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As the Audit Manager for Grep & Co., you are currently overseeing the audit of Kellwin Ltd., a company operating in the food processing industry. The audit for the financial year ended 31 October 2023 is nearing completion. However, several issues have been brought to your attention by the audit team, requiring your review and further action.
a) Goodwill Impairment
Kellwin Ltd. acquired a subsidiary, Fresh Foods Plc, on 1 November 2021. The purchase consideration for the acquisition was GH¢18 million. The goodwill arising on the acquisition was recognized at GH¢3 million in Kellwin Ltd.’s consolidated financial statements for the year ended 31 October 2022. The directors have conducted an impairment review of goodwill and have concluded that no impairment is necessary, with the carrying amount of goodwill remaining at GH¢3 million as at 31 October 2023. The directors have explained that the recoverable amount of the cash-generating unit (CGU) to which the goodwill has been allocated exceeds the carrying amount. (8 marks)
b) Accounting Policies
During the audit, it was identified that Kellwin Ltd. changed its accounting policy for recognizing revenue from contracts with customers. Previously, revenue was recognized when goods were delivered to customers. However, from 1 January 2023, the company started recognizing revenue when the goods were dispatched from the warehouse. This change was applied retrospectively, and the comparative figures in the financial statements were restated. The impact of this change is an increase in revenue by GH¢1.5 million for the year ended 31 October 2023. The directors have justified the change by stating that it provides more relevant information to users of the financial statements. (6 marks)
c) Auditor’s Opinion and Going Concern
Kellwin Ltd. has experienced significant financial difficulties during the year due to adverse economic conditions. As a result, the company has incurred a net loss of GH¢2 million and has breached its loan covenants. The directors have initiated discussions with the company’s bank to secure a waiver of the covenant breaches and to obtain additional funding. The financial statements have been prepared on a going concern basis, and the directors are confident that they will secure the necessary funding. However, the negotiations with the bank are still ongoing, and there is significant uncertainty regarding the company’s ability to continue as a going concern. (6 marks)
Required:
i) Assess the risk of material misstatement in relation to each of the issues described above.
ii) For each issue, state the audit procedures that should be performed to address the risks identified.
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You are the Manager responsible for the audit of Rail Expert Plc, a listed entity whose principal activity is the operation of a regional railway network. The audit for the year ended 28 February 2021 is the first year your firm is auditing Rail Expert Plc. The draft financial statements received from your client indicated a total asset of GH¢58 million and a profit before tax of GH¢7.4 million. The detailed audit fieldwork has started, and the audit supervisor has brought the following matters to your attention in relation to the testing of key accounting estimates:
a) Cash-settled share-based payment scheme
On 1 March 2020, Rail Expert Plc granted 550,000 share appreciation rights to 55 executives and senior employees of the company, with each eligible member of staff receiving 10,000 of the rights. The fair value of the rights was estimated on 28 February 2020 by an external expert using an options pricing model at GH¢4.50 each. Rail Expert Plc prides itself on good employee relations, and the senior management team has estimated that all 55 staff will qualify for the rights when they vest three years after the granting of the rights on 1 March 2020. The company recognized an expense of GH¢825,000 with its associated liability in the draft accounts. (7 marks)
b) Regulatory penalties
Rail Expert Plc has been subject to a review by the national railways regulator following a complaint from a member of staff with safety concerns. The regulator identified breaches in safety regulations and issued a penalty notice on 30 September 2020. Rail Expert Plc has appealed against the initial penalty payable. Negotiations with the regulator are still ongoing, and the amount payable has not yet been finalized. Rail Expert Plc currently estimates that the total penalty payable as a result of the breach will be GH¢1.3 million, which it expects to repay in equal annual installments over the next ten years, with the first payment falling due on 1 March 2021. The company’s draft statement of profit or loss for the current year recognizes an expense of GH¢1.3 million, and the draft statement of financial position includes a liability for the same amount. (7 marks)
c) Property development
Rail Expert Plc owns an industrial property which it has historically used as a maintenance depot for its engines and carriages. The company has an accounting policy of revaluing its properties to fair value, and at the interim audit, it was noted that the depot was recorded at a carrying amount of GH¢2.5 million in the non-current asset register. During the first week of the audit fieldwork, the audit supervisor identified a year-end journal which has uplifted the depot to a fair value of GH¢4.9 million in this year’s statement of financial position as at 28 February 2021. Management has advised that this represents the estimated sales value of the building following Rail Expert Plc’s plan to develop the building as a residential property. The client has confirmed that the property is suitable for conversion into residential apartments at an estimated cost of GH¢1.2 million and has negotiated secured finance for the development with their bank. The development will be subject to the payment of fees to the local council’s building regulator of GH¢173,000. (6 marks)
Required:
Evaluate the client’s accounting treatments above and state THREE (3) audit procedures you will undertake when auditing each of the transactions.
