugu Fabrics which is 100% owned and Binduri Textiles which is 60% owned. The other 40% of Binduri Textiles is owned by a single shareholder, Innovative Sissala, which has two seats on Binduri Textiles’s five-member board. Yaw Abdulai is the Finance Director of Zabzugu Fabrics. He is also the person responsible for finance at the group level but is not a member of the group’s board.

Required:
In accordance with IAS 24: Related Party Disclosures, identify the related parties of Bongo Designs in the above scenario, explaining why each is a related party. (5 marks)

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  • 10 Marks

AAA – Nov 2017 – L3 – Q1b – Audit Evidence, The Audit Approach

Describe the auditor's procedures and evidence required in relation to related party transactions.

Central to a number of government investigations in various countries have been companies trading with organisations or individuals other than at arm’s length. Such transactions were made possible by a degree of control or influence exercised by directors over both parties. Directors are responsible for the identification of such related party relationship and transactions, however, the auditor has a responsibility of ensuring good reporting in that area.

You are the audit senior of an audit firm preparing to audit a group company and its subsidiaries and sub-subsidiaries, which also trade with companies owned by some directors of the parent company.

Required:
What procedures and evidence should the auditor consider to discharge his responsibility in relation to related party transactions?

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  • 8 Marks

AAA – Nov 2018 – L3 – Q1b – Audit evidence, Planning

Discuss the auditor’s need to identify related party transactions during an audit.

Central to a number of government investigations in Ghana have been companies trading with organisations or individuals other than at arm’s length. Such transactions were made possible by a degree of control or influence by directors over both parties to the transactions. ISA 550: Related parties covers this area.

Management is responsible for the identification of related party transactions. Such transactions should be properly approved as they are frequently not at arm’s length. Management is also responsible for the disclosure of related party transactions.

As a senior partner of your audit firm, you are considering how to identify all the related party transactions of your audit client whose financial statement for the year ended December 31, 2017, you are about to audit.

Required:
Discuss FOUR (4) reasons why the auditor needs to identify related parties transactions during an audit. (8 marks)

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  • 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

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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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 5 Marks

CR – May 2021 – L3 – Q3b – Related Party Disclosures for Government Entities

Advice on related party disclosure requirements for government-controlled GHBank Ltd.

GHBank Ltd is a government-controlled bank. GHBank Ltd was taken over by the government of Ghana during the recent financial sector clean-up by the Bank of Ghana. GHBank Ltd does not directly trade with other government-controlled banks but has underwritten the development of the nationally owned postal service and the newly created railway ministry. The directors of GHBank Ltd are concerned about the volume and cost of disclosing its related party interests because they extend theoretically to all other government-controlled enterprises and banks. The directors require general advice on the nature and importance of the disclosure of related party relationships and specific advice on the disclosure of the above relationships in the financial statements.

Required:
Advise the directors of the company on how to deal with the above transaction in the financial statements in accordance with IAS 24: Related Party Disclosures. (5 marks)

 

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  • 10 Marks

AA – Nov 2021 – L2 – Q4b – Public Sector Auditing

Identifies corporate governance weaknesses in Formation Bank Ltd and provides recommendations for improvement.

Mr. William Kofi Ansah is the Founder, Chief Executive Officer, and Major Shareholder of Formation Bank Ltd. He single-handedly appointed his father-in-law as board chair and three related parties as Non-Executive Directors, in addition to the existing five (5) Executive Directors. Rewards such as first-class tickets and large consulting contracts were granted to Directors, and compensation for the Directors was excessive and not commensurate with the Bank’s performance.

There is no formal credit management policy for the Bank, and regular Board review meetings were not carried out. Large non-performing loans were granted to the related parties, which resulted in the Bank being heavily exposed. The Bank sent false monthly credit reports to the regulator, and the regulator failed to assess the report and provide prompt feedback.

The External Auditors and Regulator were treated to a high-end reception during audits and given large brown envelopes at the end of the audit. The internal audit unit is ill-resourced and reports directly to the Chief Executive Officer.

Required:
Explain FIVE (5) corporate governance weaknesses faced by Formation Bank Ltd in relation to corporate governance principles and for each weakness identified, recommend a solution to overcome it.

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  • 5 Marks

CR – May 2019 – L3 – Q2e – Presentation of financial statements (IAS 1, IAS 34, IFRS 8, IAS 24, IAS 10)

The question requires the identification of related parties for Bongo Designs and an explanation of why each is a related party, according to IAS 24.

Bongo Designs is the parent company of a small group. Its shares are stock market quoted, with many shareholders. Only one shareholder, Akwasi Boakye, has a holding over 5%. Akwasi Boakye holds 20% of the shares and was the founder of the company. He still retains a seat on the board which is made up of four executive directors (including himself) and two non-executive directors.

Akwasi Boakye’s domestic live-in partner of ten years, Abena Lamptey, recently set up a company, Gushegu Ltd, in the textile industry with a friend, Akosua Pokuaa. Abena Lamptey and Akosua Pokuaa each own 50% of the shares of Gushegu Ltd, and decisions are made jointly under a contract that both parties signed.

Bongo Designs has two subsidiaries, Zabzugu Fabrics which is 100% owned and Binduri Textiles which is 60% owned. The other 40% of Binduri Textiles is owned by a single shareholder, Innovative Sissala, which has two seats on Binduri Textiles’s five-member board. Yaw Abdulai is the Finance Director of Zabzugu Fabrics. He is also the person responsible for finance at the group level but is not a member of the group’s board.

Required:
In accordance with IAS 24: Related Party Disclosures, identify the related parties of Bongo Designs in the above scenario, explaining why each is a related party. (5 marks)

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  • 10 Marks

AAA – Nov 2017 – L3 – Q1b – Audit Evidence, The Audit Approach

Describe the auditor's procedures and evidence required in relation to related party transactions.

Central to a number of government investigations in various countries have been companies trading with organisations or individuals other than at arm’s length. Such transactions were made possible by a degree of control or influence exercised by directors over both parties. Directors are responsible for the identification of such related party relationship and transactions, however, the auditor has a responsibility of ensuring good reporting in that area.

You are the audit senior of an audit firm preparing to audit a group company and its subsidiaries and sub-subsidiaries, which also trade with companies owned by some directors of the parent company.

Required:
What procedures and evidence should the auditor consider to discharge his responsibility in relation to related party transactions?

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  • 8 Marks

AAA – Nov 2018 – L3 – Q1b – Audit evidence, Planning

Discuss the auditor’s need to identify related party transactions during an audit.

Central to a number of government investigations in Ghana have been companies trading with organisations or individuals other than at arm’s length. Such transactions were made possible by a degree of control or influence by directors over both parties to the transactions. ISA 550: Related parties covers this area.

Management is responsible for the identification of related party transactions. Such transactions should be properly approved as they are frequently not at arm’s length. Management is also responsible for the disclosure of related party transactions.

As a senior partner of your audit firm, you are considering how to identify all the related party transactions of your audit client whose financial statement for the year ended December 31, 2017, you are about to audit.

Required:
Discuss FOUR (4) reasons why the auditor needs to identify related parties transactions during an audit. (8 marks)

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  • 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

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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