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AAA – Nov 2024 – L3 – Q1b – Group Audit Risks and Consolidation Issues

Audit risks and procedures for a multinational group audit engagement.

You are a Senior Auditor at Dromo Audit Firm, assigned to audit a new client, Afroherb Pharma LTD, a multinational pharmaceutical company. During the initial stages of engagement planning, you discovered that Afroherb Pharma LTD operates in multiple jurisdictions, including Ghana, Liberia, Sierra Leone, and The Gambia. The parent company is in Ghana, and the companies in the other jurisdictions are all subsidiaries. All these jurisdictions have significant regulatory requirements and operational difficulties. The company has recently expanded its product line to include vaccine production following the introduction of The Vaccine Centre in Ghana. The production of vaccines is also subject to stringent regulatory reviews.

Required:
i) State FOUR audit procedures you could perform in relation to the consolidation of the financial statements of Afroherb Group. 
ii) Identify TWO specific risks associated with auditing Afroherb Pharma LTD, particularly in relation to its expansion into vaccine products. How should these risks be managed?
iii) State TWO problems associated with the planning of group audits

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  • 20 Marks

AAA – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

Eebuks Ltd is a retailer of academic textbooks that sells through its own network of bookshops and online through its website. The revenue from the website includes both cash sales and sales on credit to educational institutions. The company has provided historical analysis from its trade receivables ledger indicating that for sales made on credit, 25% payment is received in the month of sale, 70% after 30 days, and the remainder are irrecoverable debts.

You are a Manager in Makafui & Associates, a firm of Chartered Accountants offering a range of services from audit to non-audit for its clients. On 1 July 2023, your firm was asked by Eebuks Ltd, a company that is not an audit client of your firm, to consider a potential engagement to review and provide an assurance report on Prospective Financial Information. Makafui & Associates has already conducted specific client identification procedures in line with money laundering regulations with satisfactory results.

Additionally, Eebuks Ltd has approached your firm to obtain an independent assurance opinion on its cash flow forecast, which is being prepared for its bankers in support of an application for an increase in its existing overdraft facility.

Required:

a) In line with ISAE 3400: The Examination of Prospective Financial Information, discuss FIVE (5) matters to be considered by Makafui & Associates before accepting the engagement to review and report on Eebuks Ltd’s Prospective Financial Information. (10 marks)

b) Assuming Makafui & Associates accepts the engagement, recommend EIGHT (8) procedures to be performed in respect of Eebuks Ltd’s cash flow forecast. (10 marks)

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  • 10 Marks

AAA – July 2023 – L3 – Q1a – The audit approach | Audit-related services Planning |

Discuss five factors to consider before developing an audit proposal for a multinational company facing financial challenges.

Your firm has been approached to tender for an audit assignment by STK Ghana Ltd. The company is a multinational with its headquarters in Europe. STK Ghana Ltd is a manufacturing company that has operated in Ghana since 2010 and has made steady profits over the years. However, over the past few years, the company’s profits have been dwindling, and the group director in charge of Anglophone West Africa subsidiaries has charged the company to reduce its costs.

In a meeting with the country manager, you ascertained the following information:

  • Several creditors are pursuing the company for payment of their outstanding debt, including the previous auditor who is being owed for the past three years of audit work. The company has negotiated a payment plan for all its creditors.
  • Staff wages have been frozen, staff morale is very low, and several have left.
  • The company’s liquidity challenges commenced when the license of Glow Savings and Loans was revoked as part of the banking sector crisis with STK Ghana Ltd funds exceeding GH¢1 million locked up in short and long-term investments.

In the Terms of Reference (TOR) for the audit engagement, you are required to provide timelines for the overall audit and a financial proposal that is competitive. Upon receiving the TOR, a debate ensued among the partners on the relevance of submitting a proposal in response to the TOR.