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Describe your responsibility for subsequent events;
i) Assuming the events occurred before your report is signed (5 marks)
ii) Assuming the events occurred after signing your report but before the report was issued. (5 marks)
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a) For each of the three events below:
i) Discuss whether the financial statements require amendment. (3 marks)
ii) Describe audit procedures that should be performed in order to form a conclusion on the amendment. (4 marks)
iii) Explain the impact on the audit report should the issues remain unresolved. (3 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Oliso Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced a series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.
You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Oliso Private Company Ltd’s audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.
Receivable balance due from Obey Company Ltd: Oliso Private Company Ltd has a material receivable balance due from a customer named Obey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Obey Company Ltd for over eight months. Oliso Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.
Warranty provision: The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.
Required:
a) Recommend THREE (3) audit procedures to validate the accounting estimates. (5 marks)
b) For each of the two issues above:
i) Evaluate the appropriateness of written representations as a form of audit evidence. (4 marks)
ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements. (6 marks)
c) The directors of Oliso Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.
Required:
Explain the steps the auditor of Oliso Private Company Ltd should take to assess the impact of management’s refusal to provide a written representation on the auditor’s report. (5 marks)
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You are the audit manager in charge of the audit of Serwah Ghanaba Ltd for the year ended 31 December 2014. The partner in charge of the audit instructs you to carry out a review of the company’s activities during the financial year end. The following issues came up during the review.
i) On 28 February 2015, Jessica Mensah, who owed the company GH¢500,000.00, was killed by some robbers on her way to Accra after a visit to her hometown. The amount was part of the GH¢800,000.00 debtors appearing on the statement of financial position for the year end 31 December 2014. It was realized that it will not be possible to recover the amount from the family of Jessica Mensah.
ii) In another development, the marketing director of the Company, Stephen Odoi, who was due to retire on 31 March 2015, embarked on a 6-month leave prior to retirement with effect from 1 October 2014. Investigation instituted in May 2015 revealed that Mr. Stephen Odoi took a contract appointment with another company from 1 November 2014. As a result of the investigation, the company decided to bring an action against Mr. Stephen Odoi to recover the salary paid to him from 1 November 2014 to 31 March 2015.
Required:
a) Assess the audit implications of issues (i) and (ii) above. (10 marks)
b) Describe the nature and purpose of subsequent events review. (5 marks)
c) Recommend the audit procedures which would be carried out in order to identify any material subsequent events. (5 marks)
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Omega Ltd was incorporated to engage in the production, supply and retail of sachet water. The final audit for the Financial Statements ending 31 December 2022 is nearly complete and it is proposed that the Financial Statements and Audit Report will be signed in March 2023. Revenue for the year is GH¢78 million and profit before tax is GH¢7.5 million. The following events have occurred subsequent to the end of the reporting year of the company.
Required:
Using the three issues above: a) Discuss whether the financial statements require amendment;
b) Describe audit procedures that should be performed in order to form a conclusion on the amendment; and
c) Explain the impact on the audit report should the issues remain unresolved.
