Question Tag: Revenue and Profit

You are the external auditor of Paa Willy Ltd (PW) for the year ended 31 March 2019. PW operates 12 convenience stores in the Greater Accra region:

• Each store sells food.
• Each store is responsible for its own inventory procurement and produces monthly management accounts which are sent to the centralised accounting department at PW head office.

PW is financed by a GH¢250,000 bank loan which is repayable at a rate of GH¢50,000 per annum over each of the next 5 years starting on 31 October 2019. It also has an overdraft facility of GH¢100,000, which it uses in full. The bank overdraft facility is due for renewal on 1 May 2020.

The bank has already told the company that it will need a cash flow forecast for two years from 1 February 2020 in order for the bank to decide whether or not the overdraft facility will be renewed. The bank has also said it will require a report from the external auditors to confirm the accuracy of the forecast.

Required:
a) Define the term analytical procedures.
(2 marks)

b) In relation to the work of an external auditor:
i) Describe THREE (3) analytical procedures that should be performed to confirm PW’s revenue and profit.
(3 marks)
ii) Outline THREE (3) substantive procedures that should be adopted to verify each of the following assertions:

• The valuation of inventory.
  (3 marks)
• The completeness of payables.
  (3 marks)

c) Recommend FOUR (4) appropriate substantive procedures that should be performed to confirm PW’s bank loan.
(4 marks)