Required:
Discuss FIVE (5) factors to be considered prior to developing a proposal for submission. (10 marks)

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  • 20 Marks

AAA – May 2017 – L3 – Q1 – Planning | Audit evidence | Evaluation and review

Assess the audit implications of subsequent events involving bad debt and legal actions, describe subsequent events review, and recommend audit procedures for identifying material subsequent events.

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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  • 10 Marks

AAA – May 2016 – L3 – Q4b – Audit-related services | Planning

Suggest procedures for reviewing interim financial information for a company.

Dabiasem Insurance Company Ltd. prepares its annual financial statements to 31st December each year. Due to the magnitude of the transactions, interim financial statements for each half year are prepared at the end of June every year. This is done to facilitate the early completion and audit of the annual financial statements. Nhwehwem & Associates are the independent financial statement auditors of Dabiasem Insurance Co. Ltd. This year’s interim financial information has been prepared and is ready for review.

You are the audit senior of the auditing firm and the head of the audit team to carry out the review of the interim financial information.

Required:
Suggest the procedures you would use to carry out the review of the interim financial information.

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  • 10 Marks

AAA – May 2016 – L3 – Q3b – Audit evidence | Planning

Outline procedures for reviewing the opening balances in draft financial statements.

Demonstrate how you will review the opening balances in the draft financial statements. (10 marks)

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  • 10 Marks

AAA – May 2016 – L3 – Q3a – Planning | Audit evidence

Use analytical procedures to assess the financial statement extracts and their impact on the audit of accounts receivable.

Your audit and assurance firm has just accepted a financial statement audit engagement from Lunch Special Ltd., a restaurant that prepares lunch for the general public and on special orders. The company operates at a number of sales points in the city.

The company uses a computerised system that has networked all the Sales Points to its Head Office. Your firm is planning the new audit and has received the draft financial statements for the year. As the audit senior to lead the engagement team, you are examining the financial statements, an extract of which is shown below:

Required:
i) Using analytical procedures at the planning stage, state your observations drawn from the extracts from the draft financial statements and how they may impact your audit of the Accounts Receivables. (10 marks)

 

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  • 5 Marks

AAA – May 2016 – L3 – Q1a – The regulatory environment | The audit approach | Planning

Discuss types of information indicating non-compliance and evaluate the impact on financial statements per ISA 250.

a) Everclean Water Limited processes and packages portable water for local consumption. The factory is situated in a valley in a first-class residential area of the city. A major road used by most residents runs in front of the factory. Often this road is flooded with spill-over of water from the factory thus hindering vehicular and pedestrian movement. Management of the company on such occasions uses the services of a contractor to pump out the water from the road. This situation contravenes the provisions of the Factories, Offices and Shops Act 1970, Act 328. Everclean Water Limited has engaged Nadab and Associates as the auditors. In their preliminary tour of the factory the senior partners became aware of the flooding situation in the area. Back in the office the senior partners consulted ISA 250 “Consideration of laws and regulations in an audit of financial statements” for guidance on the auditor’s responsibility to consider laws and regulations in an audit of financial statements before carrying out the audit assignment.

i) State examples of the possible type of information that might have come to the auditors’ attention that might indicate non-compliance with the Factories, Offices, and Shops Act. (5 marks)

ii) Evaluate the possible effect on the financial statements for non-compliance with the law according to ISA 250. (5 marks)

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  • 20 Marks

AAA – Nov 2019 – L3 – Q2 – The audit approach, Planning, Audit evidence

Evaluate five business risks facing Retail Specialist Co. Ltd (RSCL) during audit planning.

Retail Specialist Co. Ltd (RSCL) is a large company, operating in the retail industry, with a year ended 31 December 2018. You are a manager in Jen & Co, responsible for the audit of Retail Specialist Co. Ltd (RSCL), and you have recently attended a planning meeting with Olivia Danso, the finance director of the company. As this is the first year that your firm will be acting as auditor for Retail Specialist Co. Ltd (RSCL), you need to gain an understanding of the business risks facing the new client. Notes from your meeting are as follows:

Retail Specialist Co. Ltd (RSCL) sells clothing, with a strategy of selling high fashion items under the RSCL brand name. New ranges of clothes are introduced to stores every eight weeks. The company relies on a team of highly skilled designers to develop new fashion ranges. The designers must be able to anticipate and quickly respond to changes in consumer preferences. There is a high staff turnover in the design team.