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You are the manager responsible for the audit of CGL, a public interest entity, for the year ended 31 December 2018. Your firm was appointed as auditors of CGL in September 2017. The audit work has been completed, and you are reviewing the working papers in order to draft a report to those charged with governance. The statement of financial position (balance sheet) shows total assets of GH¢ 78 million (2017 – GH¢ 66 million). The main business activity of CGL is the manufacture of farm machinery.
During the audit of property, plant, and equipment it was discovered that controls over capital expenditure transactions had deteriorated during the year. Authorisation had not been granted for the purchase of office equipment with a cost of GH¢ 225,000. No material errors in the financial statements were revealed by audit procedures performed on property, plant, and equipment.
An internally generated brand name has been included in the statement of financial position (balance sheet) at a fair value of GH¢ 10 million. Audit working papers show that the matter was discussed with the financial controller, who stated that the GH¢ 10 million represents the present value of future cash flows estimated to be generated by the brand name. The member of the audit team who completed the work programme on intangible assets has noted that this treatment appears to be in breach of IAS 38 Intangible Assets, and that the management refuses to derecognise the asset.
Problems were experienced in the audit of inventories. Due to an oversight by the internal auditors of CGL, the external audit team did not receive a copy of inventory counting procedures prior to attending the count. This caused a delay at the beginning of the inventory count, when the audit team had to quickly familiarise themselves with the procedures. In addition, on the final audit, when the audit senior requested documentation to support the final inventory valuation, it took two weeks for the information to be received because the accountant who had prepared the schedules had mislaid them.
Required:
a) Identify FIVE (5) purposes of including ‘findings from the audit’ (management letter points) in a report to those charged with governance. (5 marks)
b) From the information provided above, identify the matters which should be included as ‘findings from the audit’ in your report to those charged with governance, and explain the reason for their inclusion. (15 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
As the Audit Manager for Grep & Co., you are currently overseeing the audit of Kellwin Ltd., a company operating in the food processing industry. The audit for the financial year ended 31 October 2023 is nearing completion. However, several issues have been brought to your attention by the audit team, requiring your review and further action.
a) Goodwill Impairment
Kellwin Ltd. acquired a subsidiary, Fresh Foods Plc, on 1 November 2021. The purchase consideration for the acquisition was GH¢18 million. The goodwill arising on the acquisition was recognized at GH¢3 million in Kellwin Ltd.’s consolidated financial statements for the year ended 31 October 2022. The directors have conducted an impairment review of goodwill and have concluded that no impairment is necessary, with the carrying amount of goodwill remaining at GH¢3 million as at 31 October 2023. The directors have explained that the recoverable amount of the cash-generating unit (CGU) to which the goodwill has been allocated exceeds the carrying amount. (8 marks)
b) Accounting Policies
During the audit, it was identified that Kellwin Ltd. changed its accounting policy for recognizing revenue from contracts with customers. Previously, revenue was recognized when goods were delivered to customers. However, from 1 January 2023, the company started recognizing revenue when the goods were dispatched from the warehouse. This change was applied retrospectively, and the comparative figures in the financial statements were restated. The impact of this change is an increase in revenue by GH¢1.5 million for the year ended 31 October 2023. The directors have justified the change by stating that it provides more relevant information to users of the financial statements. (6 marks)
c) Auditor’s Opinion and Going Concern
Kellwin Ltd. has experienced significant financial difficulties during the year due to adverse economic conditions. As a result, the company has incurred a net loss of GH¢2 million and has breached its loan covenants. The directors have initiated discussions with the company’s bank to secure a waiver of the covenant breaches and to obtain additional funding. The financial statements have been prepared on a going concern basis, and the directors are confident that they will secure the necessary funding. However, the negotiations with the bank are still ongoing, and there is significant uncertainty regarding the company’s ability to continue as a going concern. (6 marks)
Required:
i) Assess the risk of material misstatement in relation to each of the issues described above.
ii) For each issue, state the audit procedures that should be performed to address the risks identified.
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You are the Manager responsible for the audit of Rail Expert Plc, a listed entity whose principal activity is the operation of a regional railway network. The audit for the year ended 28 February 2021 is the first year your firm is auditing Rail Expert Plc. The draft financial statements received from your client indicated a total asset of GH¢58 million and a profit before tax of GH¢7.4 million. The detailed audit fieldwork has started, and the audit supervisor has brought the following matters to your attention in relation to the testing of key accounting estimates:
a) Cash-settled share-based payment scheme
On 1 March 2020, Rail Expert Plc granted 550,000 share appreciation rights to 55 executives and senior employees of the company, with each eligible member of staff receiving 10,000 of the rights. The fair value of the rights was estimated on 28 February 2020 by an external expert using an options pricing model at GH¢4.50 each. Rail Expert Plc prides itself on good employee relations, and the senior management team has estimated that all 55 staff will qualify for the rights when they vest three years after the granting of the rights on 1 March 2020. The company recognized an expense of GH¢825,000 with its associated liability in the draft accounts. (7 marks)
b) Regulatory penalties
Rail Expert Plc has been subject to a review by the national railways regulator following a complaint from a member of staff with safety concerns. The regulator identified breaches in safety regulations and issued a penalty notice on 30 September 2020. Rail Expert Plc has appealed against the initial penalty payable. Negotiations with the regulator are still ongoing, and the amount payable has not yet been finalized. Rail Expert Plc currently estimates that the total penalty payable as a result of the breach will be GH¢1.3 million, which it expects to repay in equal annual installments over the next ten years, with the first payment falling due on 1 March 2021. The company’s draft statement of profit or loss for the current year recognizes an expense of GH¢1.3 million, and the draft statement of financial position includes a liability for the same amount. (7 marks)
c) Property development
Rail Expert Plc owns an industrial property which it has historically used as a maintenance depot for its engines and carriages. The company has an accounting policy of revaluing its properties to fair value, and at the interim audit, it was noted that the depot was recorded at a carrying amount of GH¢2.5 million in the non-current asset register. During the first week of the audit fieldwork, the audit supervisor identified a year-end journal which has uplifted the depot to a fair value of GH¢4.9 million in this year’s statement of financial position as at 28 February 2021. Management has advised that this represents the estimated sales value of the building following Rail Expert Plc’s plan to develop the building as a residential property. The client has confirmed that the property is suitable for conversion into residential apartments at an estimated cost of GH¢1.2 million and has negotiated secured finance for the development with their bank. The development will be subject to the payment of fees to the local council’s building regulator of GH¢173,000. (6 marks)
Required:
Evaluate the client’s accounting treatments above and state THREE (3) audit procedures you will undertake when auditing each of the transactions.
Find Related Questions by Tags, levels, etc.
Describe your responsibility for subsequent events;
i) Assuming the events occurred before your report is signed (5 marks)
ii) Assuming the events occurred after signing your report but before the report was issued. (5 marks)
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a) For each of the three events below:
i) Discuss whether the financial statements require amendment. (3 marks)
ii) Describe audit procedures that should be performed in order to form a conclusion on the amendment. (4 marks)
iii) Explain the impact on the audit report should the issues remain unresolved. (3 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Oliso Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced a series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.
You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Oliso Private Company Ltd’s audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.
Receivable balance due from Obey Company Ltd: Oliso Private Company Ltd has a material receivable balance due from a customer named Obey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Obey Company Ltd for over eight months. Oliso Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.
Warranty provision: The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.
Required:
a) Recommend THREE (3) audit procedures to validate the accounting estimates. (5 marks)
b) For each of the two issues above:
i) Evaluate the appropriateness of written representations as a form of audit evidence. (4 marks)
ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements. (6 marks)
c) The directors of Oliso Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.