Most sales are made in-store, but there is also a very popular catalogue, from which customers can place an order online, or over the phone. The company has recently upgraded the computer system and improved the website, at significant cost, in order to integrate the website sales directly into the general ledger, and to provide an easier interface for customers to use when ordering and entering their credit card details. The new online sales system has allowed overseas sales for the first time.

The system for phone ordering has recently been outsourced. The contract for outsourcing went out to tender and Retail Specialist Co. Ltd (RSCL) awarded the contract to the company offering the least cost. The company providing the service uses an overseas phone call centre where staff costs are very low.

Retail Specialist Co. Ltd (RSCL) has recently joined the Ethical Trading Initiative. This is a ‘fair-trade’ initiative, which means that any products bearing the RSCL brand name must have been produced in a manner which is clean and safe for employees, and minimises the environmental impact of the manufacturing process. A significant advertising campaign promoting Retail Specialist Co. Ltd (RSCL)’s involvement with this initiative has recently taken place. The RSCL brand name was purchased a number of years ago and is recognised at cost as an intangible asset, which is not amortised. The brand represents 12% of the total assets recognised on the statement of financial position.

The company owns numerous distribution centres, some of which operate close to residential areas. A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm. The authority also monitors the noise level of each centre, and can revoke the operating licence if a certain noise limit is breached. Two licences were revoked for a period of three months during the year.

To help your business understanding, Olivia Danso has e-mailed to you extracts from the draft statement of comprehensive income, and the relevant comparative figures, which are shown below.

Extract from draft Statement of Comprehensive Income
Year ending 31 December

Revenue: Retail outlets 2018 Draft (GH¢ million) 2017 Actual (GH¢ million)
Phone and on-line sales 1,030 1,140
Total revenue 425 395
Operating profit 1,455 1,535
Finance costs 245 275
Profit before tax (25) (22)
Profit before tax 220 253

Additional Information:

Number of stores 2018 Draft 2017 Actual
Number of stores 210 208
Average revenue per store GH¢ 4·905 mn GH¢ 5·77 mn
Number of phone orders 680,000 790,000
Number of on-line orders 1,020,000 526,667
Average spend per order GH¢ 250 GH¢ 300

Required:

a) Prepare briefing notes to be used at a planning meeting with your audit team, in which you evaluate FIVE (5) business risks facing Retail Specialist Co. Ltd (RSCL) to be considered when planning the final audit for the year ended 31 December 2018.

(10 marks)

b) Using the information provided, identify and explain FIVE (5) risks of material misstatements that may affect the financial statements you are going to audit. (10 marks)

 

 

 

 

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  • 20 Marks

AAA – Nov 2016 – L3 – Q3 – Planning | Audit Evidence

Identify and explain audit risks, procedures, and evidence related to Kpandu Sika Ltd. for the year ended 31 December 2015.

You are a manager in Amable & Co, a firm of Chartered Accountants, responsible for the audit of Kpandu Sika Limited for the year ended 31 December 2015. Kpandu Sika Limited is a company listed on the Ghana Stock Exchange (GSE) which has been a client of your firm in the past three years. The company manufactures consumer electronic appliances which are then sold to major retail organizations. You are aware that during the last year, Kpandu Sika Limited lost several customer contracts due to cheap imports. However, a new division has been created to sell its products directly to individual customers in Ghana and worldwide via a new website, which was launched on 1 December 2015.

Financial information provided by the Finance Manager is shown below:

STATEMENT OF PROFIT OR LOSS

 

STATEMENT OF FINANCIAL POSITION AS AT

 

EQUITY AND LIABILITIES

NOTES:
i) Kpandu Sika Limited established an equity-settled share-based payment plan for its executives on 1 January 2015. 250 executives and senior managers have received 100 share options each, which vest on 31 December 2015 if the executive remains in employment at that date and if Kpandu Sika Limited’s share price increases by 10% per annum. No expense has been recognized this year as Kpandu Sika Limited’s share price has fallen by 5% in the last six months, and so it is felt that the condition relating to the share price will not be met this year-end.
ii) On 1 July 2015, Kpandu Sika Limited entered into a lease which has been accounted for as a finance lease and capitalized at GH¢19 million. The leased property is used as the head office for Kpandu Sika Limited’s new website development and sales division. The lease term is for five years and the fair value of the property at the inception of the lease was GH¢76 million.
iii) On 30 June 2015 Kpandu Sika Limited’s properties were revalued by an independent expert.
iv) A significant amount has been invested in the new website, which is seen as a major strategic development for the company. The website has generated minimal sales since its launch last month, and advertising campaigns are currently being conducted to promote the site.
v) The long-term borrowings are due to be repaid in two equal installments on 30 September 2016 and 2017. Kpandu Sika Limited is in the process of renegotiating the loan, to extend the repayment dates, and to increase the amount of the loan.
vi) The provision relates to product warranties offered by the company.
vii) The overdraft limit agreed with Kpandu Sika Limited’s bank is GH¢5.7 million.

Required:
a) Using the information provided by the Finance Manager, identify and explain the principal audit risks to be considered in planning the final audit.
(10 marks)

b) State the principal audit procedures which should be performed in respect of the provision for the product warranties offered by the company.
(6 marks)

c) State the principal audit evidence which you would expect to find in respect of the classification of the new lease in terms of IAS 17 Leases (Do not consider the application of the new leasing standard IFRS 16 Leases).
(4 marks)

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  • 10 Marks

AAA – Nov 2024 – L3 – Q1b – Group Audit Risks and Consolidation Issues

Audit risks and procedures for a multinational group audit engagement.

You are a Senior Auditor at Dromo Audit Firm, assigned to audit a new client, Afroherb Pharma LTD, a multinational pharmaceutical company. During the initial stages of engagement planning, you discovered that Afroherb Pharma LTD operates in multiple jurisdictions, including Ghana, Liberia, Sierra Leone, and The Gambia. The parent company is in Ghana, and the companies in the other jurisdictions are all subsidiaries. All these jurisdictions have significant regulatory requirements and operational difficulties. The company has recently expanded its product line to include vaccine production following the introduction of The Vaccine Centre in Ghana. The production of vaccines is also subject to stringent regulatory reviews.

Required:
i) State FOUR audit procedures you could perform in relation to the consolidation of the financial statements of Afroherb Group. 
ii) Identify TWO specific risks associated with auditing Afroherb Pharma LTD, particularly in relation to its expansion into vaccine products. How should these risks be managed?
iii) State TWO problems associated with the planning of group audits

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  • 20 Marks

AAA – July 2023 – L3 – Q2 – Assurance services | The audit approach | Planning

Discuss matters to consider before accepting a review engagement and recommend procedures for examining a cash flow forecast.

Eebuks Ltd is a retailer of academic textbooks that sells through its own network of bookshops and online through its website. The revenue from the website includes both cash sales and sales on credit to educational institutions. The company has provided historical analysis from its trade receivables ledger indicating that for sales made on credit, 25% payment is received in the month of sale, 70% after 30 days, and the remainder are irrecoverable debts.

You are a Manager in Makafui & Associates, a firm of Chartered Accountants offering a range of services from audit to non-audit for its clients. On 1 July 2023, your firm was asked by Eebuks Ltd, a company that is not an audit client of your firm, to consider a potential engagement to review and provide an assurance report on Prospective Financial Information. Makafui & Associates has already conducted specific client identification procedures in line with money laundering regulations with satisfactory results.