Required:
Explain the steps the auditor of Oliso Private Company Ltd should take to assess the impact of management’s refusal to provide a written representation on the auditor’s report. (5 marks)
Find Related Questions by Tags, levels, etc.
You are the audit manager in charge of the audit of Serwah Ghanaba Ltd for the year ended 31 December 2014. The partner in charge of the audit instructs you to carry out a review of the company’s activities during the financial year end. The following issues came up during the review.
i) On 28 February 2015, Jessica Mensah, who owed the company GH¢500,000.00, was killed by some robbers on her way to Accra after a visit to her hometown. The amount was part of the GH¢800,000.00 debtors appearing on the statement of financial position for the year end 31 December 2014. It was realized that it will not be possible to recover the amount from the family of Jessica Mensah.
ii) In another development, the marketing director of the Company, Stephen Odoi, who was due to retire on 31 March 2015, embarked on a 6-month leave prior to retirement with effect from 1 October 2014. Investigation instituted in May 2015 revealed that Mr. Stephen Odoi took a contract appointment with another company from 1 November 2014. As a result of the investigation, the company decided to bring an action against Mr. Stephen Odoi to recover the salary paid to him from 1 November 2014 to 31 March 2015.
Required:
a) Assess the audit implications of issues (i) and (ii) above. (10 marks)
b) Describe the nature and purpose of subsequent events review. (5 marks)
c) Recommend the audit procedures which would be carried out in order to identify any material subsequent events. (5 marks)
Find Related Questions by Tags, levels, etc.
Omega Ltd was incorporated to engage in the production, supply and retail of sachet water. The final audit for the Financial Statements ending 31 December 2022 is nearly complete and it is proposed that the Financial Statements and Audit Report will be signed in March 2023. Revenue for the year is GH¢78 million and profit before tax is GH¢7.5 million. The following events have occurred subsequent to the end of the reporting year of the company.
Required:
Using the three issues above: a) Discuss whether the financial statements require amendment;
b) Describe audit procedures that should be performed in order to form a conclusion on the amendment; and
c) Explain the impact on the audit report should the issues remain unresolved.
Find Related Questions by Tags, levels, etc.
You are the manager responsible for the audit of CGL, a public interest entity, for the year ended 31 December 2018. Your firm was appointed as auditors of CGL in September 2017. The audit work has been completed, and you are reviewing the working papers in order to draft a report to those charged with governance. The statement of financial position (balance sheet) shows total assets of GH¢ 78 million (2017 – GH¢ 66 million). The main business activity of CGL is the manufacture of farm machinery.
During the audit of property, plant, and equipment it was discovered that controls over capital expenditure transactions had deteriorated during the year. Authorisation had not been granted for the purchase of office equipment with a cost of GH¢ 225,000. No material errors in the financial statements were revealed by audit procedures performed on property, plant, and equipment.
An internally generated brand name has been included in the statement of financial position (balance sheet) at a fair value of GH¢ 10 million. Audit working papers show that the matter was discussed with the financial controller, who stated that the GH¢ 10 million represents the present value of future cash flows estimated to be generated by the brand name. The member of the audit team who completed the work programme on intangible assets has noted that this treatment appears to be in breach of IAS 38 Intangible Assets, and that the management refuses to derecognise the asset.
Problems were experienced in the audit of inventories. Due to an oversight by the internal auditors of CGL, the external audit team did not receive a copy of inventory counting procedures prior to attending the count. This caused a delay at the beginning of the inventory count, when the audit team had to quickly familiarise themselves with the procedures. In addition, on the final audit, when the audit senior requested documentation to support the final inventory valuation, it took two weeks for the information to be received because the accountant who had prepared the schedules had mislaid them.
Required:
a) Identify FIVE (5) purposes of including ‘findings from the audit’ (management letter points) in a report to those charged with governance. (5 marks)
b) From the information provided above, identify the matters which should be included as ‘findings from the audit’ in your report to those charged with governance, and explain the reason for their inclusion. (15 marks)
Find Related Questions by Tags, levels, etc.
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