Additionally, Eebuks Ltd has approached your firm to obtain an independent assurance opinion on its cash flow forecast, which is being prepared for its bankers in support of an application for an increase in its existing overdraft facility.

Required:

a) In line with ISAE 3400: The Examination of Prospective Financial Information, discuss FIVE (5) matters to be considered by Makafui & Associates before accepting the engagement to review and report on Eebuks Ltd’s Prospective Financial Information. (10 marks)

b) Assuming Makafui & Associates accepts the engagement, recommend EIGHT (8) procedures to be performed in respect of Eebuks Ltd’s cash flow forecast. (10 marks)

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  • 10 Marks

AAA – July 2023 – L3 – Q1a – The audit approach | Audit-related services Planning |

Discuss five factors to consider before developing an audit proposal for a multinational company facing financial challenges.

Your firm has been approached to tender for an audit assignment by STK Ghana Ltd. The company is a multinational with its headquarters in Europe. STK Ghana Ltd is a manufacturing company that has operated in Ghana since 2010 and has made steady profits over the years. However, over the past few years, the company’s profits have been dwindling, and the group director in charge of Anglophone West Africa subsidiaries has charged the company to reduce its costs.

In a meeting with the country manager, you ascertained the following information:

  • Several creditors are pursuing the company for payment of their outstanding debt, including the previous auditor who is being owed for the past three years of audit work. The company has negotiated a payment plan for all its creditors.
  • Staff wages have been frozen, staff morale is very low, and several have left.
  • The company’s liquidity challenges commenced when the license of Glow Savings and Loans was revoked as part of the banking sector crisis with STK Ghana Ltd funds exceeding GH¢1 million locked up in short and long-term investments.

In the Terms of Reference (TOR) for the audit engagement, you are required to provide timelines for the overall audit and a financial proposal that is competitive. Upon receiving the TOR, a debate ensued among the partners on the relevance of submitting a proposal in response to the TOR.

Required:
Discuss FIVE (5) factors to be considered prior to developing a proposal for submission. (10 marks)

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  • 20 Marks

AAA – May 2017 – L3 – Q1 – Planning | Audit evidence | Evaluation and review

Assess the audit implications of subsequent events involving bad debt and legal actions, describe subsequent events review, and recommend audit procedures for identifying material subsequent events.

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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  • 10 Marks

AAA – May 2016 – L3 – Q4b – Audit-related services | Planning

Suggest procedures for reviewing interim financial information for a company.

Dabiasem Insurance Company Ltd. prepares its annual financial statements to 31st December each year. Due to the magnitude of the transactions, interim financial statements for each half year are prepared at the end of June every year. This is done to facilitate the early completion and audit of the annual financial statements. Nhwehwem & Associates are the independent financial statement auditors of Dabiasem Insurance Co. Ltd. This year’s interim financial information has been prepared and is ready for review.

You are the audit senior of the auditing firm and the head of the audit team to carry out the review of the interim financial information.

Required:
Suggest the procedures you would use to carry out the review of the interim financial information.

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  • 10 Marks

AAA – May 2016 – L3 – Q3b – Audit evidence | Planning

Outline procedures for reviewing the opening balances in draft financial statements.

Demonstrate how you will review the opening balances in the draft financial statements. (10 marks)

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  • 10 Marks

AAA – May 2016 – L3 – Q3a – Planning | Audit evidence

Use analytical procedures to assess the financial statement extracts and their impact on the audit of accounts receivable.

Your audit and assurance firm has just accepted a financial statement audit engagement from Lunch Special Ltd., a restaurant that prepares lunch for the general public and on special orders. The company operates at a number of sales points in the city.

The company uses a computerised system that has networked all the Sales Points to its Head Office. Your firm is planning the new audit and has received the draft financial statements for the year. As the audit senior to lead the engagement team, you are examining the financial statements, an extract of which is shown below:

Required:
i) Using analytical procedures at the planning stage, state your observations drawn from the extracts from the draft financial statements and how they may impact your audit of the Accounts Receivables. (10 marks)

 

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  • 5 Marks

AAA – May 2016 – L3 – Q1a – The regulatory environment | The audit approach | Planning

Discuss types of information indicating non-compliance and evaluate the impact on financial statements per ISA 250.

a) Everclean Water Limited processes and packages portable water for local consumption. The factory is situated in a valley in a first-class residential area of the city. A major road used by most residents runs in front of the factory. Often this road is flooded with spill-over of water from the factory thus hindering vehicular and pedestrian movement. Management of the company on such occasions uses the services of a contractor to pump out the water from the road. This situation contravenes the provisions of the Factories, Offices and Shops Act 1970, Act 328. Everclean Water Limited has engaged Nadab and Associates as the auditors. In their preliminary tour of the factory the senior partners became aware of the flooding situation in the area. Back in the office the senior partners consulted ISA 250 “Consideration of laws and regulations in an audit of financial statements” for guidance on the auditor’s responsibility to consider laws and regulations in an audit of financial statements before carrying out the audit assignment.

i) State examples of the possible type of information that might have come to the auditors’ attention that might indicate non-compliance with the Factories, Offices, and Shops Act. (5 marks)

ii) Evaluate the possible effect on the financial statements for non-compliance with the law according to ISA 250. (5 marks)

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  • 20 Marks

AAA – Nov 2019 – L3 – Q2 – The audit approach, Planning, Audit evidence

Evaluate five business risks facing Retail Specialist Co. Ltd (RSCL) during audit planning.

Retail Specialist Co. Ltd (RSCL) is a large company, operating in the retail industry, with a year ended 31 December 2018. You are a manager in Jen & Co, responsible for the audit of Retail Specialist Co. Ltd (RSCL), and you have recently attended a planning meeting with Olivia Danso, the finance director of the company. As this is the first year that your firm will be acting as auditor for Retail Specialist Co. Ltd (RSCL), you need to gain an understanding of the business risks facing the new client. Notes from your meeting are as follows:

Retail Specialist Co. Ltd (RSCL) sells clothing, with a strategy of selling high fashion items under the RSCL brand name. New ranges of clothes are introduced to stores every eight weeks. The company relies on a team of highly skilled designers to develop new fashion ranges. The designers must be able to anticipate and quickly respond to changes in consumer preferences. There is a high staff turnover in the design team.

Most sales are made in-store, but there is also a very popular catalogue, from which customers can place an order online, or over the phone. The company has recently upgraded the computer system and improved the website, at significant cost, in order to integrate the website sales directly into the general ledger, and to provide an easier interface for customers to use when ordering and entering their credit card details. The new online sales system has allowed overseas sales for the first time.

The system for phone ordering has recently been outsourced. The contract for outsourcing went out to tender and Retail Specialist Co. Ltd (RSCL) awarded the contract to the company offering the least cost. The company providing the service uses an overseas phone call centre where staff costs are very low.

Retail Specialist Co. Ltd (RSCL) has recently joined the Ethical Trading Initiative. This is a ‘fair-trade’ initiative, which means that any products bearing the RSCL brand name must have been produced in a manner which is clean and safe for employees, and minimises the environmental impact of the manufacturing process. A significant advertising campaign promoting Retail Specialist Co. Ltd (RSCL)’s involvement with this initiative has recently taken place. The RSCL brand name was purchased a number of years ago and is recognised at cost as an intangible asset, which is not amortised. The brand represents 12% of the total assets recognised on the statement of financial position.

The company owns numerous distribution centres, some of which operate close to residential areas. A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm. The authority also monitors the noise level of each centre, and can revoke the operating licence if a certain noise limit is breached. Two licences were revoked for a period of three months during the year.

To help your business understanding, Olivia Danso has e-mailed to you extracts from the draft statement of comprehensive income, and the relevant comparative figures, which are shown below.

Extract from draft Statement of Comprehensive Income
Year ending 31 December

Revenue: Retail outlets 2018 Draft (GH¢ million) 2017 Actual (GH¢ million)
Phone and on-line sales 1,030 1,140
Total revenue 425 395
Operating profit 1,455 1,535
Finance costs 245 275
Profit before tax (25) (22)
Profit before tax 220 253

Additional Information:

Number of stores 2018 Draft 2017 Actual
Number of stores 210 208
Average revenue per store GH¢ 4·905 mn GH¢ 5·77 mn
Number of phone orders 680,000 790,000
Number of on-line orders 1,020,000 526,667
Average spend per order GH¢ 250 GH¢ 300

Required:

a) Prepare briefing notes to be used at a planning meeting with your audit team, in which you evaluate FIVE (5) business risks facing Retail Specialist Co. Ltd (RSCL) to be considered when planning the final audit for the year ended 31 December 2018.

(10 marks)

b) Using the information provided, identify and explain FIVE (5) risks of material misstatements that may affect the financial statements you are going to audit. (10 marks)

 

 

 

 

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  • 20 Marks

AAA – Nov 2016 – L3 – Q3 – Planning | Audit Evidence

Identify and explain audit risks, procedures, and evidence related to Kpandu Sika Ltd. for the year ended 31 December 2015.

You are a manager in Amable & Co, a firm of Chartered Accountants, responsible for the audit of Kpandu Sika Limited for the year ended 31 December 2015. Kpandu Sika Limited is a company listed on the Ghana Stock Exchange (GSE) which has been a client of your firm in the past three years. The company manufactures consumer electronic appliances which are then sold to major retail organizations. You are aware that during the last year, Kpandu Sika Limited lost several customer contracts due to cheap imports. However, a new division has been created to sell its products directly to individual customers in Ghana and worldwide via a new website, which was launched on 1 December 2015.

Financial information provided by the Finance Manager is shown below:

STATEMENT OF PROFIT OR LOSS

 

STATEMENT OF FINANCIAL POSITION AS AT

 

EQUITY AND LIABILITIES

NOTES:
i) Kpandu Sika Limited established an equity-settled share-based payment plan for its executives on 1 January 2015. 250 executives and senior managers have received 100 share options each, which vest on 31 December 2015 if the executive remains in employment at that date and if Kpandu Sika Limited’s share price increases by 10% per annum. No expense has been recognized this year as Kpandu Sika Limited’s share price has fallen by 5% in the last six months, and so it is felt that the condition relating to the share price will not be met this year-end.
ii) On 1 July 2015, Kpandu Sika Limited entered into a lease which has been accounted for as a finance lease and capitalized at GH¢19 million. The leased property is used as the head office for Kpandu Sika Limited’s new website development and sales division. The lease term is for five years and the fair value of the property at the inception of the lease was GH¢76 million.
iii) On 30 June 2015 Kpandu Sika Limited’s properties were revalued by an independent expert.
iv) A significant amount has been invested in the new website, which is seen as a major strategic development for the company. The website has generated minimal sales since its launch last month, and advertising campaigns are currently being conducted to promote the site.
v) The long-term borrowings are due to be repaid in two equal installments on 30 September 2016 and 2017. Kpandu Sika Limited is in the process of renegotiating the loan, to extend the repayment dates, and to increase the amount of the loan.
vi) The provision relates to product warranties offered by the company.
vii) The overdraft limit agreed with Kpandu Sika Limited’s bank is GH¢5.7 million.

Required:
a) Using the information provided by the Finance Manager, identify and explain the principal audit risks to be considered in planning the final audit.
(10 marks)

b) State the principal audit procedures which should be performed in respect of the provision for the product warranties offered by the company.
(6 marks)

c) State the principal audit evidence which you would expect to find in respect of the classification of the new lease in terms of IAS 17 Leases (Do not consider the application of the new leasing standard IFRS 16 Leases).
(4 marks)

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